Alexia Zammit

Economist, European Commission Representation in Malta

Was social policy neglected during the crisis?

Wednesday 16th November 2016

Many argue that the EU lost its social conscience during the recent economic and financial crisis. State aid rules were side-lined for a while to assist ailing banks in a number of EU member states; temporary support measures were introduced in order for businesses to cushion the downturn; and ultimately the stimuli that the government had offered during the recession, which led to a substantial increase in sovereign debt in many member states, had to be repaid.

In order for governments to reverse years of expansionary policy, savings were necessary. This implies that (at least for a while) earnings have to exceed expenditure. Only this way would governments be able to set forth on a positive path to reducing its public debt.

But who was going to pay for all this?

The public outcry was that making tax payers pay for all the sins of reckless governments and banks was unjust. And these people may well have been right, especially with respect to those governments who for years embarked on expansionary fiscal policies when their economies did not warrant it and who did not ensure a better assessment of the activities of their banking sector.

In fact, the excessive problems faced in some member states were due, in the most part, to years of lax governance. Some governments had become increasingly dependent on debt since their economies had been losing competitiveness for a long time, as they failed to keep up with economic reforms in other countries. In some countries, governments had allowed property bubbles and other unhealthy economic imbalances to develop. Finally, some governments had ignored the rules designed to make the euro work and had not done more to coordinate their economic policies since agreeing to share a common currency with a single monetary policy.

However, what some may fail to understand is that not having introduced certain measures during the crisis would have led to a worse catastrophe for the future of the EU and its member states. The EU would have been afflicted with a more prolonged recession that would have attacked the potential future growth of the EU, possibly dropping this to a permanently lower trajectory. A number of reasons for this can be mentioned: first, protracted spells of unemployment in the workforce tend to lead to a permanent loss of skills; second, the stock of equipment and infrastructure would have decreased and become obsolete due to lower investment; third, innovation may have been hampered as spending on research and development is one of the first outlays that businesses cut back on during a recession.

But something had to be done to make sure that such a crisis did not repeat itself…

The European Commission embarked on a mission to ensure that stricter implementation and monitoring of existing rules, as well as the design of new rules, particularly in areas of fiscal policy and the banking system, kept member states in check. A new ‘European Semester’ process was introduced in 2011 to monitor economies more effectively in areas of public finances, employment, skills, social policies, as well as the business environment, in addition to other macro-economic imbalances which are also better assessed within this process.

Questions as to whether the institutional set-up of the Economic and Monetary Union (EMU) and the euro was adequate in times of crisis were also raised. The euro area is drawing lessons from the crisis of recent years and has embarked on a process of further integration and consolidation. This necessarily includes a social dimension. The Five Presidents' Report on Completing Europe's EMU stresses that “Europe's ambition should be to earn a ‘social triple A’” and that, “for EMU to succeed, labour market and welfare systems need to function well and in a fair manner in all euro area Member States”. While recalling that there is no “one-size-fits-all” template, the report underlines that the challenges are often similar across member states. It also calls for a stronger focus on employment and social performance as part of a broader process of upward convergence towards more resilient economic structures within the euro area. As a result, the European Pillar of Social Rights (EPSR) was drawn up and is currently being discussed in all eurozone member states.

The EU has learnt from the mistakes of the past. What started as a banking crisis soon became a sovereign debt crisis and ended up affecting the very core of society, namely human wellbeing. Social policy is back at the helm of policy in the EU and is likely to remain there for many years to come.