Hard Evidence: how has the eurozone affected the welfare of its citizens?

It’s a tumultuous time for countries in the eurozone; Greece is about to hold a referendum that could see it leave the euro, which could have serious knock-on effects for the other members. At this critical moment, it’s worth taking a step back and seeing what material benefits the eurozone has brought its citizens, in terms of employment, health care, poverty reduction, income protection and education.

Recent research using Eurostat data has shown that, despite sharing a single currency, there is a stark difference between the welfare offerings of Northern and Southern eurozone countries. Southern members – and Greece in particular – have fallen behind on key outcomes since the Global Financial Crisis (GFC).

To make sense of these findings, it’s important to understand what role welfare plays in the eurozone. The eurozone itself is the product of the euro currency project, which was first launched for non-cash-based transactions and central banking in 1999, with the aim of facilitating economic growth and stability. The currency was initially shared by 11 countries: Belgium, Germany, Ireland, Spain, France, Finland, Italy, Luxembourg, the Netherlands, Austria, and Portugal.

In 2002, Greece joined, and euro coins and notes went into circulation. Since then, several more countries have joined: Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011 and Latvia in 2014. The most recent addition was Lithuania, in January 2015 (this country was not included in our study). This takes the total to 19 countries, which currently form the monetary union known as the eurozone.

Map of the eurozoneWikimedia Commons, CC BY-SA

There has been a great deal of debate about how the economic, political and social aspects of the eurozone should fit together. Back in 1992, the Maastricht Treaty represented one of the first steps toward the political integration of Europe. Its aim was to enable the economies of its poorer signatories to catch up to its wealthier ones – in other words, for the economies to “converge” – in an open market. This was to be achieved with policy controls on inflation and government borrowing. The free movement of migrant labour was at the core of the open market concept.

Since then, policy debates in the eurozone have increasingly linked an open market with social reforms. Interventionists like European Commission president Jean-Claude Juncker have argued that the success of the single market depends on further political integration, and on eurozone member countries adopting a coherent set of social policies. In particular, they think an open labour market requires countries to protect the growing population of vulnerable workers who leave their homes, by giving them access to welfare. These ideas formed the basis for the 2004 Lisbon Treaty, which strengthened the legal and political institutions of the European Union.

Success or failure?

With this context in mind, we can now see whether the hoped-for convergence in welfare outcomes among the eurozone member countries has been achieved. There is a debate in this area of research about how best to measure convergence. Some have focused on single indicators of high importance. In my research, I decided to use a different method, combining five of the most important measures. They are: percentage in employment, expenditure on social protection, risk of poverty, the percentage achieving further or higher education, and meeting medical needs.

The findings demonstrated that the welfare outcomes of most of the Northern and Central eurozone countries have, in fact, converged in the wake of the financial crisis. But this is not the case for the southern states. The data shows that there are major differences between the welfare provisions in northern and southern eurozone countries, with Greece being the most vulnerable. This disparity is illustrated in the graph below.

That leaves expenditure on social protection: this refers to the total expenditure on social protection for citizens, per head of the population. This expenditure is calculated in euros, so it’s best to visualise it separately. By this measure, Greece does slightly better, compared with other southern states. But expenditure on social protection in the southern countries is still far lower than the northern ones.

But we can break these results down even further. My research compared each country on a case-by-case basis. By grouping them into clusters, we can see whether there is any evidence that eurozone member countries have converged in terms of welfare outputs over the decade between 2002 and 2012. Despite some variation over the years, the figures below show that persistent differences remain.

In the early phase of the currency union (2002 to 2005) there was evidence of a slight convergence in welfare outputs for all 18 countries assessed. There was a marginal convergence for the percentage employed, levels of social protection, a reduction of the risk of poverty and increases in educational attainment.

After the GFC of 2007, we can see there is a divergence of welfare outputs, especially for southern eurozone countries. For example, Greece is experiencing a rapid increase in relative poverty, compared with the other euro member countries.

Of course, it’s worth questioning whether material outputs – like the ones measured here – are more important than subjective well-being; or, how happy or satisfied people feel with their lives. On the one hand, one might assume there is an association between material benefits and feelings of well-being. But some countries with strong, shared cultural values and collective experiences might facilitate feelings of well-being, despite the fact that material assistance from the state is lacking.

To tackle this question, I checked the welfare output scores against the responses which Eurostat recorded to the question: “how happy would you say you are?”. On a country-by-country basis, there was partial association between scores. For the most part, in countries where the welfare output was higher, the recorded happiness was higher too. The exception was Spain: although it had relatively low welfare output scores, this country did better on the subjective outcome.

But overall, the research concludes there is little evidence of a holistic eurozone-based convergence when it comes to welfare.

Searching for solutions

Part of the reason for this lack of convergence is the difficulty in getting different countries to agree on social policy. The current debates between the euro core and the UK over benefits for migrants are a case in point.

Nobel prize-winning economist Paul Krugman has pointed out that in the US, the federation of states sharing the dollar have an advantage over the countries sharing the euro. This is because the large-scale federal expenditure (for example, the national US Social Security programme) directs income into all states, on the basis of relative need. The US government protects individual states in a way that European institutions cannot protect individual euro members.

Similarly, US banks enjoy a higher quality of protection from credit risks than regional European banks get from the European Central Bank. However, this is one area where policy in eurozone countries has been improving since the financial crisis. But there’s still scope to do more; for instance, an institution like the European Structural Fund could take some responsibility for minimum welfare standards across the eurozone, with payments from all eurozone countries being redistributed by the fund on the basis of need.

Full employment, equity of health care provision, poverty reduction and educational attainment all might be expected to converge in the longer term. But this can only happen if the crisis results in a more interventionist policy approach to political economy right across the eurozone. Ultimately, countries like Greece can only continue to survive if all member countries take greater responsibility for the welfare of eurozone citizens, rather than enforcing austerity as a punishment for previous debts.

Philip Haynes has previously received funding from Economic and Social Research Council