Outline of the book

There are many reasons to be pessimistic about the future of the European Union, and by implication Europe's welfare states. As long as European leaders remain incapable of containing the contagious sovereign debt crisis, continued political paralysis can only make matters worse, effectively endangering the institutional basis of economic prosperity and social security upon which the European integration project was founded shortly after World War II.

With the benefit of hindsight, I believe it remains possible that European political leaders and decisionmakers continue to draw important lessons from their misguided policies and steer clear of self-induced stagnation. They have done so before, both at the level of European economic integration and at the level of domestic social and economic policy. Since the Treaty of Rome of 1957, at the European level, regional economic integration has deepened, expanded, and, hence, constantly reinvented itself. The Union successfully incorporated twenty-one new member states, beyond the original six, established a single market, and developed a single currency—the euro—for seventeen member states, which has become the second largest global reserve currency.

A similar learning curve can be seen with domestic social policy. Most EU member states have, over the past thirty years, come to recast the basic policy mix upon which their national systems of social protection are built (Hemer- ijck and Schludi, 2000). Since the late 1970s, continuous changes in the world economy, European politics (most spectacularly the demise of communism in Eastern Europe), labour markets, and family structures have disturbed the once sovereign and stable social and economic policy repertoires. Some countries, most notably the Scandinavians, have in the process been able re-establish new virtuous mixes of equity and efficiency. They have done so by enlarging scope for markets in the sphere of production supported by more active and capacitating social policy provisions, anchored in rule-based macroeconomic policy. Also elsewhere, notably in a number of Continental welfare regimes and the Anglo-Saxon Britain and Ireland, labour markets have been reconfigured and social spending reoriented towards activation, with higher levels of employment for both men and women as a result. Positive additions and innovations in social servicing, it is true, have been accompanied by benefits of shorter duration, increased targeting and sanctioning in social insurance and assistance. Only a small minority of European countries, notably Greece and Italy, continued to resemble the popular caricature of change-resistant welfare states. By the early twenty-first century, however, examples of social reform backlog had become the exceptions to the more general rule of (self-)transformative European welfare state change (Hemerijck, 2002).

In the process, European economic integration has fundamentally redrawn the boundaries of national systems of welfare provision, by both constraining the autonomy of domestic policy options and opening opportunities for EU legislation, directives, guidelines, and social policy agenda-setting (Ferrera, 2005я; Zeitlin, 2005c). Notwithstanding the legal primacy of the single market, the European Commission has stepped up EU social policy ambitions ever since the 1990s. Through the Lisbon Agenda, and particularly the European Employment Strategy, Europe has become a key agent of social reform through the articulation of 'social policy as a productive factor'. Finally, the Lisbon Treaty on the functioning of the European Union, ratified in 2009, endorsed the EU's normative commitment to (a highly competitive) 'social market economy', geared towards employment and social progress, in article 3. But although the recent decade reveals that policymakers are able to adjust, adapt, and update their welfare policy repertoires to the new rules of international competition, the new shape of family life, the new flexibility of labour markets, the new realities of immigration and demographic ageing, and despite the achievement of the internal market, the single currency, and a minimal social Europe, the European Union, facing the biggest crisis in its existence, remains a halfway house. It is economically more integrated than any other region in the world, with domestic social policy supports that are fairly advanced, but its governance structure, reasoning from the idea of economic embeddedness, remains institutionally and politically fragile. The 9 December 2011 summit of the European Council, overshadowed by the British veto, to be sure, has borne out one very important lesson: it is impossible to effectively manage a monetary union without a fiscal and political union. Whether the new accord marks the beginning of a credible remedy of the beleaguered currency union will depend on the choices made by European political leaders and central bankers in the years ahead.

This book is about changing welfare states, reform trajectories, and political destinations in an era of rapid economic, social, and political restructuring, including the critically important dimension of European integration. Its overriding objective is to trace the dynamic of social reform that has swept across Europe over the past two decades. The overall scope of social reform across the member states of the European Union, as I will detail extensively in this book, is heterogeneous, disparate, and uneven. In some cases welfare state change has been accompanied by deep social conflicts, while in other instances unpopular social reforms received broad consent from opposition parties, trade unions, and employer organizations. On balance, I observe trajectories of welfare reform in many countries that are more proactive and reconstructive, rather than purely defensive and deconstructive. Alongside serious retrenchments, there have been deliberate attempts to rebuild social programmes and institutions to accommodate policy repertoires to the new economic and social realities of the twenty-first century in many advanced European welfare states. The social reform momentum of the past two decades is best captured as a search for a new welfare state. This search process remains incomplete, resulting from the institutionally bounded and contingent adaptation to new social realities. Welfare state change is work in progress, leading to patchwork mixes of old and new policies and institutions, on the lookout perhaps for more coherence. This should not surprise us. The post-1945 modern welfare state was not built from scratch. Key differences between European welfare states find their origins in the remnants and legacies of earlier episodes of social policy experimentation in the late nineteenth and early twentieth centuries.

Welfare states are complex systems, whose goals, functions, and institutions change over time, however slowly and incompletely. They defy easy explanation. In the current context, changing welfare states necessarily follow trajectories of post-formative path-dependent transformation and innovation. For this reason, it is imperative to study the politics of changing welfare states, not as models, but, more dynamically, as open systems caught up in processes of evolutionary social and economic reconfiguration. There is ample room for creative policymakers to leave their mark on welfare state adjustment.

Following this introduction the rest of the book proceeds in eight chapters. Chapter 2 revisits the landmark theoretical contribution of the 'new politics' of the welfare state perspective which gained intellectual hegemony in comparative social policy analysis over the 1990s. In a nutshell, the 'new politics' of the welfare state, pioneered by Paul Pierson, starts from the empirical observation of the surprising institutional stability of the welfare state over the past three to four decades of 'permanent austerity'. The 'new politics' explanation for protracted welfare state inertia is largely rooted in the political constituency constraints of electoral retribution, on the one hand, and organized interest opposition against welfare reform, on the other (Pierson, 2011). For Chapter 2, I venture to go beyond Pierson's narrative of change-resistant welfare states both in theory and empirics. Empirically, on the one hand, I briefly highlight a significant number of qualitative changes in macroeconomic policy priorities, labour market policy and regulation, industrial relations, old age pensions, social services, and social policy administration, covered more in detail in Chapter 6, many which are absent from Pierson's portrayal of stasis in social insurance provision. The observation of profound social reform raises important theoretical issues for the comparative study of welfare state development. Profound change on the dependent variable requires a reconfiguration of the theoretical biases to path-dependent inertia within the ambit of comparative institutional policy analysis. If policymakers, contrary to received wisdom, do engage in major reforms in spite of many institutional obstacles and negative political incentives, what distinguishes these actors and the institutional conditions under which they operate from the seemingly more general case of welfare inertia? It is my contention that dimensions of policy learning, the readiness to use information feedback from past performance, the input of new ideas and expertise, and the proliferation of inspiring reform successes across countries, should count as important conduits of the welfare states' self-transformative capacities.

Chapter 3 addresses the most important changes in the policy environment of the welfare state, challenging existing social policy provision in the coming decades (see for overview Castles et al., 2010). While the architects of the postwar welfare state could assume stable male-breadwinner families and expanding industrial labour markets, this picture of economy and society no longer holds. Five sets of socio-economic changes—exogenous, endogenous, historical, supranational, and political—have transformed the environment of modern social policy over the past decades. First, from outside, intensified international competition has come to challenge the redistributive capacity of national welfare states (Scharpf and Schmidt, 2000; Begg, Draxler, and Mor- tensen, 2008). From within European societies, increased life expectancy, declining birth rates, gender and family change, the shift from an industrial to a service economy, more skill-biased labour markets, the destandardization of employment relations, and the rising demand for health and long-term care services confront the welfare state with 'new social risk' and life course contingencies (Esping-Andersen etal, 2002; Esping-Andersen, 2009). From the past, large public resources continue to be directed at 'old social risks', including unemployment insurance, disability benefits and, especially, old age pensions. In an era of relative austerity and slower economic and productivity growth, prior extensions of welfare entitlements, together with increased fiscal pressure, constrain the policy space for 'new' risks social policy innovation (Pierson, 1998, 2001; Castles, 2004). Fourth, at the supranational level, the European Union (EU), an institutional innovation, just like the modern welfare state, of the post-war era, has emerged as a critical intervening variable in domestic processes of welfare state change. It is fair to say that in the EU we have entered an era of semi-sovereign welfare states (Leibfried and Pierson, 2000; Ferrera, 2005a). The final challenge relates to the precarious political context of early twenty-first century Europe, marked by increased electoral volatility, the erosion of party loyalties, and the rise in national welfare chauvinism, associated with mounting xenophobic populism and widespread disenchantment with European economic integration, especially in the older EU Member States (Elchardus, 2009; Judt, 2010). The fear of the 'Polish plumber' evoked by the liberalization of services in the EU is a telling example of the new context of EU-wide politicization of the single market project, constraining the policy space for welfare state reform and adaptation (Fligstein, 2008). Together, these five large-scale social transformations generate intense pressures for fundamental welfare reform. As adaptive challenges, therefore, they pre-structure the character and direction of current and future domestic and EU social policymaking.

Chapter 4 is theoretical. The chapter builds on a reconstruction of the historical evolution of social science approaches to welfare-state research. It puts forward three theoretical amendments on the 'new politics of the welfare state' perspective. Taking heed to recent insights of a number of comparative scholars closely associated with the tradition of historical institutionalism, among which are Wolfgang Streeck and Kathy Thelen (2005) it is, in the first place, necessary to make room for institutional contingency and heterogeneity, and unanticipated and unintended spillover dynamics across neighbouring policy areas over time. Secondly and more fundamentally, there is a need to allow for reflexivity in actor dispositions, especially their causal understanding, normative orientations, and preferences, so as to underline that social reform is not merely the outcome of 'a contest for power' among stable political interests but that reform is critically informed by the 'play of ideas' and social learning processes (Heclo, 1974). The third amendment to mainstream institutionalism relates to the problimatique of 'methodological nationalism' in comparative social policy analysis. Today, it is imperative theoretically to integrate the mounting influence of international organizations, policy brokers, and think tanks, such as the EU and the OECD and many more, in the articulation of contemporary social policy reform and adaptation. The overarching argument is that policy change is an act of reasoned, creative, and strategic choice, based on institutional judgements and information feedback on how best to improve policy. By advocating an open institutional perspective to understand better the complex dynamics of profound, yet gradual, contemporary social and economic policy transformation, the latter part of the chapter introduces the empirically grounded and multidimensional heuristic of welfare recalibration for the institutional analysis of contemporary welfare state change, which I developed a decade ago together with Maurizio Ferrera, based on earlier collaborative work with Martin Rhodes (Ferrera, Hemerijck, and Rhodes, 2000; Ferrera and Hemerijck, 2003). Welfare recalibration is theoretically conceptualized as a system-wide social learning

exercise, best captured as a search for a new, economically viable, politically feasible, and socially acceptable profile of social and economic regulation. Welfare recalibration highlights four key dimensions—functional, distributive, normative, and institutional. Together, these dimensions allow for dia- chronical analysis of the complex ways in which modern social contracts have been redrafted.

Chapter 5 is historical. Most social policy researchers divide the post-war era into two periods: a phase of expansion and one of retrenchment. I take a different view. In a rather stylized manner, I introduce an alternative periodization that subdivides the post-war period until the early twenty-first century into three distinct phases, with each stage structured around distinctive combinations of social and economic structure, economic policy analysis and prescription, and political compromises (Hemerijck, 2012a). For heuristic purposes, this chapter will trace the evolution of the post-war social policy in terms of a narrative of three periods. These are: (1) the era of welfare state expansion and class compromise, starting at the end of World War II; (2) the period of welfare retrenchment and neoliberalism, which took shape in the wake of the oil shocks of mid to late-1970s, and; (3) the more recent epoch in which social investment policy prescriptions took root after the mid 1990s (Morel, Palier, and Palme, 2012). Over the past 60 years, depending on prevailing social, economic, political, and geopolitical conditions, the scope, substance, form, and aim of the welfare state have been significantly recast. By and large it is possible to understand each period as marked by distinctive social policy repertoires, anchored in hegemonic theories of economic policy analysis, designed to respond to both socio-economic and political contexts and challenges of the day.

Chapters 5, 6, and 7 are empirical and cover the period, roughly between the late 1980s and 2007, before the onslaught global financial crisis. Chapter 6 is about welfare recalibration in motion (Ferrera and Hemerijck, 2003; Hemer- ijck and Ferrera, 2004). It conducts a detailed inventory of a number of substantive changes in the make-up of Europe's different welfare regime families over the past two decades. The chapter takes heed of the rich literature on 'worlds' or 'families' of welfare, dating back to the late 1980s, by separating national political economies into groups according to how key policy dimensions and institutional variables are aligned as bundles or packages of complementary policy provisions (Esping-Andersen 1990; Ferrera, Hemerijck, and Rhodes, 2000; G. Schmidt, 2006; Alber and Gilbert, 2010). I distinguish four main groups: Nordic, Continental, Southern, and Anglo-Irish welfare regimes, and add a fifth cluster of the new member states of Central and Eastern Europe. How have European welfare regimes been recalibrating the policy mix upon which their national systems of social protection were based over the past quarter of a century to changing economic, social, and (geo-)political conditions? Have the Nordic 'dual-earner' post-industrial welfare systems, thanks to their overall institutional coherence together with their full employment and active labour market policy legacy, proved relatively well equipped to tackle the challenges of economic internationalization, ageing societies, gender equality, and transition to the post-industrial economy? How have Continental welfare states tried to reverse the syndrome of 'welfare without work'? How difficult has it been to modernize southern welfare states, as external pressures from the entry into the EMU and intensified economic internationalization have combined with the rapid ageing of the population? Since the fall of the Berlin wall, the new EU Member States of Central and Eastern Europe have been laboratories of welfare recalibration in the transition form centrally planned to democratic market economies. This chapter takes stock of a broad number of substantive changes in the make-up of different welfare regimes over past decades, in the areas of macroeconomic policy, industrial relations, taxation, social insurance provision, including pensions, labour market policy, and regulation, and education and social services. Do we observe regime-specific inertia, the inability to break with antiquated social orders, and path-dependent divergence, or can we also see elements of proactive policy convergence of advancing the welfare state, adapting it to changing conditions? Which European polities have been most adamant in redirecting their commitments to social investment policy priorities?

Chapter 7 examines welfare performance quantitatively, again following the heuristic of regime theory, in terms of macroeconomic performance, social spending, employment, labour market flexibility, redistribution, wage dispersion, income inequality and poverty, educational attainment, and gender equality across different welfare regimes. The aim in of this chapter is to provide a comparative survey of welfare performance with respect to a number of key indicators for nineteen out of the twenty-seven member states of the European Union. Is there really a 'big' trade-off between economic efficiency and social equity at play (Okun, 1975)? Has it become progressively more difficult to match fiscal discipline, (full) employment, and redistributive justice in the knowledge-based service economy (Iversen and Wren, 1998)? The data analysed, contingent on availability, cover the time period between 1997, when the European Employment Strategy (EES) was launched, and 2007, the peak year of the most recent complete business cycle before the onslaught of the present crisis. The quantitative assessment yields insights into the impact of family demographics on the supply and demand of labour, the coverage of social protection, and welfare servicing. In particular, the analysis will relate employment performance to social investment indicators of active labour market policy, day-care spending, educational attainment, educational spending, lifelong learning initiatives, and social inclusion. The analysis also yields insights on gender gaps, social and family services, skill shortages, inequalities in education and underinvestment in training, and pension adequacy and sustainability. To what extent have European welfare states made progress in the direction of social investment in terms of welfare expenditure trends and welfare performance outcomes? Can we discern a shift in outcomes from the traditional function of 'social protection' to that of 'social investment'? Special attention will be given to the observed divergence between the steady rises in employment and greater (relative) income poverty, in the decade leading up to the financial crisis, under conditions of at least moderate economic growth. Is there an inevitable tension between social investment, characterized by a strong emphasis on ex ante social servicing, and social protection, aligned to ex post poverty alleviation and incomes equality (OECD, 2008; Cantillon, 2011)? I will argue that social investment can be sustainable to the extent that it contributes to raising the fiscal capacity of mature welfare states by raising labour market participation and productivity growth, so that government can fund both necessary social investment in productivity-enhancing services in education, care of dependants, and social protection programmes containing poverty and inequality.

Next, Chapter 8 examines the reciprocal, dynamic, and influential relationship between domestic social and employment policy and EU integration, as a way to assess the achievements and shortcomings of 'social Europe'. Through the lens of open institutionalism, this chapter traces how the evolution of modern welfare states and the process of European integration—two major feats of post-war institutional innovation—have exerted influence on each other and become progressively intertwined. The variegated ways in which European welfare states have developed and the different channels through which the process of European integration has taken shape, by no means present a coherent picture. Much has been written on how European integration has contributed to the loss of boundary control of national political economies, 'globalization' breaking down the borders of economic competition while contributing little to new welfare institution building (Scharpf, 1999; Ferrera, 2005a). The establishment of the internal market and the introduction of the EMU and the Stability and Growth Pact have added a new economic supranational layer to domestic social and economic policy repertoires of individual Member States (Eichengreen, 2007b). European Union social policy initiatives have surely helped to reinforce the basic underpinnings of universal social security and social dialogue since the mid- 1980s. The European Employment Strategy, launched in 1997, is exemplary of the EU's new role, designed to catalyse rather than steer domestic social policy reform (Zeitlin, 2005a, b). In the absence of binding sanctions, social learning, discursive diffusion, comparing best practices, monitoring progress with specific timetables, and reporting mechanisms, in light of common goals and objectives, serve to expose national policymakers to new definitions of social policy problems and solutions. At the 2010 deadline of the Lisbon Agenda, however, it has become apparent that many of the lofty Lisbon objectives have not been met. European integration is at a crossroads, having reached a suboptimal and politically vulnerable intermediate position, which makes it politically tempting for national political leaders to let Euroscepticism triumph over a more effective social Europe. Throughout the postwar era it proved inherently difficult to establish and maintain an economic union in the face of severe institutional differences across the participating Member States. When European economies come under stress in the wake of the stagflation crisis in the 1980s and in the aftermath of the more recent global financial crisis policy responses have been overwhelmingly national. Can deep European economic integration be sustained as long as welfare states and democratic politics remain organized along national lines? The eurozone debt and currency crisis laid bare immense shortcomings of the architecture of the internal market and the monetary union. As the Single Market programme was pushed by the idea of free capital flows and sound fiscal and monetary policies, the officials of EU institutions such as the Commission, the Council of Ministers, the ECB, and the ECJ, have largely declined seriously to pursue broader social objectives beyond economic integration.

Next, Chapter 9 returns to the financial crisis and the eurozone sovereign debt and currency crisis. It reviews the main causes and aftershocks, the major events in European politics and economics, and the most important policy responses at the level of the member states and the EU, over the period 200811. The aftermath of the global financial crisis of 2008 certainly marks a 'stress test' for the welfare state (Atkinson, 2009). Can the welfare state weather the storm once again, as it did in the 1980s and 1990s? Or will the collapse of finance-driven global capitalism outflank the welfare state in the cascade of violent economic, social, and political crisis aftershocks (Hemerijck, 2009a)? Massive increases in fiscal deficits and public debt, required to pre-empt a more severe global meltdown, have since forced policymakers to consider deep cuts in welfare services, including health, education, and social transfers to the poor, the unemployed, and pensioners, in order to shore up public finance solvency and economic stability. The crisis has affected different economies differently, as a result of their relative vulnerability to endogenous and external economic shocks and also because of the differing institutional capacities they were able to mobilize to address the economic pressure. What have been the consequences of the crisis on the trajectories embarked on by European welfare states in the run-up to the 2008 crisis? The chapter deals with the initial responses adopted across Western Europe since the outbreak of the crisis in 2008. It reviews three distinctive sequences of crisis management that have been pursued, each triggered by different, but complementary, sets of economic and political challenges. Early on, practically all advanced political economies intervened with Keynesian stimulus measures for ailing banks through monetary easing and temporary social policy expansion, in order to sustain effective demand and save jobs and skills. Next, a more conservative macroeconomic policy was employed, bent on bringing down budget deficits and public debt. The Greek sovereign debt crisis of early 2010, later followed by those of Ireland, Portugal, and Spain, punctuated the return to social retrenchment across most of Europe. The global financial crisis has affected different economies differently, as a result of their relative vulnerability to endogenous and external economic shocks and the differing institutional capacities they were able to mobilize to confront the economic duress. In particular, focus is on the developments that social investment policies have undergone since 2008. While there are differences across welfare regimes, policies with a social investment flavour (activation, childcare) have been somewhat more resilient in the face of the new fiscal austerity. While clearly suffering from an extremely unfavourable budgetary context, the reorientation towards a social investment welfare state seems still on the agenda, if anything because of a lack of alternatives.

It may be all too soon to draw definite conclusions about the future economic, social, cultural, and political consequences of this momentous economic shock. On the other hand, these questions are among the most pressing of our times. A tentative exploration of these questions is the subject matter of Chapter 10. Will the social investment paradigm carry the day in this context of predicament, or will it revert to marginality and be left orphaned in the new epoch of austerity? Endogenous social changes that prompted many welfare states to turn towards the promotion of investment-oriented social policy, however, have not gone away. If anything, they have become more pressing. Demographic headwinds will bring social contracts under further duress, especially in countries facing high unemployment and the most daunting budgetary pressures, where long-run population ageing and the feminization of the workforce have not been adequately catered for before the crisis. In this respect, the crisis has strengthened the policy saliency of poverty relief, social insurance, macroeconomic stabilization, and the need for human capital investment. In the current context of fiscal predicament, it is essential not to overlook the growth potential of productive social policies. In the concluding chapter, I examine, from a normative perspective, what is needed to rescue an affordable social investment impetus from the one-sided short-term policy orientations triggered by the financial and fiscal crisis at both the level of the European Union and its Member States. Periods of unsettled beliefs can trigger important learning moments, which in turn inspire new institutional politics. Lessons learnt from a momentous crisis play a large role in shaping future policy developments.

This has been the experience of the Great Depression as well as the crisis of stagflation in the 1970s and 1980s. We therefore need to be very attentive which lessons policymakers and wider publics take away from the current crisis, and how politicians communicate these lessons to electorates and other interested stakeholders. Today, a critical reimagining of economy, society, and polity, including the role of supranational authority, is already taking place. The question of institutional design today encompasses two tightly interconnected dimensions. Any long-term resolution to the crisis has to be both effective and legitimate at the level of the EU as well as at the domestic level of the national polities. At the level of the EU, the task is to devise a stable macroeconomic regime for the eurozone, which is better able to accommodate and discipline the diverse needs of different member economies. Domestically, institutional change requires recalibrating the welfare state by combining capacitating social policy supports with a fair distribution of life chances. The key challenge is to make long-term social investment and short-term fiscal consolidation mutually supportive at both the EU level and in the Member States (Vandenbroucke, Hemerijck, and Palier, 2011). I believe that the objectives formulated in the 'Europe 2020 Strategy' provides an adequate—not perfect—framework to achieve this, on the condition that an affordable social investment impetus is anchored in a pro-growth budgetary policy and financial regulation, and accompanied by a strong social narrative of a 'caring Europe' as one of the founding principles of European cooperation, capable of giving hope to European citizens of a better future. The EU can no longer advance as merely a project of market integration and fiscal austerity. Solutions, as I argue in this book, are available—a contention supported by plenty of evidence.

The critical challenge lies in redirecting the broad political support for the welfare state in most EU member countries towards designing a new social model that is able to equip European citizens and societies to face endogenous social change and growing global competition. Against the background of ageing populations, the importance of social investment in the aftermath of the financial crisis can hardly be overstated in terms of employment and productivity growth. Let us hope that, sooner rather than later, more policy creativity and political imagination will encourage EU and national policymakers to turn the current tide of inward-looking pessimism about the EU's future and the sustainability of European welfare states into a renewed and much needed political effort at forward-looking 'social pragmatism', based on shared notions of social justice and the political willingness to fight growing inequalities in European societies.

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