Thank you for inviting me to speak to you today at your Annual Meetings. A few months ago I spoke to Guntram (Wolf) about this event and about a possible topic for my remarks. There are elections coming up in France, Germany and my country, the Netherlands. At the same time, the polls – not to mention the outcome of the Brexit referendum – highlight the appeal of populists all over Europe. My remarks today will focus on what Europe’s agenda should be to counter these populist trends.
Where are we today?
Let me first talk briefly about where we are.
Despite global headwinds, our economy is recovering. Growth has returned to almost all EU countries. Growth in the eurozone in the last quarters was higher than in the US. Unemployment is expected to decrease to slightly over 10% this year which is still far too high. And our deficits are falling as well; 19 countries left the EDP since 2011 and debt levels are steadily declining. The general government deficit in the euro area in 2009 was over 6%, and is expected to decrease to slightly below 2% in 2016.
So, all in all, there are many positive developments to report. However, reading today’s newspapers you would guess differently. In fact, you’d encounter quite a lot of doom and gloom.
– ‘Europe is old and inward-looking’
– ‘Europe’s economy is in a bad shape’
– ‘Europe is slow, expensive and inefficient’
I could go on for a while.
According to Europe’s populists, the solutions are relatively simple and straightforward. Just close the borders, leave the eurozone, leave the EU and don’t sign any more trade deals in the future.
So where is all this pessimism coming from?
To answer this, let us first go back a few years, to the end of 2008, when we were faced with something unprecedented: a huge banking crisis. Which then became a sovereign debt crisis. We are still recovering from this, and then last year, we were faced with a big refugee crisis.
Using the word crisis, is beginning to be inflated. It is used too much. I’m beginning to wonder if we are not suffering from a post-traumatic stress syndrome. Every event that occurs is immediately framed as the next big crisis. Take the volatility in the stock markets at the beginning of this year, for example. Or how the markets behaved ahead of the Brexit vote. Even the slightest headwind seems to be framed as the beginning of the next crisis.
This preoccupation stemming from the trauma of 2008 – 2010 blurs our vision on the real issues at stake.
It is true, in my mind, the EU has failed to deliver on its main tasks.
The EU, and the euro area in particular, is a unique construct in the world, but in recent years it underperformed. The refugee crisis and the threat of terrorism, coming on top of the financial crisis, made it painfully clear that we were unable to guarantee people the prosperity and security that they rightly ask of us. Today, whilst the EU has become more and more intrusive, people feel that the EU has not been the solution to their problems.
The EU is also unique because of its high standard of socioeconomic security. That’s something we can – and should – be very proud of. The welfare state is part our core social-cultural heritage, it is part of our identity. We, policy makers, should be much more aware of this. And yet, this social system cannot remain static. Our welfare state is under increased pressure due to several reasons.
Firstly, the economic and financial crisis created pressure. All member states have to increase competitiveness while bringing back their finances on a sustainable footing at the same time. This requires for politicians to make difficult choices between solidarity and investing in future growth. Preferably keeping the both together.
Secondly, demographic ageing forces us to define the scope of our solidarity even further. Our population is turning increasingly grey, which poses a challenge to our public finances, for example due to the costs of health care, long-term care and pensions.
But also the ratio of people over 65 and those aged between 15-64 that changes drastically, making our social welfare state unaffordable without adaption.
Thirdly, migration may seem to offer an attractive solution to ageing, but it would be hard to realise this in practice. Immigrants face barriers because of their language or cultural backgrounds.
Their skills don’t match many of the new jobs in our societies.
Without a job they rightfully receive income support benefits and this can put pressure on our welfare states, again. And, when immigrants do enter the labour force they tend to occupy jobs in the lower segment. This means that natives face increased competition, which can put further pressure on their wages and reduce their employment opportunities. Indeed, these concerns played a major role during the Brexit debate in the UK.
And lastly, globalisation. Globalisation can be seen as another threat to our welfare state although it has brought many benefits. Take for example the rise of China,. Not only have millions of Chinese people been lifted out of extreme poverty, but lower prices for many goods have also boosted growth in advanced economies. However, too often we have focused on these aggregate gains which conceal substantial redistributive effects. Workers in sectors which competed directly with countries like China have seen their factories close and have faced lower wages or unemployment.
We often assumed that the transition to new sectors would take place automatically. But this has proven harder than predicted and the workers who have lost out have become sceptical of free trade.
We may have underestimated these side effects of globalisation. We have to face up to the fact that some have simply benefitted more than others.
So what does this mean for our agenda today?
First of all, let me say this; in recent years politicians in all our countries embarked on lots of reforms to solve problems, despite the risk of losing elections. Sometimes we were forced by external factors, implosion of banks, risk of defaults of sovereigns. Sometimes we forced each other to reform, like in programme countries. These reforms have been perceived and sometimes skillfully framed as an attack on the social security system. They have been framed as an abuse of the crisis to get rid of governments. Feeding directly into populism.
My direct response to populism would therefore be to ensure fairness and equity, between the generations, between insiders and outsiders, and between globalisation’s winners and losers. Because inequality is not a given. Because ageing and migration don’t require us to dismantle the European social model. And because implementing reforms doesn’t mean we have to diminish our social welfare state. Fairness and equity are not the answer to everything, but they surely have a vital role to play, also to understand the rise of populism in Europe. We need well-designed and well-timed reforms to increase fairness along different dimensions.
Let me mention a few.
First, fairness of people’s opportunities. Here education is the most important investment for people to get ahead. High quality education give our children the opportunity to become smarter and more productive. Training gives adults the chance to develop new skills to adapt to a changing world. The OECD’s 2016 ‘Going for Growth’ report indicated that the biggest gains in labour productivity are achieved through educational reforms. Oo little attentioj is given to that. So we need to invest in education, vocational training, improving the quality of our teachers and providing early childhood education. This is by far the most socially beneficial type of reform. It will promote fairness and equal opportunities for all. And it will help both migrants and their children. And those who are at risk of losing out from free trade.
Secondly, fairness is also about who pays the bill at the end of the day. Each and every individual or company should contribute its fair share. Let me give a few concrete examples what this entails. It means multinationals that profit from a well-functioning educational and judicial systems, also contribute by paying for these services.
This is at the top of our agenda today. If we were part of the problem in the past, now The Netherlands need to be part of the solution. We need to fix our tax systems, also in the Netherlands.
That means fighting tax avoidance and increasing tax compliance. This is a fundamental issue to fairness. A fair and effective way to allocate the costs also means if a bank fails, the investors who took the risk should carry the burden. The well-known shift from bail-out to bail-in. If you want the profits in good times, you will carry the losses in bad times.
Another example of “who pays the bill” in relation to fairness is about sharing burdens across generations. Ageing comes at a price. We share the burden of this equally over generations by linking life expectancy to retirement age.
Thirdly, we need fairness in adapting to globalisation. In this respect ensuring fairness between globalisation’s winners and losers requires on the one hand that we acknowledge that trade deals will bring benefits but also concentrated costs. So we will need to provide short-term social support as well as also long-term labor market reforms to stimulate employment shifts between sectors. On the other hand it will also be necessary to ensure other countries do not compete by lowering their labour standards or ignoring environmental standards. We’ll need to protect our standards in the trade deals we sign. There is a third element – to avoid a race to the bottom – the free movement of labour also requires we assure employees from elsewhere cannot work here by undercutting our national minimum wage.
Fourth, we need to reform our tax systems, true for almost all countries in the eurozone, to reduce the tax burden on labour. Taking on a worker is still very expensive in Europe. We can help fix the labor market and improve income equality by reforming our taxes, if we focus our efforts on the lower parts of the labour market.
To conclude, I would be the first to say that fighting the different types of inequality is not the sole solution to today’s populism. But I’m absolutely convinced that inequality is one of the biggest drivers of people’s concerns. And many populist parties understand that very well and put the social welfare state on their agenda. Let’s take it back. So, fairness and equity should be the leitmotif in our approach today.
Solving the real underlying problems is one thing we have to do. Another is avoiding to repeat old mistakes. The EU has in past decades been built by taking big, historic steps. Taking a lot of risks of weakening the whole construct. So let’s not take any more big leaps in the dark as we have done in the past.
As I said the EU is a unique construct with no simple governing structure. And yet questions of migration and globalization are too big for individual member states. My response to populism is not a lecture on how we can improve the governing framework of the EU. It is not to think of another big project that requires a deep dive in the pool of integration. Not now, at a time when our fundamentals are so unstable and people question the legitimacy of the EU as a whole. The worst response to real problems is to simply repeat the old answer of more and deeper integration.
Let’s take a pragmatic and yet fundamental approach. Let’s take on the questions of migration, globalization, ageing and technological disruption from the angle of equity and fairness, to reduce the many threats to our electorates. Security and prosperity should again be the key deliverables of the EU. Step by step.
Strengthen what we have and actually complete it. Secure our outside borders in order to manage migration and integration. Reform our welfare state so it becomes and remains beneficial for all generations. And finish projects such as the Banking Union, so it really protects tax payers, the Capital Markets Union, so capital becomes available to smaller companies and start-ups, and the Single Market, which can still contribute to growth.
Explain what Europe is and isn’t. And stop using Europe as the convenient scapegoat for the difficult decisions we need to take.
Compliments of the European Council