The Lisbon summit of March 2000 establish an ambitious aim to EU government authorities: making the European union "the best and active knowledge-based economy on earth, capable of ecological economic growth with an increase of and better jobs and greater social cohesion". Even though some progress has been made, you can say that the desired goals remain definately not being achieved. Low job rate, low monetary growth and ageing of inhabitants are just a several elements that question the success of this ambitious project.
In this newspaper we make an effort to analyse the impact that European union social insurance policies have on the entire monetary performance of the EU territory.
The first part of our own paper focuses on the development of EU social coverage, by explaining its progression and the main distinctions existing among EU social models. The next part provides theoretical framework on the controversial trade-off involving social equity and financial efficiency. In the third part, we analyse the key economic losses linked with European union welfare procedures. Finally, we use these effects to provide some useful types of EU social programs and assess their negative impact on EU monetary efficiency.
European Sociable policy
According to the Treaty of Rome, social policies remained largely under nationwide affair, as the countries didn't manage to reach a compromise about their harmonization. Among the accomplishments of the Treaty of Rome is the provision about the establishment of the Western european Social Finance (ESF). It was mainly worried about the simplification of the work of employees, the increase with their mobility in the Community and their version to change by means of vocational training.
The Single European Function, the Maastricht treaty and the Nice Treaty helped bring further changes in terms of social policy.
The Lisbon Summit offered a new increase to the introduction of the European public policy. The Open Approach to Coordination (OMC) is defined as an instrument of the Lisbon Strategy. This new tool of governance is aimed at the coordination and harmonization of public policies and is dependant on European guidelines, which are transferred into national action packages. The OMC founded common indicators for comparing best practices. The evaluation and review of the national ideas are periodically arranged at the Western level.
European social models
Despite initiatives trying to harmonize social policies at the EU level, we can notice that a single Western social model can't be detected, since the preferences range among member Claims.
Sapir distinguishes between four types of European sociable models. Nordic countries (Denmark, Finland, Sweden and holland) are characterized as countries with the best level of communal spending, high taxation rate and strong labour unions. In Anglo-Saxon countries (the United Kingdom and Ireland) cash transfers are mainly directed to the folks in working get older. The labour unions are weak. As to wage dispersion, it is quite huge and increasing. Continental countries (France, Germany, Austria, Belgium and Luxembourg) are characterized by high expenditure on employment coverage, health and pensions, still having strong trade unions. In Mediterranean countries (Italy, Spain, Portugal, Greece) the primary part of the social spending goes to pension money. The sociable welfare systems of these countries acknowledge job protection and early retirement.
Economic perspective of welfare policies
Extra-economic factors are also at the base of welfare regulations, and can make clear the reason why they constitute nowadays such a controversial issue. The core matter regarding welfare plan is due to the dilemma of the complex relation between equity and efficiency.
Equity versus Efficiency
The reason welfare policies are believed important relies on social concerns implying more equitable monetary perspective similarly, and significant costs on the other.
The degree of inequality, existing in virtually any country, can be explained by the Gini coefficient produced from the Lorenz curve, which shows the relation between the cumulated circulation of income to the cumulated syndication of homes.
In Amount 1, the diagonal signifies the curve of utter equality, where each person must have the same amount of income. A hypothetical curve in the left-bottom nook will symbolize the curve of complete inequality, where one individual will have the total income. The curve 'c' shows a hypothetical country where in fact the distribution is among the two complete opposite extremes.
Curve of overall inequality
Figure 1 - Lorenz curve (Source: based on Samuelson, Nordhaus)
The area in gray represents the Gini coefficient. It differs significantly among EU member Expresses, with typically 30. 6% in 2007 and of 30. 5% in 2008. In 2009 2009, the interpersonal welfare expenses in the European union accounted for 42. 2% of government authorities expenditure, however the data available till now don't give evidence of an improving situation in conditions of equity (Stand 1).
Table 1 - Source: Eurostat
The "leaky-bucket" experiment - developed by Okun - can provide an explanation of the trade-off between collateral and efficiency. Okun illustrates the price of redistribution insurance policies by demonstrating that not the entire sum of money taken from the richer would go to the poorer.
Figure 2. Source: predicated on Pestieau
Pestieau runs on the simple example to make clear this monetary metaphor. As with Physique 2, he assumes that at point A, Robinson has 8 oranges whereas Tintin has 2. If we want to redistribute the oranges equally, we should copy 3 from Robinson to Tintin. However, even as transport those oranges in a "leaky bucket", some of them will be lost: Robinson will have 5 oranges and Tintin 4 (point B). The lost orange represents the price tag on transfer, exhibiting a damage in terms of efficiency. In real life, that cost is because of factors such as administrative costs and lower work in work created by the tax-payers and savings.
The Matthew Effect
Another reason at the base of welfare procedures inefficiency is the so-called Matthew result. The Mathew impact supports the idea that - usually - individuals who benefit the most from sociable spending are those who need it less. This is due to social and institutional reasons: the lowest socio-economic groups are often stopped from benefiting from EU social guidelines because of "administrative complexity and fear of stigmatization".
The result of this phenomenon can be an upsurge in inefficiency of welfare insurance policy, related to the disregard of its main goal: redistribution of prosperity.
The aspect of the trade-off between equity and efficiency is a controversial concern. Despite the fact that the statistics may actually show a correlation between general public spending and GDP, we can dispute about the course of the causality. Furthermore, as Pestieau mentions, "we can not correlate interpersonal spending with GDP because less good cultural systems [. . . ] experienced globally higher expansion rates than more flourishing systems like the Northern expresses of the European union in the first eighties". Actually, if we analyse the tendency over the years, we notice that countries with a laissez-faire market had a better GDP performance during the last decades.
In another paragraphs we will concentrate on the impact of European union welfare procedures on economic efficiency, particularly through the influence that these insurance policies have on savings and investment, competition and disincentives to work in the European Union. Furthermore, we will show the inefficiency of the EU welfare policies, not necessarily consistent with their expected result. Finally, we will use those tools to discuss on the financial efficiency of some European union policies being currently undertaken.
Savings and Investment
Basic macroeconomic theory debates about the value of cost savings and investment to be able to accomplish increased economic development. Many economists declare that "because the tendency to save increases with income, insurance policies redistributing revenue from the richer to the poorer would reduce personal savings and expansion by the same token". Quite simply, richer European citizens will reserve an extremely large proportion of the additional income on personal savings, while disfavoured socio-economic groupings are likely to save less. Therefore, inequality can be economically desirable to some extent, since economies with greater inequality levels would experience a higher economic development.
Given the recent failing of the Lisbon strategy, the concern about the ability of the EU to contend with other world major financial powers, including the US and China, is being significantly questioned.
EU welfare guidelines would not prevent the fact that part of the social protection financing originates from labour fees. In a globalized world where in fact the EU operates as a significant trade player, the existence of these fees would cause a detrimental effect on EU's competitiveness. In fact, the bigger the Western european firm's wage cost and cost of production is, "the less competitive it will be relative to companies from countries with lower tax burdens". Thus, taxation techniques can be an "element that makes the European union a less attractive place", by discouraging overseas investors and stimulating duty evasion and emigration. Consequently, it is important that EU public regulations do not adversely affect competition and that private companies are able to compete freely, because they are naturally better.
EU welfare plans would also cause deadweight loss through the distortions of consumer choices, given that all of the products reduces without competition. Taking into account Ricardo's model of comparative gain, the modification of income implied in payroll taxes would give a comparative edge to both labour and capital intensive countries when trading products with the EU.
Disincentives to Work
Another essential requirement of EU welfare policies is the problem of the disincentives to work and the effect of individual behavioural replies to the incentives implicit in them. Both have a large impact on monetary efficiency. For instance, "social security can generate socially undesirable early on retirement". Also, "disability insurance can lead to more absenteeism on grounds of slight health complaints".
"Traditional micro-economic reasoning is based on the concept that an individual is only going to seek work when it offers him with materials gain". If preventing to work and taking benefits was more economically attractive than making profits via work, employees would presume the possibility to lessen their labour supply, catching them within an "inactivity trap". Furthermore, many people would consider the possibility to work in the unreported current economic climate while still illegally profiting from minimum pension provisions.
Inefficiency of the execution of EU policies
Finally, it is vital to consider the inefficiency of the execution of EU public policies. Following the Matthew impact - described earlier - the distribution of the EU's social expenditure has a poor impact on monetary efficiency in the European union. Indeed, public expenses associated with European union plans often favours the wealthiest social groups, by giving them with "social procedures intended for the disadvantaged groups".
Finally, the Administrative costs should be talked about. Even though it holds true that having EU common social policies generally reduces administrative costs, they are still significantly high, as the execution of such Western policies is manufactured on a nationwide level.
Figure 3. Best Practice frontier (source: Pestieau )
To sum up, the fruitful inefficiency in the allocation of resources should be considered when it comes to social insurance policies. As seen in Figure 3, there's a productive inefficiency if the same development of goods and services can be carried out with fewer resources (point a to c) or if more can be produced with the resources used (in point a to b). This denotes that "better can be carried out with less".
Now that people know from what extent social guidelines affect economical efficiency, we can concentrate on the impact that some of the European union welfare procedures may have on its economical performance.
Examples of EU welfare policies
At the European union level, lifelong learning programs - such as Erasmus and Grundtvig- have emerged as "critical factors for attaining the Lisbon strategy's goals of enhancing economical expansion, competitiveness and cultural addition" by enhancing the knowledge, skills and competences of Western citizens.
Notwithstanding the social benefits associated with such programmes, we can still question whether there can be an monetary payback for the 7 billion spent for 2007 to 2013.
For instance, the Grundtvig programme is aimed at "supporting adult learning personnel to travel abroad for learning experiences". Setting the public benefits aside, we can debate if the marginal economic end result of teaching an adult is the same as of instructing a younger person that will be much longer in the labour market. This may cause a deadweight reduction. If the increase in productivity doesn't replace the money invested on that programme, there is no economic advantage in doing so. This will have a negative effect on EU's competitiveness in comparison with other countries.
Moreover, we have to ask if the people profiting from these programmes are the ones who actually need it, just as the Matthew effect. The substantial personal financing needed in programmes like Erasmus can exclude lower socio-economic organizations. This has a counter-efficient result on collateral too.
Furthermore, the results of these programmes highly will depend on individual behavioural replies.
Finally, the administrative costs and other actions of the life span Learning Programme also needs to be taken into consideration, as it accounts for about 180 million per calendar year.
The Health insurance and Safety polices can have a poor effect on the efficiency of European union overall economy too. As a matter of known fact, there is an opportunity cost when complying with these legislation, as more successful investment decisions - such as professional expansion plans - need to be either postponed or deserted. This builds a specific drawback to the competitiveness of the European union towards other countries.
Health and safety at the job "represents today one of the main advanced fields of the cultural policy of europe" according to the European Payment. However, the commitments concerning for case workplaces and work equipment can have a poor effect on the economic part. These regulations - backed by the Improvement programme - can in some cases arm the competitiveness of EU companies, given that international competition will always have the choice to make other investment options, based specifically on whether they are better or not from an monetary point of view.
Environmental Directives can also cause the same problems as medical and Safeness work regulations. A good example of this can be the Directive on Environmental Sound and on Misuse elimination and management, which signifies one of the EU's 6th Environment Action Programmes. Even though the purpose of these EU procedures is also related with reducing overall costs, it will always be more efficient to use in an unrestricted market. If those directives really experienced a positive impact on economical efficiency than the private sector would apply them automatically.
Concluding, there a wide range of fields where EU social procedures can have an undesirable impact on the efficiency of EU economies. The main is to examine whether "the deficits associated with these welfare procedures exceed the associated gains". It is in this romantic relationship between your total economic benefits and losses that economists don't find a consensus.
As in Shape 4, there can be an optimal point (A) where online gains can be maximised.
Figure 4. Economic Gains and Losses of the Welfare Talk about. (Source: predicated on Haveman )
It is a good question to ask if one of the reason why for the indegent financial performance of the European union during the last few decades is probably not related with its size. Indeed, the aspect of the European union policies might not be at an ideal point, as in point B. Furthermore, we could even argue whether economic deficits engendered by these welfare plans surpass or not - nowadays - the economic gains, just as point C of Body 4.
In this newspaper we tried to give a general summary of the European interpersonal policy in an economic perspective, highlighting the financial costs related to the people policies.
After reviewing the development of the European cultural policy, different social models and analysing some monetary aspects, we connected both perspectives jointly and structured them into four main categories. Moreover, we used these to assess the economic efficiency of a few of the social programs being currently put in place at the EU level.
Despite the potential social benefits associated with EU insurance policies, we can conclude that there is financial inefficiency. Those cultural policies have a negative impact on savings and investments, a detrimental influence on EU's competitiveness, and may also create disincentives to work among its beneficiaries. In addition, we mentioned the inefficiency in the execution of these social policies. THE VERY BEST Practice Frontier graph demonstrated that "better may be accomplished with less".
Taking into consideration all these arguments, we can conclude that some important reforms have to be executed at the European union level. Structural and financing changes have to be made in order to maximize total profits and lessen total loss, making the European union welfare regulations more economically successful and ecological.