Don’t forget the social dimension! Enabling social convergence in a new European governance framework

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In the Berlin Perspectives series, the Institut für Europäische Politik (IEP) presents analyses of Germany’s European policy to an English-speaking audience. The authors analyse German positions on current debates and provide policy recommendations based on their findings.

The latest policy brief by Björn Hacker is re-published on this blog in an extended version. You can find the original text on the IEP website.

“While budgetary restraint was being spurred, attempts to strengthen employment and social policy coordination have not been very successful.”

The planned new economic governance framework of the EU is of utter importance not only in a pure economic sense. It will also determine the place given to the social dimension of the integration process. While citizens show great support for tackling social deficits at the EU level, most of the member states have prioritized sound finances. Germany should overcome its traditional fixation on budgetary issues by supplementing them with proposals for an EU social convergence path.

Piecemeal social union

While the European Union’s economic integration proceeded fast over the past decades, visions for a European Social Union have not been realized. Even though the social acquis has grown, ranging from gender equality to minimum wages, work on the social dimension of the EU remains piecemeal compared to the big economic integration projects of the single market and monetary union.

In 1992 the Treaty of Maastricht marked a major step for the development of a Social Europe by overcoming decision traps. This was achieved through extending majority voting to social policies in the Council and establishing a comprehensive European Social Dialogue between employers and trade unions.

Nevertheless, the following years were primarily characterized by economic integration. Additionally, the austerity course set during the euro crisis of 2010-15 deepened the socioeconomic divergences between member states. High levels of unemployment and greater risk of poverty and social exclusion showed the dark side of an EU coordination policy concentrating on budgetary and competitiveness aspects.

The European Pillar of Social Rights

There was renewed attention to a Social Europe with the development of the European Pillar of Social Rights (EPSR), which was proclaimed inter-institutionally at the Social Summit for Fair Jobs and Growth in Gothenburg in 2017. Its 20 principles reminded the EU institutions and the member states to ensure adequate social provision. This comprises equal opportunities and access to the labour market, fair working conditions, and social protection and inclusion. The EPSR has only declaratory character, but it soon became the main reference point in all sorts of EU regulatory, distributive and coordinative social policies.

At the Porto Social Summit in 2021, its implementation became an important aspect of the NextGenerationEU (NGEU) investment package for recovery from the Covid-19 pandemic. At the summit, the member states confirmed that the social dimension of the EU was a key goal alongside the transitions to a carbon-neutral economy and digitalization. They also decided on an action plan on three concrete objectives with regard to jobs, skills and poverty reduction until 2030.

Measures remain non-binding

These steps and the EU’s new crisis management from 2020 onwards – with a focus on maintaining employment, leaving budgetary space for economic stimulus packages and drawing the contours of a common investment policy mechanism – helped to bring back a Social Europe on the political agenda. The remaining problem is the nonbinding character of the well-intentioned measures to accompany the twin transitions and to really achieve upward social convergence.

The EPSR’s only instrument is a social scoreboard containing 17 indicators to measure development in member states in social terms. Yearly progress or regression is presented in the Joint Employment Report published by the European Commission and the Council as part of the European Semester. But this governance framework is lopsided in favour of economic elements, which is why recommendations to the member states integrate social issues only to a very limited degree. Insights on the social developments of a country compared to its neighbours are typically not discussed publicly and drawing out the consequences remains a field for experts.

Reform of the Stability and Growth Pact

In December 2023, the Council of Economic and Finance Ministers agreed on a reform of the Stability and Growth Pact with the aim to change the procyclical and one-size-fits-all nature of budgetary consolidation for an individualized net expenditure path derived from a country-specific debt-sustainability analysis and a medium-term fiscal-structural plan, taking into account national peculiarities of deficit and debt, investments and reforms.

This plan should be prepared by each member state for a period of four to five years with the option of an extension to seven years if the government commits itself to further reforms and investments. Even if this new agreement on the pact would bring slower deficit and debt reduction, social progress remains in the backseat: only lip service is paid to it by mentioning the EPSR as part of the European Semester, which is nothing new.

Germany’s obsession with budgetary stability

Germany was once the main driver for making European integration not only a process of market enhancement but also a means towards political union. In 1972, Chancellor Willy Brandt proposed far-reaching ideas for a European Social Union as a complement to economic unification. In general, Germany has supported the expansion of European social policy but at the same time it has made sure to not lose national competencies. For it is always easy to agree on market enhancement, but very difficult to find a European compromise on policies belonging to the national welfare state tradition.

Germany, under Chancellor Helmut Kohl, successfully steered the negotiations for the Stability and Growth Pact in 1997, which sets the benchmarks of an annual budgetary deficit of 3 per cent of GDP and a public-debt-to-GDP ratio of 60 per cent. This open-ended limiting of public spending in the eurozone was justified as necessary for economic stability in monetary union. Its dark side was weakened investment activity, a lack of infrastructural renewal, bad social services and housing conditions, and less social and educational progress. Ironically, Germany was then one of the first member states to break the EU’s fiscal rules.

Priority for fiscal rules, not social matters

While budgetary restraint was being spurred by deficit procedures and governments’ fear of sanctions, the coordination of employment and social policies was performed quietly under the European Employment Strategy and the Open Method of Coordination. Attempts to strengthen the significance of employment and social policy coordination as well as growth and investment policies with the Lisbon and the Europe 2020 strategies have not been very successful.

Germany’s governments – no matter in which political configuration – always welcomed coordination approaches, but they rarely showed interest in comparing, peer reviewing, and mutual learning exercises when it came to the coordination cycles, and they expressed strong opposition to “naming and shaming” rankings on social matters. Conversely, they embraced such practices for the EU’s budgetary rules. For example, the government of Chancellor Angela Merkel defended and strengthened the fiscal rules in the euro crisis, which was mirrored in the austerity priority in the newly introduced European Semester from 2011 onwards.

Two political camps in the EU

During the euro crisis, Germany’s insistence on fiscal consolidation and internal devaluation for the affected member states meant the development of not only two socioeconomic camps, but also two political ones in the EU. While Austria, Finland, the Netherlands and many Eastern European countries stood behind Germany and its stability approach, France led the opposite camp, with Belgium, Italy, Spain, and the countries in crisis by its side.

In 2012, France’s President François Hollande helped to integrate a tiny social dimension in the eurozone crisis management, and it was hard work to convince Germany and the stability camp of the necessity of further steps against socioeconomic divergences up to the proclamation of the EPSR in 2017. Merkel did not attend the Gothenburg summit.

No agreement within the German government

During the Covid-19 pandemic, then finance minister Olaf Scholz was one of the architects of NGEU, which he called a “Hamilitonian moment” for the EU, referring to the first treasury secretary of the USA and suggesting the advent of European fiscal federalism. But the three-party government coalition Scholz now leads as chancellor seems to be split on the priorities for the new governance framework, which the European Commission wants to see resolved before the European Parliament elections in June.

While the Labour Minister Hubertus Heil, of the Social-Democrats, was active in the designing of the latest steps in European social policy – the EPSR action plan, the directive on adequate minimum wages, the recommendation on minimum income – with the support of the Greens, the Free Democrats favour instead the traditional pre-pandemic budget consolidation line.

There has been a similar distribution of perspectives after the Constitutional Court ruled parts of the federal budget to be inconsistent with the country’s debt brake in November 2023. Finance Minister Christian Lindner, of the Free Democrats, negotiated safeguard margins for deficit reduction into the Council’s deal on economic governance reform, and ensured that climate or social investments beyond NGEU will not be excluded from measuring deficits.

European Parliament: More leeway for social investments

The European Parliament’s stance on the reform of the EU’s governance framework is more progressive than that of the Council. Although its similarities with the finance ministers’ deal on deficit reduction are obvious, the parliament’s Committee on Economic and Monetary Affairs proposed in December 2023 more leeway for member states investing in the common priorities of the EU. Under these are explicitly subsumed the principles of the EPSR and the social targets until 2030.

While a general “golden rule” to not count public investments on climate and social issues when measuring deficits and debt did not receive majority support in the European Parliament or the Council, the explicit reference to EU policy challenges would help to better balance the new governance rules.

Social Convergence Framework within the European Semester

Social divergences are among the challenges confronting the EU, and they are highly important politically as extreme right-wing politicians try to exploit the disappointment of citizens about a lack of social advancement by proposing nationalistic and xenophobic recipes. To foster convergence, Belgium and Spain have proposed to better detect and monitor social imbalances in 2021. This proposal – now known as a Social Convergence Framework – has made its way through different EU institutions.

In parallel to the negotiations on the governance framework, the Belgian Council presidency wants to organize a joint meeting of the finance and labour ministers in March 2024 with the aim to adopt the new instrument as part of the European Semester process. This would help to better balance economic and social objectives, and it would enable a still missing public debate on social deficits in the member states.

Recommendations to foster social convergence

In the autumn 2023 Eurobarometer, the four topics respondents said they would like the European Parliament to give priority attention to were “the fight against poverty and social exclusion” (36 per cent), “public health” (34 per cent), “action against climate change” (29 per cent) and “support to the economy and the creation of new jobs” (29 per cent).

In view of the European Parliament elections in June, it is therefore advisable to make the integration process more social by adopting the four following positions:

• A clear “no” to a return of austerity policies. The suspension of the Stability and Growth Pact enabled the member states to get over the economic crisis caused by the pandemic relatively quickly. The reform of the economic governance framework of the EU must give enough leeway to member states on their deficits and debt reduction pathways. The members of the European Parliament insisted on not introducing too detailed safeguards in the trilogue with the Council; they could not prevent them. When it comes to implementation, it is particularly important to consider the economic situation of the member states in a holistic way and not just in terms of quantifiable budget criteria.
• A consideration of social imbalances in the European Semester. A better balance of economic and social integration is key for meeting the challenges of the decarbonization of the economy and the digitalization of the world of labour. The new governance framework would be incomplete without integrating social aspects. Accordingly, the negotiators in the trilogue agreed that social aspects should be given greater consideration in the EU’s economic governance in the future. It would be helpful if Germany publicly supported the propositions made by the Belgian Council presidency on a Social Convergence Instrument to better detect and tackle social imbalances in the EU.
• Integration of the temporary Support to mitigate Unemployment Risks in an Emergency (SURE) in the governance framework of crisis management. Thanks to this tool the EU experienced a far lower increase in unemployment during the pandemic than during the euro crisis. It is better to be prepared before the next economic slump hits the EU. Germany could propose making SURE a permanent instrument by renewing the ideas of a European unemployment reinsurance scheme.
• The development of ideas to finance mitigation of the social risks of the twin transformation after NGEU comes to an end in 2026. The discussion on the next Multiannual Financial Framework will speed up after the European Parliament elections. The EU will need more investments to meet the challenges of the twin carbon-neutral and digitalization transformation as well as of the new global environment ahead. Members of the European Parliament and national parliaments alike as well as governments should develop ideas to extend the positive effects of NGEU, like a reward system for member states pursuing reforms and investments on EU challenges like climate change and social convergence.

Sources and further reading:

• Corti, Francesc/Alcidi, Cinzia/Gros, Daniel/Liscai, Alessandro/Shamsfakhr, Farzaneh (2022): A qualified treatment for green and social investments within a revised EU fiscal framework, CEPS Research Report 2022-02, May 2022, Brussels: Centre for European Policy Studies.
• Darvas, Zsolt/Pisany-Ferry, Jean/Zettelmeyer, Jeromin (2023): Bringing the reform of European Union fiscal rules to a successful close, Bruegel, 12 December 2023.
• Dawson, Mark (2023): How to democratize Europe’s fiscal rules. Proposals for reforming the EUs Economic Governance Package, Study, Friedrich-Ebert-Stiftung.
• Hacker, Björn (2023): Social Europe. From vision to vigour. The need to balance economic and social integration, Bonn: J.H.W. Dietz.
• Hacker, Björn (2023): The European Pillar of Social Rights: Impact and Advancement. Somewhere between a Compass and a Steering Tool, SWP Research Paper 14, November 2023, Berlin: Stiftung Wissenschaft und Politik.
• Hacker, Björn/Koch, Cédric M. (2017): The divided Eurozone. Mapping conflicting interests on the reform of the Monetary Union, Brussels: Friedrich-Ebert-Stiftung.
• Sabato, Sebastian/Vanhercke, Bart/Guio, Anne-Catherine (2022): A “Social Imbalances Procedure” for the EU: Towards Operationalisation, ETUI Working Paper 2022.09, 24 March 2022, Brussels: European Trade Union Institute.
• Schmidt, Vivien (2023): Making EU economic governance fit for purpose, Social Europe, 5 October 2023.
• Theodoropoulou, Sotiria (2023): The European Commission’s legislative proposals on reforming the EU economic governance framework: a first assessment, ETUI Policy Brief 2023.04, Brussels: European Trade Union Institute.
• Zettelmeyer, Jeromin (2023): Assessing the Ecofin compromise on fiscal rules reform, Bruegel, 21 December 2023.

Björn Hacker is a Professor of Economic Policy at the University of Applied Sciences (HTW) Berlin.

Pictures: Concrete building with balconies: Fedor Shlyapnikov [Unsplash License], via Unsplash; portrait Björn Hacker: Elke Schöps [all rights reserved].