Social Europe

European civilization is united in the concept of social protection, the welfare state. It
is one of the concepts that identify the European states, as a contraposition to other parts of
the world. The idea of the social protection of the state is commonly accepted by the whole
society, and even in times of crisis social policies are protected by the social actors of each
European state. The social policies can be compared to those of the United States, a country in
many senses similar to Europe, but with big differences, especially in this field. The study of
the social system can be based on the differences between the situation in the European Union
and the situation in the USA, because the main difference between the Americans and the
European is the concept of a social system.
First of all, the EU has more solidarity than the USA, but, on the other hand, the
Americans are more efficient. According to the Gini coefficient, that measures the distribution
of revenue, and where 0, 0 means absolute equality and 0, 1 means the opposite; there are big
differences between the USA and the EU. The American country has a coefficient of 0, 4 and
it is increasing, the European Union of the oldest 15 members has a coefficient of 0. 27.
In this sense it is important to remark that the population living in poverty in these two
societies, with less revenue that 50% of the average income is 20% in the USA and 10% in
the European Union.1
Another important tool for measuring the societies is the social mobility of its
members. The USA traditionally has higher social mobility than Europe; more people change
their status within the society. But this social mobility is decreasing in the USA, and the gap
with Europe in this sense is becoming smaller. In the last 32 years, 42% of families of the
group of the people who belong to the 20% of society with less or poorer income could not
rise the next group of revenue (next 20%), and just 6% could join the group with higher
revenue. In the case of the European Union, we see the exceptional case of the UK, where
social mobility is higher, while in the rest of the 14 members analyzed, the people with no
higher education or qualification suffered more problems raising their incomes and climbing
the social ladder.2
Social policies have a big influence on the economy, as they are paid by the income of
the state, so higher social protection means higher expenditure by the state. As the main

1
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:22405907~
menuPK:6626650~pagePK:148956~piPK:216618~theSitePK:430367,00.html
2 http://www.equalitytrust.org.uk/why/evidence/social-mobility
revenue of the state is taxes, higher social protection means higher taxes, with all its
consequences on the economic field. The GIP of the USA from 1975-2000 grew 3.2 points
per year; during the same period of time the combined GIP of the 15 older members of the
Union increased 2.2% per year. Also the population of the USA grew 1.2%, and of the EU
0.4%, so the USA grew 3 times more than the EU. Finally, income per capita is 30% bigger in
the USA than in Europe.3 The main reason for these differences is that the economy of the
USA is more efficient than the European, and hence the employment rate, in the last 30 years
as an average per year, grew 1.3% in the USA and 1.1% in the EU, plus the total working
hours grew 0.2% in the USA and decreased 0.3% in the EU.4
Paul Krugman explains this situation by globalization, because competition in the
world is becoming stronger, and technical development is more important in this context of
global competition. It means bigger income inequality in the USA and bigger unemployment
in the UE because the demand for highly qualified workers is bigger, and, on the other hand,
the demand is smaller for non-qualified workers.5
As the USA is more efficient, globalization creates wealth but also generates bigger
inequality between revenues through bigger gaps between salaries and bigger adjustments in
employment. In Europe, where the social model is more generous but the economy less
efficient, globalization created less wealth, but also fewer inequalities. In the EU this has
meant a bigger unemployment rate, but for outsiders, or people who are looking for a job
(women, the young, and immigrants); for the insiders, or people who are already working, it is
not a problem. Trade unions protect their members, the people who are already working, but
they do not protect the outsiders, and hence, they complain less about the globalization
process and its influence in the work market. Here the most important decision is about
having more people working even if they have low quality jobs, and all workers working
more hours, as in the USA, or higher unemployment, working fewer hours, but with generous
subsidies. The society has to decide which of these two situations is better in terms of
equality, and the way the society express its opinion is via elections. So, voters decide what
they want because they choose their governments.
Most Europeans prefer a more generous welfare state, paying for it in higher taxes, but
also having more free time instead a bigger income
On the .other hand, most Americans prefer more efficiency to more equality, and
hence more work, and have more income than more free time. The situation is clear, but it
3 http://www.internationalviewpoint.org/spip.php?article96
4 http://www.bls.gov/fls/intl_unemployment_rates_monthly.htm
5 http://krugman.blogs.nytimes.com/
raises the question of why the Europeans prefer earning less money working fewer hours than
the Americans. Research done by Roper Starch Worldwide (2000)6 shows that 57% of
Americans prefer more income than more free time, and just 37% are willing to earn less if
they have more time for their leisure. On the other hand, we see that 50% of Germans,
Italians, and English and 67% of French want more revenue and less free time, against the
social systems implemented in their own countries. Logically, as these people are voters, their
influence in the elections to their national parliaments will lead to a change in their own social
models. Nowadays we are seeing the wide support in the European countries of their
governments in reforms of the social system actually as an inevitable consequence of the
economic crisis.
Nevertheless, the perception of equality is different between the USA and the EU; as
America is a country born of emigrants looking for opportunities, economic institutions are
more flexible, and rising in society is easier. So, there is a strong tradition supporting
‘equality of opportunity’. If this is achieved, there is not much compassion for those who did
not take advantage these opportunities, ‘voluntary losers’ who did not make enough effort to
progress.
Sixty percent of Americans think that most of the poor are so because they are lazy or
made less effort. The EU is an old society, with more difficulties for promotion and a less
flexible economy. So, the tendency is for ‘equality of results’; 54% of Europeans think that
the level of income is fixed not by effort, but by luck or outside forces, so generous social
policies for the poor are needed.
The main differences between the USA and the EU in social policies are explained in
different ways by different experts:

James Heckman7 (2003) says that the differences between both economies are the
regulations of the states. He calculates that 40% of each Euro collected by the states
goes to the welfare system. And the system just protects the insiders, against the
outsiders, so it gives security to some at the cost of others, neither fair nor efficient.
Olivier Blanchard8 (2004) is against Heckman; he supports reform of the work market
keeping social policies, as the Netherlands or the Scandinavian countries did.

6 http://findarticles.com/p/articles/mi_m3092/is_8_39/ai_62657129/
7 http://ideas.repec.org/h/eee/ecochp/6b-70.html
8 http://ideas.repec.org/e/pbl2.html
 Jonas Agell9 (2003) says that during the ‘60s and the beginning of the ‘70s the EU had
less unemployment with bigger protection of the labor market. Plus the UK liberalized
its labor market in the ‘80s and was not much better in the ‘90s than the rest of
Europe. Macroeconomic facts and its consequences on institutions are also important.
On the other hand, he supports the idea that a progressive tax system does not help to
reach more equality, because the offer of highly qualified jobs goes down. If we have
reductions in the tax system for higher salaries, it will increase the offer of them,
which allows more income for the state (more people paying taxes, indirect taxes,
more consumption, etc) that can be distributed among people with lower salaries.

Anthony Atkinson10 (1999) says that the unemployment subsidy should be limited in
time in order to activate the search for a job, and then on the expiration date the
unemployed will accept a job. Also, workers who left their job by their own decision,
or were fired because of bad behavior, or rejected a reasonable job offer, should lose
the subsidy.

The regulations of the work market can achieve three main goals:

Market focus: When workers lose their job, if they have an unemployment payment
they can keep their consumer levels. So it is good for the economy because otherwise

9 http://econpapers.repec.org/RAS/pag93.htm
10 http://stats.lse.ac.uk/atkinson/links/publications.html
 these unemployed will drastically reduce their consumption level, reducing the
economic activity of the area. Also work security and health care increase the
efficiency of the economy because workers enjoy better health and are able to produce
more, reducing the absentee hours.

Social focus:

Social policies to redistribute the income between social classes. A minimum salary is
used to transfer revenues from the owners of capital to the less qualified workers. But
regulations to redistribute the revenues reduce the efficiency of the economy, like high
unemployment subsidies, which make the unemployed people more demanding to
pick up a new job. Or severe legislation in work protection could block the way out of
inefficient industries; plus companies in expansion will hire fewer people, avoiding
future problems of firing their workers if the economic situation changes.

Protect revenues. It is a way of protecting the incomes of workers.

Social policies that beget neither equality nor efficiency.

For example, as in many countries of the EU, the high cost of firing some workers was
meant at the beginning to protect weak workers against unfair loss of their job, but
which, in the long term, just benefits the insiders, putting them out of the pressure of
the competition of the outsiders.

There are different social models in the European Union (15 members) basically divided into
4 main groups:
 Nordic model: (Denmark, Finland, Sweden, and Holland) High social protection, plus
universal social services, plus bigger expenditure in active politics of employment and
strong trade unions. It makes inequality of revenues very low.

Anglo-Saxon model: (the UK and Ireland) it combines important social protection in

the last instance, especially for people of working age. It is a system based on
incentives to the activity and subsidies for those really looking for a job. This system
plus weak trade unions make for bigger differences in salaries, and many workers
have low salaries.

Continental model: (Austria, Belgium, France, Germany, and Luxembourg) A system

based on security for the unemployed or people who find no job and a system of
retirement pensions. Trade unions have fewer numbers, but are still strong, and
collective negotiation is respected.

Mediterranean model: (Spain, Greece, Italy, and Portugal) Combines social

expenditure in retirement pensions, wide assistance and huge incentives to early
retirement, plus huge protection to jobs with high firing costs, and trade unions with
fewer numbers but strong collective negotiation, which leads to low disparities in
salaries.11

The social models are looking for three main objectives: reduction of poverty and inequality
of revenues, protection of the labor market, and participation in the labor market.
According to these objectives, we see big differences between the four main social models of
Europe:

1a) Inequality of revenue: The following models reduced inequality in the following
proportions:
Nordic reduction of 42%
Continental reduction of 40%

11 http://www.etuc.org/a/2771
Anglo-Saxon reduction of 39%
Mediterraneanreduction of 35%

1b) Reduction of poverty: People who live under 60% of the average income.
Nordic 11%
Continental 13%
Anglo-Saxon 19%
Mediterranean20%

2. There are two ways of protecting jobs: first protecting existing jobs with high firing costs;
by doing so you elude paying big unemployment subsidies. Second, generous subsidies to
unemployed people paid with taxes of workers. Again, it is an issue of outsiders versus
insiders and the importance of the trade unions.

- The Mediterranean model has a high level of protection of existing jobs, less generous
unemployment payments.

- The Nordic model has more flexibility to fire workers (less cost) and bigger subsidies for the
unemployed.

- The Continental model has high protection of existing jobs and high subsidies.

- The Anglo-Saxon system protects the existing jobs less but offers subsidies almost as high
as the Nordic and Continental.

In this field there are important differences with the USA, where protection of existing
jobs is as low as in the UK, but subsidies are also very low, which makes the American
unemployment rate lower than in Europe.

3. Participation in the labor market. Per cent of the population of working age doing any
economic activity:

Nordic 73%
Anglo-Saxon 70%
Continental 64%
Mediterranean63%12

The comparison of these social models in terms of efficiency and equality also shows big
differences. Efficiency is the ability to create a high and stable employment rate, and equality
is linked to keeping the poverty risk rate low. So, according to these two concepts, the
European social models will rank as follows:

Nordic model 1 efficiency, 1 equality.

Continental 3 efficiency, 2 equality
(Exception of Austria)
Anglo-Saxon 2 efficiency, 3 equality
Mediterranean4 efficiency, 4 equality

Their general rank according to the countries will include as the top states Denmark,
the Netherlands, Sweden, Finland, and Austria, and the worst states are Greece, Italy, Spain,
Ireland, and Portugal. The countries where the equality is higher are Sweden, Luxembourg,
Finland, Denmark, the Netherlands, and France, and the countries with less equality are
Greece and Ireland. On efficiency we see on the top Denmark, the Netherlands, Sweden and
the UK, and on the bottom Italy and Greece. Efficiency is negative for a high level of
protection of jobs because with lower protection the employment rate is higher, and the other
way around, with higher protection the employment rate is lower. Generosity in subsidies is
not so important in terms of efficiency because it has little influence on the employment level
and provides adaptability to the work force to new situations, as globalization. The risk of
poverty or equality is strongly linked with the level of education. The population between 25
and 64 years with secondary or higher studies is more unlikely to live in poverty. It means
that the people with less education have a bigger risk of poverty. The population with these
studies in the different models is:
Nordic 75%
Continental 67%
Anglo-Saxon 60%
Mediterranean40%

12 http://www.ulb.ac.be/cours/delaet/econ076/docs/sapir.pdf
 It clearly shows that the Nordic countries are less likely to increase their people living in
poverty as their educational rate is higher than in the other models. It also shows the problems
of the Mediterranean area, where just 40% of the population between 25 and 64 have an
education that could keep them away from poverty.

European Social systems comparison

Anglo Saxon Continental Nordic Mediterranean

Benefits Flat Rate Cash Flat Rate Cash
(Low intensity) (High intensity) (High intensity) (Low intensity)

Financing Taxes Payroll Taxes Mixed

contributions

Gender Female Part-Time Occupational- Ambivalent-

polarization feminization specific family

Goals Individual Choice Income Network public Resource

maintenance services optimization
Ideology Citizenship Neo-corporatism Equality Social Justice

Labor Market De-regularization Insiders/Outsiders High Public Big informal

employment economy
Poverty Dependency Insertion culture Statist culture Assistance culture
culture
Services Residual public Social partners Comprehensive Family support
public

CSR Business in the Sustainability Partnership Agora-type

community

(Source: International Journal of Sociology and Social Policy)

 The analysis of the main European social models leads us to different long term
possibilities accepting the following premises:

If a model is not efficient it is not sustainable in the long term. There are no new
revenues, or they are too expensive for the tax system. Sweden and Holland changed
their models in the ‘70s. An older population, new technology, and globalization are
other factors that make a model not sustainable in the long term.

More equitable models can last longer in terms of democracy. If there are too many
poor, the voters will chose a government that will reduce poverty.

Even if the model can last politically, in the economic sense it needs enough money to
pay health care and retirement pensions. So, if a state gets huge revenues from taxes
(high employment) they can economically afford their social system.

The two European models with less efficiency and with a lower employment rate, the
Mediterranean and the Continental, normally have higher public debt, the
Mediterranean with 80% of its GIP and growing, the Continental with 71%. On the
other hand, the Anglo-Saxon 36% and the Nordic 49% are more efficient. It means
fewer possibilities of financing the model for the areas more needed, as the
Mediterranean countries. The negative perception of globalization in terms of
employment is higher in the less efficient models: Mediterranean 52%, Continental
42%, Anglo-Saxon 36%, and Nordic 37%. This leads to the question of why the voters
of the less efficient states did not want a change. The answer is that most of the
unemployed are outsiders, the young, women and immigrants, but now the situation is
changing with a bigger risk of losing ones job. So it is a real possibility that the
Mediterranean model gets closer to the Anglo-Saxon and the Continental to the
Nordic.

The Working Group on Aging Population (AWG)13 made different reports supported by
ECOFIN about the aging of the European population and its consequences on public
expenditure on pensions, health care, and subsidies for the unemployed. For 2004-2050 the
public expenditure will grow more in the Mediterranean model.

13 http://europa.eu/epc/working_groups/ageing_en.htm
 The first option to pay this expenditures could be public debt, but it means bigger taxes for
the future to be paid by future generations that will not enjoy the social benefits because the
GIP will not grow as much as the social expenditure. The economic crisis also makes this
option unlikely, as more countries are under pressure from the markets because of their high
public debt. Also the public debt in the countries more in need of extra funding already have
high rates of debt, so their possibilities of increasing it are really reduced.
A second option could be increasing indirect taxes, like a social VAT, as Sarkozy
recently proposed. The problem is the more modest people are the ones that consume a higher
part of their rent income, so they will pay more, increasing the inequality of the social models.
On the other hand, globalization makes IT impossible to increase direct taxes because of the
high mobility of capital.
A third option is increasing the number of people of working age and get them jobs,
because their contributions will increase the revenues of the state. It can be done by:

Immigrants with jobs. They pay taxes, but this is a temporary solution because
the will also retire.

Increase the age of retirement, adapting it to life expectancy (longer now) as

Germany and other European countries are doing, from 65 to 67 years old. It
means fewer pensioners and more taxpayers.

A fourth option is decreasing the welfare state, less social security health care, or
increasing the years needed to get them. As the European population is becoming older, more
voters will be older, and they will reject this option.
The European problem is that the work market is still national, but the goods and services
markets are European. The reform of those, especially services (just 20% of services trade is
European) will force the states to change their work markets. The future scenario for a
common social policy will be easier as the Mediterranean system will converge with the
Anglo-Saxon system, and the continental and Scandinavian systems will merge. It gives us
two different social systems, easier to integrate. Also, the influence of the social systems in
the economies of the member states of the European Union is an important factor for creating
a common policy, because in a common market the countries with less efficient social
systems will be at a disadvantage for their companies, with the consequent loss of market
share. In order to compete on equal terms in a common market, a common social policy is
needed. Nevertheless, it seems that the countries with more efficient and equal systems are
not going to be willing to change their models in a convergence with the average of the
European states. It is more likely that European social policy will start its development with
minimum standards, allowing more progressive legislation in the field, and hence the
disparities between systems, but at the same time reducing them. Another important problem
for the creation of a social policy in Europe is the situation created mainly by the UK, where
not all members of the Union are included in the social chapter, allowing the creation of a
multi speed Union of different levels. The ideal situation will be when the common social
policy based on minimum standards works effectively, and the other states not include in it
will see its benefits and will join later. Finally, as the social policy is strongly linked with the
incomes of the state, taxes, and it is very important for European citizens, some kind of
federal structure should be need in order to deal with the common social policy. It means that
more political integration is needed before a real social policy can be achieved, and the
current possibilities lead us to minimum agreements in the field. The economic crisis does not
help in this integration, as countries such as Greece, Italy, or Spain (Mediterranean system)
have huge problems with their public debt and the sustainability of their social systems. But
as Europe has been built during different crises, the current one could lead us to some sort of
European Economic Government, paving the way for a general common posture in the field
of taxes, and hence facilitating the convergence of the social systems. It is difficult to make
previsions, but it is likely that in a middle term the social policy will be developed in the
European level on general grounds, leaving to the member states the option of keeping some
differences as political integration increases in the European Union.14

14