Social stability will become Europe’s challenge in 2019
Many interpret the current turbulence on financial markets as
anticipation of an economic downturn. Although many sentiment
indicators, but not all, predict some economic slowdown in 2019, the
actual economic data remain relatively strong. The expected slowdown
follows a decade-long period of gradual recovery after the financial
crisis. In many countries recovery has been underpinned by economic
reforms and austerity measures. The relatively strong economic
performance in advanced economies softened the call for better
social protection, as people benefited from new job creation and
rising disposable incomes. The upcoming economic slowdown, as well
as the long and often intensive reform period, will awaken new calls
for better social protection. Recent protests in various EU
countries are likely to be just the beginning of a period with less
social stability. It will become a challenge to policy makers, at
international and national levels, to find a balance between
increasing social protection and maintaining the course of
indispensable structural economic reforms.
The European economy benefited from a remarkable recovery after the global financial crisis and the European debt crisis. Although EU economic growth still lags substantially behind US growth, the gradual recovery supported job creation and disposable income growth. Both have important social implications as more people have been able to find a job and an income, reducing their dependence on social security systems. For the entire EU, employment increased by 4.2% in the past decade (Eurostat), while real gross disposable income grew by 5.9% between 2008 and 2018 (DG ECFIN). Despite these positive evolutions, one may argue that both job creation and income growth actually disappoint in comparison with real GDP growth (9.3% since 2008). Hence, European households benefited from the economic upturn, but maybe not as much as some have been hoping for. Obviously, these aggregate evolutions hide substantial disparity in income evolutions, adding additional arguments to the debate on the equal distribution of welfare gains.
Moreover, there are striking differences in real disposable income
developments across the EU. As Figure 1 indicates, Southern Europe in
particular suffered from a decline in real disposable income. Apart
from Luxembourg and Sweden, it is mainly Central and Eastern European
countries that benefited from a clear rise in real disposable income.
Most Western European economies hardly witnessed any increase.
Compared to the US, where real disposable income grew by 22% over the
past decade, Europe clearly lags behind. Even European economies that
did exceptionally well in recent years, like Germany, hardly
experienced an income growth effect in real terms, despite the low
Figure 1 - Real gross disposable income in 2018Q3 versus 2008Q1
A similar picture emerges from comparing employment growth figures. Total employment declined in several EU countries, in particular in Southern Europe, but also in some Eastern European countries. Employment growth has definitely been better in Western European economies, but it hasn’t been exceptionally good. Continued rigidities and recent tightness of the labour markets in many EU economies are undoubtedly part of the explanation.
Figure 2 - Employment in 2018Q3 versus 2008Q1
More Social Europe?
These figures indicate that the overall welfare gains for households have been limited this decade, and even negative in a substantial number of EU member states. These insights provide some background for the recent social turmoil in some EU countries. It is clear that the overall welfare gains for European society could have been larger in such a long recovery period. It also indicates that the European recovery is far from accomplished. The expected downturn comes far too early for the European economy. Since the EU, as an open economy, is currently the victim of international developments like the ongoing trade war, it will be hard to avoid a decline in EU growth. It remains, however, essential to continue structural reforms and investments in order to revive the European economy again.
The recovery so far has been insufficiently translated into welfare gains for European households. The demand for more purchasing power and better social protection seems legitimate given the observed macroeconomic developments. It risks, however, to slow down structural reforms which could cause more damage to the European economy in the longer run. A careful balancing between increasing welfare gains for European households and strengthening the potential of the European economy in the longer run will be a fundamental challenge to European and national policy makers.
Various risk factors have influenced the economic outlook in 2018.
Many of them will continue to be on the agenda in 2019, including
Brexit, the trade war and concerns about debt sustainability. Social
instability has so far been limited as a risk to the economic outlook.
From an economic perspective, it seems likely that the call for social
protection and welfare gains will be louder in 2019. Though many
demands may be legitimate, they are a reason for concern for the
future economic outlook