There are quotes so good they become trite through overuse. So it might be thought of Jean Monnet’s line that Europe will be forged in crises and become the sum of the solutions it addresses them with. Cliché or not, the foresight of Monnet — one of the architects of the EU — has held up in this crisis as it has in past ones. The pandemic helped the EU cross the Rubicon of common borrowing for fiscal transfers.
But another change also pushed the EU forward in this crisis, which didn’t involve finding new solutions but rediscovering something old. For two decades from the 1990s on, Europe’s governing parties — the centre-right but also the centre-left, notably under Gerhard Schröder in Germany — were seduced by a form of market fundamentalism-cum-redistribution: restrain the state, let markets work their magic, then compensate where necessary. That governing philosophy was already wearing thin after years of fiscal austerity, under-investment, and the growing threat of climate change. The pandemic put the nail in the coffin: the obvious imperative of smart state intervention, to manage the health crisis and to support livelihoods through lockdowns, allows Europe to embrace the social market economy again.
The relish with which the European commission is running with this revaluation of the economy’s social aspects makes it near-unrecognisable from its own incarnation of just a decade ago. Then, it was the champion of fiscal consolidation, deregulation, and “competitiveness” in the form of lower unit labour costs, aka compressing the wage share of national income. And now?
This month the commission launched an action plan for the “social economy” — the various types of entities that carry out economic but not-for-profit activities, from social enterprises to mutual societies and charities. In the same week, it published proposals to firm up and clarify gig workers’ rights — putting into legislation some of the developments that have been taking place in courts around the world or by individual EU governments to ensure that platform workers do not get short-changed by cracks in labour law.
Meanwhile, its year-old push for an EU directive on adequate minimum wages is gathering pace. The Nordic countries, which don’t have legal minimum wages, have opposed it for fear it will undermine their model of collective bargaining. Now Sweden’s new social democratic prime minister, Magdalena Andersson, has accepted a compromise in the council of national governments. It is very possible the French council presidency will bring the process to a conclusion next year.
Wind in the sails of Europe’s social market economy, then. But these winds are international. In the US, Joe Biden’s administration is explicitly making policy using a doctrine I describe as progressive supply-side economics, which sees social spending as investments into higher work participation and greater private sector productivity. The UK, barely a year after leaving the EU in a quest for divergence, adopted a European-style wage replacement scheme for those losing their livelihoods in the pandemic. Its conservative government is raising taxes to historically high levels to fund the public health service. And in Japan, a new prime minister rails against “neoliberalism” and promises a more redistributive economic policy.
So the EU and its member states (in many of which the centre-left is ascendant) are riding the changing global currents of economic thinking. That was true in the previous phase, too: the uncritical infatuation with little-regulated markets was a worldwide phenomenon. The difference is that now, Europe is aligning with a global phenomenon that plays to its strengths.
In a new paper, economists Thomas Blanchet, Lucas Chancel and Amory Gethin use the most comprehensive methodology of inequality to compare Europe and the US. Europe has more egalitarian incomes; no surprise there. But two other findings are far from obvious. Europe’s greater equality is not due to a more progressive tax and transfer system. In fact the US redistributes more to the poorest. Instead, the markets’ own rewards — before redistributive taxes and transfers — are much more equally shared in Europe. More, in fact, than in America after redistribution.
That is the return from persistent social investments — even during the lean years. The global social turn caused by the pandemic allows Europe to reclaim its DNA. Former German chancellor Angela Merkel used to say Europe has 7 per cent of the world’s population, 25 per cent of its economy, but 50 per cent of its social spending. She meant to point out a problem. It looks increasingly like an example to emulate.