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The recovery triangle must include social investment if it is to succeed

Social investment / COMMENTARY
Laura Rayner

Date: 17/12/2020
The COVID-19 crisis has exploited and widened social inequalities. Europe must learn the lessons of the last crisis and ensure that the recovery sets the goal of reducing inequalities as its guiding compass.

The pandemic has brutally exposed the false economy of a decade of pursuing debt consolidation and strict budgetary discipline through cuts to social investment. Throughout 2020, Europe’s public services have creaked under the burden of the immediate and severe extra pressure the pandemic has provoked. Even those health systems generally acknowledged to be more resilient had difficulties in coping. Social services, often already underfunded and struggling with staff shortages, have experienced increased demands while needing to operate in more complex environments. The ability of educational institutions to quickly adapt to online learning has been greatly influenced by pre-existing financial pressures and the socioeconomic status of their pupils.

Inequalities are too wide and still growing

It is clear that we have not all been in this together. Instead, inequalities – already too wide – are likely to widen further still. Women’s participation in the labour market has fallen thanks to the unequal gender participation in sectors which have been hit particularly hard by the lockdowns and are unlikely to make a full recovery (e.g. retail, tourism). Children growing up in poverty, who were already less likely to reach tertiary education, experienced difficulties participating in digital education during the lockdowns. This, combined with the potential weakening of their parents’ or carers’ employment prospects, means that they are facing a future with fewer opportunities, not more.

Already disadvantaged areas are most vulnerable to the negative impacts of the COVID-19 pandemic, therefore creating new and exacerbating existing internal divergence within the EU. The expansion of non-standard forms of work has created divisions in the labour market between well-protected workers and those with limited access to social protection and employment rights. It has also made it more difficult to reach those most in need of support. The impact of this crisis will be long-lasting, wide-ranging and inequitable.

For the overall resilience of the EU, the recovery must place people at the centre. Europe must counter both pre-existing and new inequalities, not just because it should but because it makes economic and political sense to do so. Allowing a feeling of abandonment by our institutions to develop does not move us towards a more stable and sustainable future, and certainly does not strengthen the EU. Indeed, the Green Deal, such a central tenet of the recovery, will not succeed if the burdens of the green and digital transitions are not distributed amongst the population equally.

Social investment must be a priority in the recovery

The Recovery and Resilience Facility (RRF) offers an opportunity to lead this change. Currently, however, the overall balance of the Facility does not suggest that improving social outcomes is a top EU priority. The “fairness” element of the four priorities set out in the 2020 and 2021 Annual Sustainable Growth Strategies does not receive close to the same attention as the other principles in the RRF guidance. Furthermore, only one of the flagship projects in the RRF, “Reskill and upskill”, can be construed as pursuing a social objective at its core – though it remains clearly related to the labour market.

Social investment must be about more than just employment. It is about investing in people to allow them to participate fully in all aspects of life. It is shifting our mindset to one of prevention instead of cure. A happier, healthier and more productive workforce will have a positive impact on our economy, resilience, and individual and collective well-being. Providing opportunities for those with disabilities to participate fully in society demands less in terms of other support (e.g. unemployment support). Creating a labour market and society which provides greater opportunity for older people, migrants and vulnerable groups to contribute not only makes our society more inclusive but also moves to address Europe’s growing challenge of demographic change. Breaking the intergenerational poverty cycle will result in lower expenditure in response to poor health outcomes, higher crime rates and increasing need for social protection.

If the EU wishes to be more resilient in the face of long-term, strategic challenges – future pandemics, climate change, demographic change –, then future-oriented social investments must be programmed into the national recovery plans currently under development. While stimulating investment in large infrastructure projects can have benefits in terms of creating jobs or rejuvenating deprived areas, it alone will not result in the societal change that is needed. Bearing in mind the debt burden we are now likely to inflict on the next generation due to this crisis, it is our obligation to make sound investments into their future, aiming towards true upward convergence for all.

COVID-19 has underlined the necessity of change

With most, if not all, member states likely to see their deficits exceed 3% of GDP this year, public debt increasing across the board, and the low-interest-rate environment likely to remain, it is time for a thorough reflection on the role of EU fiscal rules, and EU economic governance more broadly. The balance between investment and consolidation has not been well-maintained since the establishment of the European Semester process a decade ago. Although the initiation of the general escape clause created flexibility for member states to react to the crisis, its continuing necessity has the potential to undermine the rules it is supposed to support. If the exception becomes the rule, then there is reason to reconsider the good sense of the rule in the first place.

EU fiscal rules must be reformed to exempt social investment in assessments of government deficits and compliance with the Stability and Growth Pact (SGP). Providing more fiscal space for social investment allows member states to make long-term structural investments without fearing an imminent requirement to consolidate spending. These investments help develop overall resilience by upgrading social care systems, improving education, reducing skills gaps and preparing for the impact of demographic change. Reinstating SGP rules without executing this reform would undermine the work already done to stimulate the recovery.

Social resilience must also be measured

National and regional governments must prioritise social investment which supports basic public services during the recovery. Indeed, it could be argued that channelling recovery funding to people through social investment in public services, rather than via companies for stand-alone projects, is more compatible with the Single Market. This is especially relevant considering the distortion of the level playing field already caused by member states’ uneven use of state aid flexibility.

In order to properly identify vulnerabilities, the RRF must incorporate indicators that measure the social dimension of resilience, as well as the economic, green and digital dimensions. The move away from the predominance of GDP as a measure of progress must now begin in earnest. Through the European Semester process, the Commission has become adept at identifying key social issues across all member states, with the country reports and country-specific recommendations becoming increasingly attentive to issues wider than economic and fiscal governance. The Commission must now live up to its repeated assertion that it will stand firm on ensuring that member states incorporate policies which address the social country-specific recommendations, issued in recent years, into their recovery plans. The progress on the implementation of these reforms must be properly monitored. This approach should not be time-limited to the life of the RRF but must also continue thereafter.

The twin transitions will not happen without public support

‘Building back better’ will not be possible without wide public support. Suppose it appears that the primary ambition of the RRF is limited to strengthening the economy, increasing productivity, and pursuing green objectives with little or no consideration for the wider social impact. In that case, it would be very hard, if not impossible, to persuade people to make the changes necessary to move towards a more sustainable existence. If governments across the EU are seen as being unable to provide basic public services because of poor resource allocation, it will only build scepticism in their abilities to successfully fund the green and digital transitions and prepare for demographic change, which will require high levels of capital investment and innovation absorption.

Investing in more accessible, affordable and higher quality services to all – whether through early years care, education, health, long-term care or any other public service – will lead to better productivity, employment rates, health outcomes, social inclusion, political stability and well-being. The EU must prove that it has learnt the lessons of the last crisis. If it is to make the transition to a more sustainable future and build its resilience in the face of the challenges to come, social resilience must be fully interwoven with the green and digital transitions, into a recovery triangle.

Laura Rayner is a Policy Analyst in the Social Europe and Well-Being programme.

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