We asked two analysts to share with us their insights on the impact of Covid-19 over de Southern European Welfare States.
«The crisis could and should be an opportunity to improve the safety nets»
The corona-crisis and the measures to slow the spread of the virus have led governments to put their economies in an induced coma. A large proportion of workers are either asked to work from home, or to put their economic activity on hold. The contraction in both demand and supply demands massive government intervention to support companies and workers. In Southern Europe, the crisis has revealed the fragilities of systems of income protection, but it could also constitute an opportunity to close longstanding gaps in social safety nets.
Southern European economies are the ones that will likely be the most negatively affected by the corona-crisis. The European commission’s economic forecast for 2020 projects a decline of -9.5% of GDP in Italy, -9.7% in Greece, -9.4% in Spain and -6.8% in Portugal. In contrast, the projection for Germany is -6.5% and -5.5% for Austria. Northern Europe has a higher proportion of skilled, service-based jobs that are easier to perform from home (e.g business consultants and financial advisers), while jobs in Southern Europe tend to be less skilled (e.g shop assistants) and more difficult to perform remotely. In 2017, more than a third of Dutch workers worked sometimes or usually at home. This proportion was less than 5% in Italy. Prof. Pedro Martins of Queen Mary, University of London, estimated that only 9% of Portuguese workers could perform their job remotely.
The problem is that all these workers that cannot perform their job remotely need extensive government support, and Southern European safety nets have notoriously struggled to reach people at the periphery of the labour market. This is because they often privileged the protection of jobs over the protection of people. There are two ways to protect workers from unemployment: one can provide income support if they lose their jobs, or make it more difficult for them to lose their jobs in the first place. While employment protection has been relatively high (emphasising the latter), the social safety net had many gaps (to the detriment of the former). One simple way to measure this is to compare the number of people receiving unemployment benefits and the number of unemployed: the OECD shows that the discrepancy between these two numbers is much greater in Mediterranean countries than in Northern Europe. These gaps in coverage -due to restrictive entitlement rules such long minimum contribution periods, or a sizable informal sector– have particularly affected younger people, families and women without long and stable contributory periods.
In this context, reaching effectively those in need of government assistance has been a challenge in Southern Europe. Layoff or income protection programs have been able to reach those that could justify formal employment, but Southern Europe’s shadow workers, for instance the female carers and childminders that take care of the young and old in Italy, have struggled to access assistance while their economic activity had to be interrupted. The crisis could and should be an opportunity to improve this safety net.
«The blame game is not so easy to play this time»
In the aftermath of the 2010 Eurozone crisis, a new economic governance architecture created to protect the Economic and Monetary Union (EMU) against macroeconomic imbalances imposed severe control mechanisms that lead to across-the-board spending cuts in countries under fiscal surveillance. Strict control and enforcement mechanisms of the European Semester were directly responsible for major retrenchment in key welfare domains such as health, education, pensions or unemployment that had, until that point, remained within the remit of nation-states. The intrusive role that European institutions and the IMF played through the Memoranda of Understanding changed the rules of the game with regards the nature of the relationship between European institutions and (some) member states. The question that looms until today is the extent to which this form of supranational control over the decision making capacity of member states in policy domains where the EU has a weak mandate is explained by the extraordinary circumstances of the economic shock of the Great Recession or signals a more permanent shift. For sure, the European integration project has paid a price for the enforcement of austerity politics. Even if European institutions are only partially responsible, regressive policy recipes combined with longer than expected economic recession has created a fertile ground for rising Euroscepticism and domestic populism.
The response that the EU will give to the economic crisis caused by the Pandemic and strict lockdown measures needs to be understood against this historical background. Italy and Spain will be amongst the countries most severely affected. Their capacity to respond to the health and economic crises is highly compromised by their high levels of public debts. With the prospects of a long and deep economic recession, their capacity to sustain the important social protection packages, the so called escudo social will crucially depend on financial assistance from the EU. What role has the EU played? For a number of reasons, the EU has been pretty irrelevant in the management of the health crisis. The European Agency for Disease Control (ECDC), despite being created after the previous global health pandemic, has played a very marginal role. Countries have responded individually with the WHO being the only supranational organization playing a relevant role. Politically then, hopes for the relevance of the European Union in this crisis are placed in the subsequent economic crisis.
At the last European Summit in March 23, the Spanish PM asked for mutualization of the debt in the form of a recovery fund financed through perpetual EU debt. The plan was backed up by Portugal and Italy but rejected by Germany and the Netherlands, whilst France stayed quiet. Although the issue is obviously highly contentious from a political point of view with a sharp (again) North-South divide, Southern European countries seem to have greater negotiation power that they did back in 2010. The blame game is not so easy to play this time. Whichever the final solution, the trade-off can go in different directions. Whilst a less solidaristic approach will probably increase Euroscepticism in countries of the periphery, a more flexible approach might create domestic tensions in countries of the core. Negotiations are anything but simple.