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Enlargement and the European social model

  • Date(s)
    7 September 2006
  • Location

In co-operation with the Social Democratic Party of Romania (PSD) Policy Network organised a high-level debate on “Enlargement and the European Social Model” as part of its larger project on the future of the European Social Model (ESM). It follows a string of ESM debates Policy Network has held in Italy, Belgium, the Netherlands, France, the UK, Hungary, Spain, Germany and Finland.

The event took place in Bucharest on the 7th September 2006 and was hosted by the leader of the PSD and former foreign minister, Mircea Geoană, bringing together senior politicians, government advisors, European Commission officials, academics and experts in private working sessions and a public debate.

The following text provides an insight into the discussion and briefly summarises the points and questions that have been addressed during the event.

The 2004 enlargement round was the biggest experienced by the European Union yet and had distinct characteristics from earlier rounds in many regards. The post-state socialist countries acceding had to face a decade of radical social and economic change in order to prepare for their respective EU memberships. The same is true for those countries joining imminently – Bulgaria and Romania, for instance.

The participants agreed that after having gone through different stages, including recession during the early 1990’s, the Eastern and Central European countries now within the Union have progressed well towards transforming their economic structures and constructing a new social model. However, their economic standards and indicators are still utterly different from those of the hitherto EU-15, particularly when it comes to wage levels. This is all the more true for those countries likely to join the EU in the foreseeable future.

Meanwhile, the enlargement process proves to also have impacted substantially on welfare structures in the EU-15. Some observers have predicted the emergence of unfair competition with the Eastern European workforce leading to a race-to-the-bottom in social standards, taxation and wages. The argument presumes that the accession countries follow more or less uniformly a neo-liberal economic agenda undermining the foundations of the traditional European Social Model (ESM).

The discussion demonstrated that while this was true for an initial phase of convergence in the early 1990’s dominated by the policy impact of international financial institutions, the accession states and candidates later developed distinct welfare structures incorporating elements of both the Anglo-Saxon and continental models.

In this context, participants attempted, firstly, to identify common structural challenges faced by the ‘old EU-15’ and post-state socialist accession countries as well as the specificities of Eastern European countries. A second part focused on some of the policy answers capable of tackling these challenges to the welfare state created by the interplay of enlargement and globalisation in general.

The task was thus to closely examine to what extent the perception of the transition countries as a ‘special case’ and the fears in the EU-15 lead to the creation of a false dichotomy - overlooking the fact that both groups of countries are essentially facing much of the same problems. Meanwhile, where there are points of divergence these have to be established as clearly.

The overall conclusion was that the challenges of globalisation and of economic competition with other regions in the world, demographic change leading to unsustainable increases of the cost of traditional social security systems and the transformation towards a knowledge-based economy are equally valid for East and West. These general developments lead to similar problems in all our countries, for example to high unemployment, especially among the young and older sections of populations and to increasing income inequalities. But these challenges naturally impinge on different conditions to start with, aggravating in particular some of the adverse effects in post-socialist state countries.

These differing conditions represent the specificities prevailing in accession countries faced with the European integration of their societies: the need for strengthening market institutions and for improving the service industry sectors – while not unheard of in the West - are all the more pertinent in post- socialist state countries; the near total lack of a civil society as an important actor in providing societal structures; and the need for state reform to create functioning institutions with the ability to implement more complex welfare policies.

Therefore, policy-makers in Eastern and Central European countries will have to focus on promoting the development of a functioning civil society and on reforming state structures as pre-conditions for the successful implementation of effective social policies like progressive taxation or active labour measures. While the example of Scandinavia shows that high taxation levels do not necessarily coincide with low growth and FDI the need for flat-tax policies, often perceived as ‘dumping’ in the West, is mainly the consequence of dysfunctional fiscal authorities.

An example of a structural development commonly taken for granted is the reliance of transition countries on the relocation of light labour-intensive industries. While it is true that all accession countries are relying on a continuing influx of foreign direct investment, the structure of that investment differs substantially from country to country. Especially the Visegrad countries were successful in attracting high value-added and capital intensive investment including R&D, while others, such as the Baltic and the South-eastern states, keep on relying on labour-intensive production which is coming under growing pressure from emerging market economies such as China and India. As a result, the emerging ‘division of labour’ is not simply one between East and West but also exists among different Eastern and Central European countries, thus showing a much more complex pattern than commonly assumed. There was overall agreement amongst participants that this division will not easily be overcome in the next few years but will be here to stay in the interim.

Similarly, this has also impacted on the social models adopted in different countries, which are equally diverse in the region. The Baltic states, for example, having adopted an economically neo-liberal agenda, perform well with regard to macroeconomic stability but lagging behind in terms of industrial transformation and social inclusion. The Visegrad countries, in contrast, with their “embedded neo-liberalism” geared towards a more continental model tend to perform better in terms of social inclusion and industrial transformation but have more problems with macroeconomic stability. Finally, the sole exception Slovenia is the only accession country with a truly continental style corporatist structure with indicators close to those of the EU-15.

While the first part of the seminar provided a thorough analysis of the socio-economic problems, the second part focused on potential policy measures - at the domestic and the international level - that can address the common structural challenges while accommodating the identified specificities of different regions. How do we put into place measures to give people the security they need in the future, tackling at the same time rising inequalities and growing scepticism in the EU?

Different opinions emerged, for example, on whether the situation called for further international harmonisation of social and taxation policies – even if this would be a very slow and long process - or if the EU needs to accept that for divergent structural reasons harmonisation strategies simply do not constitute a reasonable option. Instead, policy-makers would have to prioritise on providing essential public services like those of education and health.

Participants agreed that the supply of high quality education has to be the main concern on the national as well as at the European level. Only where highly skilled labour is available, will there be prospects for high-value added industries establishing themselves. In particular in regions where industrial transformation of this kind will not be possible, the state must do its utmost in order to open up opportunities for citizens through first class education. Yet, this presents major challenges for a state like Romania with relatively few available resources, especially in rural areas.

Some even advocated that the public supply of decent education and health services would be all that is possible in some disadvantaged regions, assuming that governments will be unable to prevent the exclusion of a certain part of the population from economic growth in transition countries over the next few years. Others argued for the promotion of active welfare policies as a second pillar of a successful progressive social model, following so-called ‘flexicurity’ mechanisms as have been adopted, for example, in Scandinavia. Empowering citizens through education and built-in incentives in welfare systems was identified as the means through which to address growing scepticism towards further integration fostered by growing social disparities within the Union.

Finally, the challenge for Romania as one of the biggest transition countries was summarised by the interplay of three major tasks, wholly dependent on one another: an active welfare policy; the strengthening of the economy; and - highly important - a sound state reform enabling to implement any meaningful policies.

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