Solidarity and EU social policy is the key to economic recovery

Europe may need a social pact and solidarity, not just new fiscal rules, if it wants to come good on the promise of job creation and economic growth

Must social policy – in particular, solidarity at the European level - be viewed only as a victim of Europe's debt crisis, with supporters fighting a rear-guard action against spending cuts? Or should it aim to play a crucial role in restoring confidence and growth? For the last two years, European leaders have been locked in discussions over the financial arrangements necessary to avoid a meltdown in the debt crisis that started with Greece. Indeed, one of the ways in which this has damaged Europe is that there has been little time to examine other issues. Scant attention has been paid to addressing the social dimension of the crisis, yet this may provide the key both to gaining voter support during difficult times and to maintaining growth potential over the short and long run.

There is a need to consider both from a theoretical and practical perspective the requirement for social policy to play a role not just in budget cuts, but in shaping the solutions by which Europe can survive and emerge stronger from the present crisis. As Gordon Bajnai, former prime minister of Hungary suggests: "Europe must confront the two major forces shaping the world of politics: markets and voters." To resolve these tensions, Europe needs to offer a route back to growth and prosperity, and it will need a coherent social policy. Nobody would choose fiscal austerity and certainly not democratically elected governments that sooner or later must be accountable to voters. Yet an era of fiscal stringency is inescapable, if heavily-indebted countries are to avoid continuing financial crises and policy stalemates.

The threat posed by budget cuts to a wide range of social programmes have already been widely discussed, leading many commentators to argue that social spending should be protected on a very broad basis – that Europe needs a social pact and solidarity, not just fiscal rules. Nevertheless, such discussions often become complicated by conflation of various aspects of social and economic policies. In addition, it is virtually impossible for fiscally constrained governments to avoid cuts in some of the largest components of public sector spending. Nor can the European Commission take up such a broad role, if only because budgetary resources are extremely limited.



However, a sharply focussed "gold standard" programme for social investment is not only justifiable and affordable - but good value for money. It is also readily actionable, for example, through extension of existing successful European Union schemes. We are in favour of an EU-level "gold-standard" for social investment in human capital, based on expanding cross-border education and training schemes. This would guard against the potentially debilitating effects of fiscal austerity on human capital by ensuring that opportunities in education, life-long training and EU job markets would be open to all citizens. The target would be to create a stronger base for a skilled and mobile continental labour market, benefiting job seekers and employers alike. Furthermore, such a programme would enhance both short and long-run growth prospects and make an important contribution to EU integration and social stability.

While recent proposals from the commission to greatly expand the successful Erasmus training and education programme – into "Erasmus for All" with more placements abroad – would be a step in the right direction, they are still too timid in the face of the current problems. A bolder step would be an annual investment of €40-50bn - about 0.3 per cent of European GDP - could offer as many as five million full and part-time cross-border placements each year, generating an alumni tsunami and significant contributions to skills formation, mobility and reductions in youth underemployment. Such a labour-intensive programme might support as many as a million full and part time jobs in the education sector and expand the economy by more than 0.5 per cent over a five year time frame.

A commitment of this type would go a long way towards safeguarding standards and avoiding divisive divergences in education, skill formation and employment opportunities for citizens. Notably, such developments would at least start to address valid criticisms that - in contrast to the United States - Europe has a fragmented, inappropriately skilled and insufficiently mobile workforce that generates grossly divergent unemployment rates under monetary union – implying that a single currency regime is unsustainable. A core programme should be adequately funded and actively pursued at the supranational level because of the important externalities involved in education and training. This would represent a key contribution to the future economic prospects and social stability of the whole EU and not just individual recipients of assistance or their home states. Europe-wide costs would be containable and relatively low in comparison with potential returns in terms of economic and social progress. Additional, if less tangible, benefits such as a more inclusive and resilient society might also follow.

Vanessa Rossi is global economics adviser at the consultancy firm Oxford Analytica and one of the authors of the Solidarity: for Sale? The social dimension of the new European economic governance report, published by the Bertelsmann Stiftung research group