Resilience of European welfare regimes against the negative impacts of the financial crisis 2008

Table of contents

List of Tables and Figures

1 Introduction

2 Challenges for Three European Welfare States: Sweden, Austria and Spain
2.1 Welfare State Typology
2.2 Atypologyofeconomiccrises
2.3 Impacts of the financial crisis on national budgets (2007 - 2010)

3 Impact of the Crisis on Unemployment, Poverty and Distribution
3.1 Unemployment: Developments in Sweden, Austria and Spain in comparison
3.1.1 Unemployment rate of the total population (from 15 to 74 years)
3.1.2 Youth unemploymentrateandyouth unemploymentratio
3.1.3 Unemployment rateaccording to the highestlevelofeducation
3.2 Poverty: Developments in Sweden, Austria and Spain in comparison
3.2.1 Poverty rate ofthe total population
3.2.2 Youth-povertyrate
3.2.3 Old-age poverty rate
3.2.4 Poverty rate of single parents with one dependent child
3.2.5 Summary ofthefindings concerning poverty
3.3 Distribution: Developments in Sweden, Austria and Spain in comparison
3.3.1 Which lessons can be learned from past recessions concerning distributional effects?
3.3.2 Which lessons can be learnedfrom the current crisis concerning distributional effects?.
3.3.3 Summary ofthefindings concerning the Gini coefficient

4 Summary and Conclusion

Bibliography

Appendix

List of Tables and Figures

Tables

Table 1 Overview ofthe specificwelfare regimes, their characteristicsandtensions before and afterthe outbreak of the financial crisis

Table 2 Real GDP growth rate - volume as percentage point change on previous year, 2007 - 2011

Table 3 Developmentofthetotalgovernment revenue asapercentage of GDP, 2007-2010

Table 4 Developmentofthetotalgovernment expenditure asapercentage of GDP, 2007-2010

Table 5 Generalgovernment expenditure by its main function asapercentage of GDP, 2007-2010

Table 6 Generalgovernmentaldebtas percentage of GDP and Public balance as percentage of GDP, 2007 - 2010 17 Table 7 Illustration ofthe youth unemployment rate andyouth unemployment ratio, population underthe age of 25 years, 2007-2010

Table 8 At-risk-of-povertythreshold definedas60% of median equivalised income forasingle person, 2007-

Table 9 At-risk-of-poverty rate definedas 60% of median equivalised incomeaftersocialtransfer for different groupsofsociety, 2007-2010

Table 10 Developmentofthe Gini coefficient, 2007-2010

Figures

Figure 1 Illustration ofthe unemployment rate: monthlyaverage, seasonallyadjusted date, total population upto 74 years; 2007-2010

Figure 2 Illustration ofthe unemployment rate: monthlyaverage, seasonallyadjusted date, population underthe age of 25 years, 2007 - 2010

Figure 3 Illustration ofthe youth unemployment ratio: yearlyaverage, seasonallyadjusted date, population under the age of 25 years, 2007 - 2010

Figrue 4 Illustration ofthe percentage of inactive people between 15-24 yearsthinking nojobsareavailable in Spain, 2007-2010

Figure 5 Illustration ofthe unemployment rate by the highest levelof education attained, population between 15 - 74 years, 2007-2010

Figure 6 Illustration ofthe unemployment rate by the highest levelof education attained, population between 15 - 24 years, 2007-2010

'International economic crises are to countries what reagents are to compounds in chemistry: they provoke changes that reveal the connections between particularities and the general. Ifthe comparativist canfind countries subject to the same stresses, it then becomes possible to see how countries differ or converge and thereby to learn something about cause and effect'

- Peter Gourevitch: Politics in Hard Times (1986: 221)

1 Introduction

The financial crisis, which struck the EU countries in 2008, was followed by the severest economic recession since the end of the Second World War, involving a significant drop in GDP (negative economic growth) for most of them.^[1] Output growth has turned negative or stagnated in several countries, the impact on labour markets has led to rising unemployment rates and public debt and deficits have soared.^[2] In the aftermath of the crisis countries were confronted with a deteriorating social context, which is due to the severity of the economic downturn, the worsening job situation and the increased unemployment. This has resulted in a heightened need for social protection while at the same time making it more difficult to finance.^[3]

The crisis has highlighted the role of social protection as a social buffer and an economic stabilizer that cushions the impact of recessions. Social benefits have been an essential element of national crisis response in the countries of the European Union.^[4] Social security programmes not only act as an important component of the crisis „exit strategy", helping to revitalize the economy but they also protect the most vulnerable part of society.^[5] The sharp fall in employment and therefore disposable income affected some sectors of economy as well as some social groups much more than others.^[6] One of the lessons that can be learned from the crisis is that countries and their inhabitants are differently exposed to economic shocks due to the variations in the design of social security that they are covered with.^[7] This consideration is essential to analysis because, as Özdemir et al (2010) point out, the origins of the crisis can be spotted in the financial sector, where income levels tend to be relatively high. Nevertheless, there is piecemeal evidence that the most vulnerable in society have to struggle mostwith the negative consequences ofthe crisis.^[8]

This work examines the capacity of specific types of welfare states, classified mainly according to Esping-Andersen's concept, to absorb macro-economic shocks - in particular with reference to the most vulnerable parts of society. Which social policy challenges arise in Sweden, Austria and Spain and which differences in the economic and socio-political impacts of the crisis can be identified?

The question regarding the ability of a system to handle external disturbances gains importance, as one of the main claims after the outbreak of the financial crisis is to improve our political, economical and societal systems to become more resistant or resilient.^[9] Resilience is defined as the ability of a system to withstand a major disruption within acceptable degradation parameters and to recover within an acceptable time, and composite costs, and risks.^[10] The term originated in the field of ecology and describes how an ecological system can handle external disturbances and absorb changes in variables and parameters and still persist, like a forest regenerating after a fire.^[11] A noteworthy remark to bear in mind for the following analysis is that both the concept of the business cycle and the term 'resilience' convey a degree of cyclical development. While the business cycle describes the periodical ups and downs of the economy^[12], resilience is embedded in the theory of an adaptive cycle. This theory stresses development of dynamical systems such as ecosystems, societies and economies underlies a continuous and cumulative process, undergoing the four phases: rapid growth and exploitation, conservation, collapse or release and reorganisation.^[13] Identifying the social impact of the economic downturn for European countries in the aftermath of the financial crisis is not straightforward.^[14] There are various direct and indirect consequences for individuals of a country. Therefore, the purpose of this work is to investigate three indicators of the downturn and their development in the middle term to highlight the impacts of the crisis from different perspectives. The first indicator analysed is the unemployment rate, which indicates the economic aspects of the crisis. The focus will be on analysing the consequences for employees with different levels of education and for the younger workforce (15-24 years) to identify whether these social groups have been especially affected by the crisis. Secondly, to investigate whether the economic downturn has heightened the danger to be affected by poverty, changes in the poverty rate will be presented for Sweden, Austria and Spain - each country representing a different type of welfare state. Finally, the analysis of the Gini coefficient shall show whether there have been shifts in the distribution of income within the society.

The approach adopted relates to the data from the European Labour Force Survey and those compiled by the EU-SILC to illustrate the consequences of the crisis - in particular with reference to the most vulnerable parts of society and the capacity of specific types of welfare states to absorb macro-economic shocks. Although, the investigation of the unemployment rate in combination with the poverty rate and the Gini coefficient reflects only a sub-area of the consequences that countries have to face it shall provide insights into national differences of the ongoing crisis. The goal is to test the hypothesis whether a specific type of welfare state model is more resilient to the impacts of the crisis than others.

2 Challenges for Three European Welfare States: Sweden, Austria and Spain

2.1 WelfareStateTypology

Von Kempski (1972) defines the general term 'welfare state' as a class of democratic industrial capitalist societies, characterized by certain properties. These include for example social citizenship or the fact that more or less extensive welfare provisions are legally provided, or, in other words, the fact that the state plays a principal part in the welfare mix alongside the market, civil society, and the family.^[15] According to Esping-Andersen (1990), this class of societies does not consist of a great number of unique cases but they cluster together in regime-types, which he defines according to their quality of social rights, social stratification, and the relationship between state, market, and family.^[16] In his book 'The three worlds of welfare capitalism' he distinguishes between the liberal welfare state, the corporatist welfare state and the social-democratic welfare state.^[17] Before continuing to outline the characteristics of each group in greater detail, it is essential to explain the connection of the welfare state typology and my further analysis.

Firstly, attention has to be paid to the fact that Esping-Andersen clusters the welfare states into these categories but points out that in the real world there are no one-dimensional nations. Core liberal elements for example can be found in predominantly social democratic states and vice versa, meaning that there are no one-dimensional nations.^[18] With that in mind, the reader should be aware that this analysis does not intend to compare the welfare states and the intensity with which they have been hit by the crisis on scales of more or less as this would oversimplify a very complex issue. Instead, the country specific context has to be considered when we are trying to ask if one of the countries was more resilient against the negative impacts of the crisis than others.

Secondly, it is true that Esping-Andersen did not only receive acclaim for his work but also criticism. Critics argue that his typology is neither exhaustive nor exclusive and therefore needs revising.^[19] Others even go one step further and point out that typologies as such have no explanatory power meaning that his scheme is not appropriate for theorizing about what is happening with and within welfare states.^[20] Nevertheless, regarding the purpose of this article, Esping-Andersen's typology offers the distinctive advantage of giving a bird's eye view of the broad characteristics of a social or historical situation. Through the simplification and aloofness from details it emphasizes on the essential features of a situation considered as a whole.^[21] On these grounds, his categories will be the point of departure for this investigation although no country representing the liberal welfare state will be included due to the limited extent ofthis paper.

Finally, one important criticism of Esping-Andersen's classification is that he did not develop a separate clusterforthe Mediterranean countries such as Spain, Portugal and Greece. Nevertheless, it has to be recognized that these countries have some important characteristics in common like the catholic imprint (with the exception of Greece) and a strong familialism.^[22] Some commentators of his typology (Leibfried, 1992; Ferrera, 1996; Bonoli, 1997; Trifiletti, 1999) have developed classifications of European welfare states integrating a separate cluster for the 'southern model'.^[23] 1 consider these states especially interesting when investigating the negative impacts of the crisis as they are - at the time of writing this paper - exceedingly present in the media and I will therefore include one representative of the Mediterranean countries, namely Spain, into the following analysis.

This works compares the social policy challenges arising in Spain (representing the Southern European welfare state), in Sweden (representing the social democratic-regime type) and in Austria (representing the conservative welfare state) and the capacity of each country to absorb macro­economic shocks.

Sweden

Social democratic welfare state

The social democratic regime-type is named after the social democracy that was the predominant force behind social reforms. Beside Sweden, countries such as Denmark, Finland, the Netherlands and Norway belong to the category of social democratic welfare states. The principles of universalism and decommodification of social rights were extended to promote an equality of the highest standards. All social strata are incorporated under one universal insurance system and benefits are graded according to the level of earnings. This model represents a counterbalance to the market and, in contrast to the conservative welfare state, it does not follow the principle of subsidiarity. Thus, it does not wait until the family's capacity to aid is exhausted but to pre-emptively socialize the costs of familyhood.^[24] Women in particular are encouraged to participate in the labour market. This system of generous universal and highly redistributive benefits is aimed at a maximization of capacities for individual independence. To ensure such a high-level solidaristic welfare system these types of welfare state regimes are dedicated to full employment.^[25]

Austria

Conservative or corporatist welfare state

According to Esping-Andersen, Austria belongs, alongside other countries such as France, Germany and Italy, to the category of conservative welfare states. In these conservative and strongly 'corporatist' welfare states, the liberal obsession with market efficiency and commodification was never preeminent and, as such, the granting of social rights was hardly ever a seriously contested issue.^[26] But the direct influence of the state is restricted to the provision of income maintenance benefits related to occupational status. As a result, the sphere of solidarity remains quite narrow.^[27] According to Esping-Andersen, the market in these countries could be displaced as a provider of welfare by the state, which is illustrated by the marginal roles that private insurance and fringe benefits play. The conservative welfare state is historically shaped by the church and supports the preservation of traditional family. The principle of "subsidiarity” assures that the state will only interfere when the family's capacity to service its members is exhausted.^[28]

Spain

Familialist or Southern European welfare state

Karamessini summarises findings from the lively discussion about the distinctiveness of a Southern European Model of social protection and welfare regime that goes back to the early 1990s.^[29] She points out that family is still the cornerstone of this model - even labelling it 'the main social shock absorber'^[30] - and the primary locus of solidarity when it comes to the provision of care and support^[31]. Trifiletti argues that only certain risks are covered largely by the welfare state those against the family cannot protect itself.^[32] Labour force groups such as women, young people and migrants suffer from high unemployment and are disproportionately involved in irregular forms of work. Social security is based on occupational status and work performance, and social assistance schemes are residual since those without a normal working career must primarily rely on the family for support. Furthermore, the family members and mainly women's unpaid work basically provide the care of children and elderly. Karamessini criticises that labour segmentation creates gaps and inequalities in both employment and social protection and that unemployment compensation is underdeveloped. Overall, welfare state institutions seem highly inefficient.^[33] According to Ferrera, social protection systems of Southern countries are highly fragmented and, although there is no articulated net of minimum social protection, some benefits are very generous (such as old age pensions).^[34]

Apart from merely understanding the basic characteristics of each welfare regime it is furthermore essential to consider changes that each country has undergone in the last two decades as well as outlining tensions before and to some extent after the outbreak of the crisis, which are summarised in the table below.

Table 1 Overview of the specific welfare regimes, their characteristics and tensions before and after the outbreak of the financial crisis 2008

illustration not visible in this excerpt

Source: adjusted illustration on basis ofLehndorffet al (2012): 12ff (Introduction)

2.2 A typology of economic crises

In discussing the effectiveness of welfare states concerning their resilience against the negative impacts of crises, it is necessary to know how a crisis in general can be distinguished from normal fluctuations or recessions in the business cycle, what the core-elements of such a crisis are and what different types of crises exist.

The most prominent example of an empirical characterisation of the business cycle is from Burns and Mitchell who summarise it as follows:

"Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consist of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle."^[35]

A recession, as defined by the National Bureau of Economic Research (NBER), means a 'significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.^[36] In contrast to a recession, the aggregate income decreases in absolute terms during depressions.^[37] The main features of a depression include withholding of investment, rising unemployment, and falling prices and profits.^[38]

An economic crisis in general is characterised by a sudden, and often unexpected, deterioration of most key macroeconomic indicators, including GDP growth, unemployment levels, inflation rates and public debt.^[39] An economic crisis may be triggered when rational expectations are displaced or replaced by mania or speculative excess in financial markets.^[40] Reinhart and Rogoff explain that recessions associated with crises are more severe in terms of duration and amplitude than the usual business cycle benchmarks of the post-World War II period.^[41]

Crises that are even part of a global phenomenon may be worse in the amplitude and volatility of the downturn.^[42] An international economic crisis is triggered by an external shock and affects a large number of countries world-wide.^[43] The current crisis, which can be seen as the most severe financial crisis since the Great Depression - in terms of both economic costs and geographical reach - was triggered by adverse events in the global financial markets starting in mid-2007. Almost all developed countries and most major emerging markets experienced high levels of financial stress and reduced economic activity.^[44] Other post World-War II crises were either country-specific or at worst regional whereas the recent crisis is global in scope and far deeper.^[45] This is because output, trade, equity prices, and other indicators behave much the same way for the world aggregates as they do in individual countries. A sudden stop in financing typically impacts on a large part of the world's public and private sector.^[46] The global scope of the crisis has made it far more difficult for individual countries to grow their way out through higher exports or to smooth the consumption effects through foreign borrowing.^[47] Examples from previous crises demonstrate that graduation from recurrent banking and financial crises is much more elusive.^[48]

Typically, a financial crisis is characterised by large-scale defaults of financial and non-financial enterprises, usually accompanied by falling incomes and prices in the economy as a whole. Through financial and other economic interdependences the implications of such crises spread internationally.^[49] Claessens et al. suggest in their work that the post-2007 crisis stemmed from multiple factors, some common to previous financial crises, others new.^[50] The sharp (and unsustainable) increase of asset prices, credit booms that led to excessive debt burdens, and the build-up of marginal loans and systemic risks are typical indicators for financial crises in general.^[51] Furthermore, the post 2007-crisis has some features that were not familiar to past crises. Sophisticated financial intermediaries and instruments, increased interconnectedness among financial markets and a strong role of household indebtedness are critical factors for the severity and breadth ofthe crisis.^[52]

Without doubt, the U.S. financial crisis of 2007 spilled over into other markets like Germany and Japan through direct linkages.^[53] The ferocity, with which the recession spread globally, starting in the fourth quarter of 2008, is one important difference from previous crises. The sudden stop in global financing rapidly extended to businesses around the world infecting the real economy.^[54] This contagion can be defined as an episode in which there are significant immediate effects in a number of countries following an event. If these consequences evolve over a matter of hours or days, Kaminsky, Reinhart and Végh label them "fast and furious”.^[55] The potential of a global economic crisis is intensified by the increasing integration of financial markets and the fact that modern information and communications technology permit panic and mania to be transmitted almost instantaneously from one market to another.^[56]

The aftermath of severe financial crises share three characteristics:^[57]

- The asset market collapses are deep and prolonged.
- The aftermath of banking crises is associated with profound declines in output and employment.
- The value of government debt tends to explode. The main cause of debt explosion is not the widely cited costs of bailing out and recapitalizing the banking system. The biggest driver of debt increases is the inevitable collapse in tax revenues and increase in social expenditure that governments suffer in the wake of deep and prolonged output contractions.

Social policy responses are designed directly in response to an economic crisis, or indirectly, to address the social and economic consequences of such a crisis.^[58]

2.3 Impacts of the financial crisis on national budgets (2007 - 2010)

This chapter provides an overview of the economic and social impacts of the global financial crisis for the countries of the European Union placing a focus on Sweden, Austria and Spain. A comparison of the developments of the GDP growth rate, of the total government revenue and expenditure and of general government debt is provided. This aims to illustrate the severity of the economic downturn and furthermore, the variations that arose from country to country.

Table 2 Real GDP growth rate - volume as percentage point change on previous year, 2007 - 2011

illustration not visible in this excerpt

Source: Eurostat (online data code: tecOOHS)

Swedish real GDP growth rates dropped first in 2008 and reached their lowest mark of minus 5 per cent in 2009. Strikingly, recovery followed swift with positive growth rates of 6,2 per cent in 2010 and 3,9 per cent in 2011. In comparison, Austria's GDP growth rate turned negative by -3.8 per cent in 2009, but reached values of 2,1 per cent in 2010 and 2,7 per cent by 2011. Spain's GDP growth rate has suffered less compared to Sweden, Austria and the EU average. In 2009 it has reached its low water mark at -3,7 per cent before improving to -0,1 per cent in 2010 and 0,7 per cent in 2011.

In summary, although Swedish real GDP growth rates were more drastically affected than Spain's, Sweden experienced a relatively fast and strong rebound. In Austria real GDP growth rates deteriorated slower than in the other two countries, but the values for Spain and Austria were nearly at the same low levels in 2009. Nevertheless, Austria's real GDP growth rates recovered in the following years more significantly.

Table 3 Development of the total government revenue as a percentage of GDP, 2007 - 2010

illustration not visible in this excerpt

Source: Eurostat (online data code: gov_a_main)

Sweden has the highest total government revenue in percentage of GDP compared to Austria, Spain and the EU average. Those revenues decreased by 2,1 percentage points between 2007 and 2010 from 54,5 to 52,4 per cent. On the other hand, Austria's revenue has even experienced a slight upward trend from 47,6 to 48,1 per cent within the same time period. Spanish government revenues plunged the highest from 41,1 per cent in 2007 to 36,3 per cent in 2010. This might be traced back to the early turning point for rising unemployment in May 2007 in combination with the rapid monthly deterioration. (Compare Figure 1 below and Appendix 1.)

Table 4 Development of the total government expenditure as a percentage of GDP, 2007 - 2010

illustration not visible in this excerpt

Source: Eurostat (online data code: gov_a_main)

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^[1] Cf. Euzéby (2010): 72

^[2] Letschke et al. (2012): 243

^[3] Cf. Euzéby (2010): 72

^[4] Cf. Euzéby (2010): 71

^[5] Cf. Konkolewsky (2009): 3

^[6] Cf. Özdemir et al. (2010): 3

^[7] Cf. Behrendt et al. (2011): 169

^[8] Cf. Özdemir et al. (2010): 3

^[9] Cf. http://www.zeit.de/2012/03/A-Analyse, Die Zeit (28.10.2012)

^[10] Cf. Aven (2011): 517

^[11] Cf. Holling (1973): 17f

^[12] Cf. Burns; Mitchell (1946): 3f

^[13] Cf. Carpenter (2001): 766

^[14] Cf. Figari et al. (2010): 4

^[15] Cf. Von Kemskpi (1972) as cited in Arts and Gelissen (2002): 139

^[16] Cf. Esping-Andersen (1990): 29

^[17] Cf. Esping-Andersen (1990): 26ff

^[18] Cf. Esping-Andersen (1990): 28f

^[19] Cf. Arts, Gelissen (2002): 139

^[20] Cf. Baldwin (1996): 41

^[21] Cf. Ars, Gelissen (2002): 139

^[22] Cf. Esping-Andersen, (1997): 180

^[23] Cf. Arts, Gelissen (2002): 145

^[24] Cf. Esping-Andersen (1990): 27f

^[25] Cf. Arts, Gelissen (2002): 142

^[26] Esping-Andersen (1990): 27

^[27] Cf. Arts, Gelissen (2002): 142

^[28] Cf. Esping-Anders (1990): 27

^[29] Cf. Karamessini (2007): 2

^[30] Cf. Karamessini (2007): 2

^[31] Cf. Karamessin (2007): 5

^[32] Cf. Trifiletti (1999): 49

3 Cf. Karamessini (2007): 5

^[34] Cf. Ferrera (1996): 4ff

^[35] Burns; Mitchell (1946): 3

^[36] http://www.nber.org/cycles.html, NBER (28.10.2012)

^[37] http://wirtschaftslexikon.gabler.de/Definition/depression.html), Gabler Verlag (28.11.2012)

^[38] Cf. Jones (2001): 320

^[39] Cf. Starke et al. (2011): 2

^[40] Cf. Jones (2001): 259

^[41] Cf. Reinhart; Rogoff (2009): 269f

^[42] Cf. Reinhart; Rogoff (2009): 269f

^[43] Cf. Starke et al. (2011): 2

Cf. Claessens et al. (2010): 269

^[45] Cf. Reinhart; Rogoff (2009): 233

^[46] Cf. Reinhart; Rogoff (2009): 269f

^[47] Cf. Reinhart; Rogoff (2009): 239

^[48] Cf. Reinhart; Rogoff (2009): 283

^[49] Cf. Jones (2001): 537

^[50] Cf. Claessens et al. (2010): 270

^[51] Cf. Claessens et al. (2010): 272

^[52] Cf. Claessens et al. (2010): 274

^[53] Cf. Claessens et al. (2010): 242

^[54] Cf. Claessens et al. (2010): 240

^[55] Cf. Kaminsky et al. (2003): 55

^[56] Cf. Jones: (2001): 257

^[57] Cf. Reinhart; Rogoff(2009): 224

^[58] Cf. Starke etal.(2011):2