Professor Tim Callan:

I am glad of this opportunity to address the joint committee about the European Commission's proposals on the social dimension of EMU. The committee will understand that I speak here on my own behalf, since the ESRI does not adopt a corporate view on these matters.

I have, however, benefited greatly from discussions with my ESRI colleagues, Helen Russell and Dorothy Watson, and their expertise has influenced much of what I will say.

I would like to turn to strengthening the social dimension of the EMU referred to in the Commission's document. Five years into the great recession, Europe’s recovery is still fragile and uncertain. As a result, unemployment in many EU countries remains high, averaging 12.2% in the eurozone. There are wide variations ranging from 5% in Germany and Austria to 13.5% in Ireland and more than 25% in Spain. A key aspect of the Commission’s proposals relates to "Reinforcing the monitoring of employment and social developments as part of macroeconomic surveillance". The macroeconomic surveillance procedure has been analysed by the distinguished economist, Paul de Grauwe, who states:

The European Commission has now been invested with the important responsibility of monitoring and correcting macroeconomic imbalances in the framework of the Macroeconomic Imbalance Procedure, MIP. The key idea in the MIP is symmetry, that is, imbalances between surplus and deficit countries should be treated and corrected symmetrically. As our analysis illustrates, up to now the European Commission does not seem to be willing (or able) to impose symmetry on the adjustment process. It imposes a lot of pressure on the deficit countries but fails to impose similar pressure on the surplus countries. The effect of this failure is that the eurozone is being kept in a deflationary straitjacket.

In the light of that analysis, adding indicators such as the unemployment rate to the procedure could lead to further asymmetries, with high unemployment seen as purely the responsibility of high unemployment countries and to be addressed by national rather than collective European actions. This would be at odds with the Commission’s expressed intention elsewhere that, “Without collective action to ensure that employment and social challenges are tackled in a timely and effective manner, long-lasting disparities may develop". Similar points are made elsewhere in the document. To realise this intention, it is critical to spell out the ways such additional indicators would be used and how they would link with broader macroeconomic policies.

I will turn to the section about reinforcing surveillance of employment and social challenges and strengthening policy co-ordination. Much of the monitoring is being done in the "Social Europe" space. This is confirmed by the statement that there will be no additional reporting requirements for member states. It is important, however, that these issues be considered within the framework of the EMU. Resolution of the problems identified by social indicators will often require action in terms of economic policy, including macroeconomic and banking policy, rather than being regarded as separate issues for social policy action. Monitoring of problems helps to enhance their visibility but helping to improve the situation requires a knowledge of how the social outcomes being tracked are linked to policies and to other shaping factors. This is where social research can contribute evidence on the likely impact of alternative policies. Two approaches are particularly relevant in this regard: micro-simulation modelling, which helps to assess the impact of potential future policies on tax and welfare, for example, before they are implemented; and cross-national research, which can help to explain why other countries achieve better outcomes.

I refer to some of the indicators in use in the MIP and to the proposed new headline measures. The alert mechanism report in the MIP includes what is termed the “at risk of poverty and social inclusion" rate. This includes all those who are either "at risk of poverty", which is below 60% of median income or suffering severe material deprivation or living in households with low work intensity, often referred to as jobless households. My colleague, Bertrand Maitre and his co-authors Brian Nolan and Chris Whelan, have argued cogently that this measure is seriously flawed. As they state, "The absence of coherent principles underlying the measurement process is likely to undermine the stated objectives of achieving an effective way of communicating in a policy environment, and a necessary tool in order to monitor national situations".

It seems the five new headline indicators will attract most attention. They are strongly focused on the working age population but incorporating the social dimension would imply consideration of older people and children not just those who can be "activated" or contribute to economic growth. In particular the rationale for reporting poverty only for the working age population is not clear. It would seem more appropriate to include child poverty and poverty among older age groups in top level indicators. There is also a narrow focus on income-employment and unemployment as outcomes. In some of the sub-indicators in the annex, issues such as literacy, early school leaving, material deprivation, and a narrow range of quality of work issues are mentioned, but there is nothing on health, psychological well-being, social participation and access to services. It is necessary to flag that these are also important.

The "real gross disposable income of households" is suggested as a headline indicator. It is not stated whether this is to be the median value or the mean. It would be preferable to have both but if one is to be chosen, then the median may be preferred. It is important to have indicators of low income, for example, the at risk of poverty rate, from the perspective of social exclusion rather than indicators of average income. Given known problems in relying on income alone, including its failure to capture long-term command over resources, direct measures of living standards from a range of indicators of material deprivation would help to provide an improved picture. As well as employment-unemployment at the individual level, household joblessness should be considered as an employment-related indicator. We know from the Irish experience that it is possible to have a low unemployment rate combined with a high household joblessness because household joblessness is sensitive to the distribution of work across households and the level of inactive statuses other than unemployed.

The work of Watson, Maitre and Whelan shows that household joblessness is not a good indicator of poverty and social exclusion because it does not necessarily result in low income or deprivation. It is a risk factor for poverty and social exclusion, just as lone parenthood and low education are risk factors, but it is not an indicator of the same concept as is captured by income poverty and material deprivation. Household joblessness needs attention in its own right. Given that activation and human capital development strategies are relevant to solving it, it belongs to the "employment" space rather than the "social exclusion" space.

Social cohesion and the importance of maintaining public support for the political system are given prominence in the introductory text but are not followed through in terms of indicators. For example, the implications of migration for social cohesion are not considered nor is there a proposal to track the level of public trust in government or democracy or support for welfare state despite the fact that information on these issues across the EU is collected in the European Social Survey and Eurobarometer. I thank the committee for its attention.