ALIBI IN AGONY: THE EUROPEAN WELFARE STATES DURING CRISIS

Kosta Josifidis, University of Novi Sad, Serbia1

John Hall, Portland State University, USA
Novica Supic, University of Novi Sad, Serbia
Emilija Beker Pucar, University of Novi Sad, Serbia
The first draft
Abstract: The paper examines the nature of changes of the European welfare states affected by the
current economic crisis. We try to provide the answers to the question of whether the differences,
which exist among different welfare state regimes, are evident in reaction to the consequences of the
2008-2009 crisis. Welfare state regimes are the result of different institutional perception of social
risks making it realistic to expect specific responses to the effects of the economic crisis. The
absence of such responses can be interpreted in two ways: i) the existence of common basis, which
is a constant for different welfare state regimes, relatively independent of economic shocks, or ii)
the lack of preparedness for the modernization of existing social programs in accordance with the
changed economic situation. In order to recognize convergent vs. divergent solutions, in the paper
we perform a comparative analysis of key social problems, caused by the economic crisis, and the
anti-crisis measures, observed by the welfare state regimes in the EU.
Keywords: Welfare state, Economic crisis, the European Union, Anti-cyclical policies, Institutional
changes.
JEL: D63, H53.
Introduction
The Great Recession from 2008, in its expression, affected the EU-15 countries causing financial,
economic and fiscal problems. When the signs of crisis of the financial sector became apparent in
2007-08, the initial step in most countries was financial support for the financial institutions and
large companies, along with simultaneous consideration on the possible directions of reform of the
financial sector. Very quickly, the financial crisis spilled over to the sector of real economy, causing
a decline in production and employment. By lowering of interest rates to zero levels, the monetary
policy had reached its limit in the correction of the market mechanism. The next step, in most
countries, has been the use of policies of encouraging aggregate demand in order to stimulate the
economy. When signs of recovery became visible, some countries had slowly started abandoning
the expansionary fiscal policy, although the problems of the increased level of public debt and the
budget deficit remained the same.

1 Corresponding author: josifidis@gmail.com

1

The welfare state in EU-15, due to inherent inertia and institutional rigidity, in the early years of the
crisis had not shown more significant signs of slowdown and decrease. However, the intensity of
the recession, as well as the instigated financial, economic and fiscal adjustments to crisis
circumstances cannot but have an effect on the welfare state. Therefore, it is not the question
whether the crisis will spill over into the welfare state, rather how will the welfare state reform in
the newly emerging situation. Can we expect convergent or divergent responses between countries
in this regard, whether cyclical changes are sufficient or are structural changes in social policy also
inevitable, to what extent can our existing theoretical frameworks of the welfare state typologies,
developed for many years, be useful in understanding and projection of the future of the welfare
state in EU-15?
1. Literature Survey
Reflections of the 2008 crisis on the European welfare states are the subject of increasingly
extensive research in recent years. It is possible to single out a number of works that represent the
basis of our research, both in terms of provocation, through a greater or lesser coincidence with the
findings contained in this work, as well as inspiration for future studies. Fundamentally, the
consulted papers are divided into two groups, depending on whether the primary focus of the study
was institutional or the adjustment of mechanisms of the welfare state to the new circumstances of
crisis.
Explanations of influence of the previous crises and projections of the effects of the current crisis on
the European welfare states, in the institutional context, are contained in the papers of many authors
(Anton Hemerijck, Ben Knapen, and Ellen Van Doorn 2009; Peter Starke and Franca Van Hooren
2010; Francis Castles, 2010; Sabina Stiller 2010; Kosta Josifidis, Alpar Loonc, and Novica Supi.
2010; Bruno Palier et al. 2010, Barbara Vis, Kees van Kersbergen, and Tom Hylands 2011;
Alexandra Kaasch, Peter Starke, and Franca Van Hooren 2011; Sotiria Theodoropoulou and Andrew
Watt 2011; Mara Yerkes, and Romke van der Veen 2011; Peter Starke, Alexandra Kaasch, Franca
van Hooren 2012).
In institutional terms, the welfare state is characterized by a high degree of rigidity which may delay
the reforms needed to overcome the crisis. Vis, van Kersbergen, and Hylands (2011), focusing on
selected advanced democracies (UK, US, Germany, Netherlands, Denmark, and Sweden), found
that these countries face similar welfare state problems and that their response to these problems is
rather similar, too. Instead of retrenchment, their responses on crisis are typically but temporary
expansions. They proposed that the public support for the welfare state is one of the main reasons
for the lack of retrenchment. The institutional rigidity of the welfare state in relation to economic
shocks has its limits, depending on the intensity of the crisis and the (in)ability of the government
for addressing the increasing social problems.
Thus, Theodoropoulou and Watt (2011) evaluating the austerity packages that the governments of
EU member states have announced and implemented following the Great Recession, found that the
distribution of measures between expenditure cuts and tax rises is skewed in favour of the former in
most analysed countries. Social protection and public administration predominate among the areas
2

of public expenditure which governments have targeted for expenditure reduction, while indirect
tax rises predominate among the types of revenue that most governments have chosen to raise.
Pensioners, public sector employees and welfare benefit recipients are among the groups in society
likely to be most severely and adversely affected by the measures in most countries.
Compared with the approaches that emphasize the institutional changes of the welfare state in
period of crisis, the papers which are focused on the impact of the crisis on the change in
mechanisms of the welfare state policies, both in individual countries as well as in a comparative
perspective, is much more abundant. As particularly influential, we could select some authors like
Claudia Hartmann-Hirsch 2010; Willem Adema, Pauline Fron, and Maxime Ladaique 2011;
Heejung Chung and Wim Van Oorschot. 2011; Paul de Beer 2012; Jochen Clasen, Daniel Clegg,
and Jon Kvist 2012.
Most of the research on these approaches emphasizes the effects of the crisis on labor markets,
earnings and income distributions of EU countries and consequently the welfare state reaction in
terms of higher or lower generosity of specific social policy programmes. Thus, de Beer (2012),
based on examples of five EU countries Denmark, Spain, Germany, Slovakia and the United
Kingdom, investigated the impact of the crisis on earnings and income distribution. They found that
the vehemence with which the crisis affects a country is linked to its labour market regulation,
especially in the context of the distinction between external labour market flexibility and internal
flexibility. However, there is no one-to-one translation of difference in labour market adjustment
into real incomes and income inequality, because such translation depends also on policy measures
taken during the crisis. Or, Clasen, Clegg, and Kvist (2012), studied different response on crisis in
the six EU member states (the Czech Republic, Denmark, France, Germany, Spain and the United
Kingdom) tried to answer the question of whether the economic crisis has also brought a labour
market policy reform crisis. They found that in the first phase of the crisis, all countries expanded
their labour market policy efforts. As crisis deepened, there was a clear bifurcation between those
states that stepped up structural reforms intended to reduce labour market segmentation and those
that turned to a more aggressive agenda of retrenchment.
2. European Welfare Regimes - Institutional Design Review
In the field of welfare state literature, an agreement on the division of the European welfare state
area into welfare regimes is widely present, taking into account their tradition, institutional
specificities, structure of the welfare state programs, as well as the impact on economic and social
outcomes. Starting with the leading approaches in the classification of welfare regimes (Gsta
Esping-Andersen 1990, 1996; Maurizio Ferrera 1996; Giuliano Bonoli 1997), and according to the
aim of our research, we chose the division of EU-15 into four regimes of the welfare state: i) the
liberal model, ii) the social-democratic model, ii) the corporatist and, iv) the Mediterranean. Despite
the fact that, initially, the given typology is almost two decades old and is based, primarily, on
institutional design of the welfare state, its validity is still sustainable, in terms of the classification
of models according to redistributive effects, as well as the comprehensiveness of data at the macro
as well as micro level (Andreas Krammer, Judith Niehues and Andreas Peichl 2012). When
institutionally describing the welfare regimes, we shall devote more space to the pension system
3

and the system of unemployment benefits, as they are the two areas of the welfare state that will be
emphasized in the following research.
2.1. The Liberal Model
A key feature of the liberal model is an ungenerous welfare state where state interventionism is
limited by the exhaustion of market possibilities in solving social problems. It is an approach in
which the mechanisms of the free market, due to low budget restraints and high employment in the
private sector, create conditions for continuous and sustainable growth of welfare in society. In the
short term, the state, with the implementation of redistributive mechanisms can generate a welfare
level above the market optimum. However, in the long term, the suboptimal allocation of economic
resources, inherent to state intervention, leads to the lowering of economic efficiency and thus
welfare, as well, below the level which would be generated by the free market. In EU-15, the
solutions characteristic to the liberal model are most noticeable in the Anglo-Saxon countries: UK
and Ireland.
The main channel for solving social problems is the labor market so that transfer payments are
relatively low. Social assistance is granted according to the principles of mean tested and universal
flat rate. Moreover, the promotion of work ethics and economic liberalism holds off potential users
of social assistance because of fear of social stigmatization. Consequently, the redistributive
potential of transfer payments is limited.
The pension system is based on the Beveridge model, with tax-financed public pensions. Additional
private pension insurance is encouraged, which allows workers the use of pensions after retirement
higher than the level secured by state pension insurance. As for the system of unemployment
benefits, benefits deriving from insurance are relatively modest, while unemployment assistance
based on the mean tested principle is a key tool of protection of the income of the unemployed.
Expenditure on means tested full time unemployment benefits often exceeds non-means tested
unemployment benefits (Stovicek and Turrini 2012). A strict control over the activities of job search
is present, while active labor market policies are of less importance.
2.2. The Social Democratic Model
A key feature of the social democratic model is a generous welfare state based on the principles of
universality and de-commodification. Universality implies that all citizens, on the basis of
citizenship, have the right to enjoy the programs of the welfare state, regardless of their contribution
to funds of the welfare state. The decommodification principle reflects the effort to reduce the level
of dependence of the individual on outcomes in the labor market, in the sense that the market is not
the only mechanism that determines the economic, social and political status of the individual in
society. Social welfare can be recognized by the low level of economic inequality and high
employment, even at the cost of sacrificing macroeconomic stability - budget constraints. The
model promotes egalitarianism and universality in covering social risks, especially when it comes to
socially vulnerable groups who face problems of finding a job in the private sector. The goal attainment of full employment is achieved through high employment in the public sector. At the
4

same time, employment in the public sector is also the mechanism for achieving greater equality,
especially regarding the status of women in society. Typical representatives of the social democratic
model are the Scandinavian countries.
High standards are defined in the labor market that protect the rights of workers, while employment
in the public sector, overall, influences a low level of earning inequality relatively independently of
programs of redistribution. The model is recognizable by the most generous programs of social
policy, mostly funded from taxes, which, combined with the principle of universality, gives
redistribution a vertical character. Instead of monetary transfers, the provision of social services is
emphasized, especially in the field of active labor market policy. In order to prevent a potential
collapse of social public security and ensure a more effective redistribution, along with public social
programs there is also a private social security present, based on income, integrated into a universal
egalitarian structure.
Similarly to the liberal regime, the pension system is based on the universal Beveridge model, with
state pensions financed from taxes. Social democratic countries are also recognizable by high rates
of replacement and the intensive implementation of the social security pensions mechanism. The
unemployment benefits system is generous, both in terms of comprehensiveness, as well as in terms
of replacement rates. To prevent the decline of work motivation, special attention is granted to
programs of active labor market policy and activation, from which strict conditions are derived
regarding job search and work availability, which the unemployed must fulfill in order to qualify for
the use of benefits. The system of unemployment benefits is highly redistributive due to limiting of
the amount that individuals with high income can count on.
2.3. The Corporatist Model
A key feature of the corporatist model is a moderately generous welfare state in which the right to
use welfare state programs is connected to previous payments of contributions for social policy. The
need for predictability and sustainability of the welfare state is emphasized, which is why market
activity is limited by laws clearly defining mutual rights and obligations of social policy subjects.
According to its characteristics, the corporatist model is located at the intersection of liberal and
social democratic solutions. In the relation of economic individualism - social equality, social
equality prevails. However, the use of the budget to finance social expenditure is limited and closer
to the liberal principles of savings than the social democratic principles of universality and
generosity. State intervention in the social sphere is limited by the application of the principle of
subsidiarity.
Status segmentation, based on work results, is not only emphasized but is, in a certain way,
promoted in order to achieve better work efforts. The necessity of redistribution is justified by the
fear that market-generated economic inequalities may threaten the social order. Typical
representatives of the corporatist model of the welfare state are Germany, Austria and France. The
influence of labor unions is emphasized in the labor market. The dispersion of earnings is relatively
small due to highly coordinated corporate industrial relations. Moderate employment in the public
sector and the strong position of sector unions results in a moderate level of earning inequalities.
5

Tax rates and a broad tax base suggest an even redistribution through taxes. Social policy programs
are primarily funded through contributions, reflecting status differences between particular social
groups. Consequently, there is a lack of political support present for a more pronounced
redistribution through transfer payments. Thus, the model, in terms of redistribution, can be
characterized as moderate. However, the picture differs regarding the area of the pension system.
The corporatist model is characterized by generous pensions with a high replacement rate. In this
case, the redistribution between social groups is low, because pension rights are closely linked to
previous payment of contributions. Corporatist model countries, generally, have a generous and
comprehensive system of unemployment benefits. Compared with the social democratic countries,
the replacement rate is less and the time of benefit use shorter. By emphasizing activation and active
labor market policies, the risk of unemployment and the decline of work motivation is reduced.
2.4. The Mediterranean Model
Despite the similarity with the corporatist model, in literature in the field of the welfare state, the
prevalent opinion is that Mediterranean countries: Spain, Portugal, Italy and Greece constitute a
special regime of the welfare state. A key feature of the Mediterranean model is i) relative
underdevelopment of the welfare state, in a normative sense, and ii) segmentation of the welfare
state. Underdevelopment of the welfare state describes the fact that certain social risks, for which
there are welfare state programs in other European countries, are not recognized and, therefore, not
covered by either the state or the private sector. Segmentation of the welfare state describes
differences in the expression of the welfare state towards different social groups, particularly with
regards to the labor market. Special features of the Mediterranean model, compared to the countries
in the EU, are not as noticeable in the structure of social expenditure as compared to the relationship
of the population to the welfare state, taking into account the specificity of the political process and
institutional culture. The advanced spirit of family inclusion and intergenerational redistribution has
a special place in the model.
The labor market is characterized by a dual structure according to the insider outsider theory. On
one side, there are institutionally well covered and unionized workers - insiders, primarily public
sector employees, who enjoy job stability and high wages, frequently higher than the wages in the
private sector. On the other side are the unemployed and unorganized workers - outsiders, for whom
the many benefits of workers in the first category are institutionally difficult to attain. A review of
the tax system does not indicate the existence of a clear difference compared to other models of the
welfare state. Taxation of income is less than in the corporatist model countries, while contributions
for social security are quite high. When it comes to social security, the countries of the
Mediterranean model follow the corporatist tradition, especially regarding the treatment of the
family. There is universal health care, but examples of the practice of a guaranteed minimum
income are rare.
Similar to the corporatist model, the level of pensions is determined by earnings and depends on the
contributions paid. The model is characterized by a higher prevalence of early retirement compared
to other countries. The generosity of the system of unemployment benefits varies according to the
6

age of the user and the duration of the unemployment period. Terms of use of unemployment
benefits from insurance are very strictly defined, while unemployment assistance is small and
limited. The activation policy has a relatively marginal role. The application of an active labor
market policy is widely spread and is associated with the retention of the right to receive benefits.
3. Methodological Framework and Data Sources
The initial methodological issue in the analysis of the degree of convergence or divergence in the
expression of the welfare state in response to economic shocks is the classification of countries
according to welfare state regimes. The assumption is that similar institutional solutions,
recognizable within the same regime, result in similar reflections on crisis situations. Despite the
differences that exist between countries, the extended classification of Esping Andersen represents,
for this purpose, an acceptable methodological framework. While interpreting the results, of course,
it is necessary to take into account the additional features that were not included in the initial
criteria for the classification of countries according to welfare regimes, in particular: i) countrys
membership in the Euro Zone, the assumption is that the countries that have adopted the euro as
their official currency have been more affected by the crisis due to limited possibilities of the
application of monetary policy, and, ii) the size and degree of the internationalization of economy the assumption is that small and open economies are more vulnerable to economic shocks.
The following methodological issue concerns the way of covering the effects of the crisis on the
welfare state. The starting position is that the Great Recession of 2008, from the financial, through
the economic, to the fiscal crisis, due to its intensity and dynamics, leads to the crisis of the welfare
state. The hypothesis on the crisis of the welfare state is founded, on one hand, on the reduction of
the basis for redistribution, due to the slowdown in economic growth, and increasing the number of
users of welfare state programs, due to rising unemployment numbers and unfavorable demographic
trends, and, on the other hand, on the conditions of high institutional rigidity of the welfare state.
In order to test the hypothesis on the crisis of the welfare state, based on the previously described
causality, indicators which have been monitored in the work are the real GDP, unemployment
numbers and social public expenditure in pre-crisis and crisis years. The variations of the GDP
change the size of the real basis for redistribution which, in the long term, has an influence on the
generosity of social expenditure. Similarly, the demand for the programs of the welfare state is
directly connected, in the short and long term, with the movement of unemployment numbers,
which also influences the proportions of social expenditure. The adjustments of the welfare state to
the circumstances of a narrowed redistribution base and a growing demand for social expenditure
requires changes to the mechanisms of the welfare state programs, in terms of quantitative changes,
as well as an institutional reform of the welfare state, in terms of qualitative changes.
An important methodological issue is also the time-frame to be covered by the study. 2007 is taken
as the base year in relation to which the changes of indicators relevant to the welfare state are
monitored, both before and after the crisis. The starting point year for all countries is 1995, as to
observe the same institutional framework of the welfare state, national, as well as supranational,
expressed through the existence of the European Social Model, taking into account the fact that EU7

15 was completed in 1995, with the admission of Austria, Finland and Sweden. Starting with
currently available data, the last observed year is 2012. The period before 2007 is considered as the
pre-crisis state, while effects of the crisis are observed in the period post 2007.
For each indicator, the GDP, unemployment and social public expenditure we have determined: i)
changes in the crisis years, beginning with 2008 until 2012, in relation to the pivotal 2007 and, ii)
the trend in the pre-crisis and crisis period. Changes in relation to the initial - non-crisis situation are
calculated by basic indexes, where 2007 is taken as basis. Trend calculation is based on the Average
Annual Rate of Change - AARC methodology. The AARC procedure implies the selection of two
temporal points, the starting and end point, between which the trend of the time series is
determined, based on the formula derived from the calculated net present value:
FV =PV (1+ r) t (1)
FV
=( 1+ r) t (2)
PV

FV
=(1+r )
PV

(3)

from which the final formula is derived:

r=

FV
1 ,
PV

r=

x t=2
1
x t =1

(4)

x t=1 the starting year in the observed period,

Symbols respectively indicate:
year of the observed period, t - time, t - change in the observed period.

x t=1

the end

To test the hypothesis that countries that belong to the same welfare state regimes have similar
reactions to economic shocks, it is necessary to adopt an appropriate definition of convergence. To
this end, we chose the concept of relative sigma convergence. According to this approach,
convergence occurs when the dispersion of the observed value, as measured by the coefficient of
variation, decreases over time, or if the condition is met:
CV t+T <CV t (5)
where: CV t+T is the coefficient of variation in the period t+T; CV t - the coefficient of
variation in time t. In this way it is possible to determine how the values of the selected indicator
change, in the observed country, in relation to the average values of the given indicator in the group
of countries that constitute a particular regime of the welfare state.

The coefficient of variation is calculated when standard deviation is divided by the arithmetic mean
of the observed set of data. In our example, convergence is determined for social public
expenditure, therefore the formula for calculating the coefficient of variation is:

1
N

CVSPEtT

i 1

1
N

SPEit SPEt T

SPEt T

i 1

(6)

SPEit -social expenditure in the country i in the year t, SPEt - average social expenditure in
where:
1 N
SPEt T
the country i in the period t+T, N i1
- average social expenditure for the particular model
of the welfare state in the period t+T.

In the last step of the research, after gaining general insight into the reflection of the crisis on the
real GDP, unemployment numbers and social public expenditure, as well as determining the
(non)existence of convergence between countries and welfare state regimes, we shall focus our
attention on highlighting the changes in the two segments of the welfare state, which, in our
opinion, reflect the necessity and the direction of changes in European welfare states in the next
decade: i) the pension system, and ii) the system of unemployment benefits.
Regarding the sources of data, we used public electronically accessible databases of economic and
social expenditure indicators: AMECO, EUROSTAT-ESSPROS, European Industrial Relations
Observatory (EIRO), OECD Social Expenditure Database (SOCX) MacroDataGuide and
Sustainable Governance Indicators.
4. The Great Recession and the Crisis of the Welfare State
4.1. Production - The Basis for Redistribution
The Great Recession of 2008 had a strong impact on the economies and the welfare states of the
EU-15 countries. Generally, it is possible to identify three phases of the recession, where each of
them has left a deep mark on the functioning of the welfare state. The first phase is related to the
financial crisis, than the economic crisis occurred, while the third, current phase, can be described
as the fiscal crisis. Manifestations of the recession were largely the same in all EU countries,
expressed through the decline in values of key macroeconomic indicators. However, the intensity of
the crisis was not uniform, which is understandable given the specific features of the economic
structure, as well as public finances, between countries. Consequently, the reactions to the crisis,
through the economic policy, were varied, ranging from harsh austerity measures, required by
international financial organizations, in countries most affected by the crisis, to the use of limited
bailout packages for the banking sector, in countries where the crisis has not reached full
momentum. Particularly affected were the countries where, parallel with anticyclical measures,
9

structural reforms have been implemented, with the support and monitoring of the Troika European Central Bank (ECB), the European Commission (EC) and the International Monetary
Fund (IMF).
The impact of the 2008 recession on the welfare state in EU-15 was twofold. On one hand, the
decline in aggregate demand, bankruptcy of companies and, consequently, a sharp rise in
unemployment deepened the existing and also led to the emergence of new social problems which
increased the demand for welfare state programs. On the other hand, the implementation of austerity
measures, in order to overcome the problem of public debt and the budget deficit, has burdened the
funding of programs of the welfare state. In addition to the requests for a reduction in social
expenditure and changing its structure, the anti-crisis programs also contain a component of
institutional reform of the welfare state due to which it is reasonable to say that the recession, along
with the financial, economic and fiscal crisis, caused the crisis of the welfare state in EU-15.
Table1. The impact of the crisis on GDP (PPS) in EU-15
Country

Germany
France
Belgium
Austria
Luxembourg
CWR
Netherlands
Sweden
Denmark
Finland
SDWR
Italy
Spain
Greece
Portugal
MWR
United Kingdom
Ireland
LWR

% GDP
EU-27
2007.

% GDP
EU-27
2012.

%
AARC
20071995
3

19,6
15,2
2,7
2,2
0,3
40
4,6
2,7
1,8
1,4
10,6
12,5
8,5
1,8
1,4
24,2
16,6
1,5
18,2

20,5
15,7
2,9
2,4
0,3
41,8
4,7
3,2
1,9
1,5
11,3
12,1
8,1
1,5
1,3
23
14,7
1,3
16

3,67
4,52
4,04
4,18
7,81
4,84
5,66
4,84
4,30
5,62
5,11
3,59
6,88
5,69
5,19
5,34
5,16
9,33
7,25

2007

2008

2009

2010

2011

2012

4
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

%
AARC
20122007
11

100,4
99,8
100,8
101,1
97,9
100,0
101,9
99,9
102,3
101,9
101,5
101,1
100,6
103,1
99,4
101,0
97,4
91,9
94,7

93,0
96,1
97,2
96,0
90,8
94,6
94,7
91,8
95,7
92,5
93,7
95,0
94,7
98,9
96,1
96,2
90,6
85,1
87,8

99,9
100,1
103,3
101,8
100,5
101,1
98,5
99,2
103,7
95,9
99,3
96,8
95,4
95,1
100,4
96,9
95,3
88,4
91,8

104,5
103,3
106,7
106,4
107,4
105,7
101,4
105,4
104,8
100,0
102,9
98,6
97,0
89,1
99,6
96,1
96,6
91,4
94,0

107,6
105,7
108,9
109,8
110,2
108,5
102,7
108,8
106,8
102,1
105,1
98,5
97,9
85,3
98,7
95,1
99,1
94,4
96,7

1,48
1,11
1,73
1,89
1,97
1,64
0,54
1,69
1,32
0,42
0,99
-0,29
-0,43
-3,12
-0,25
-1,03
-0,18
-1,15
-0,66

Source: The authors' estimation based on AMECO 2013 data.

Table 1 contains the data on which it is possible to obtain a generalized view of the level and
dynamics of GDP of the EU-15 countries, regarding the models of the welfare state, before and
during the crisis. 2007 is taken as the base year. In the pre-crisis period, from 1995 to 2007, the
trend of GDP growth had been noticeable in all countries. Growth was strongest in LWS countries,
on average 7.25% annually (a particularly illustrative example is Ireland which, in 2007, had almost
three times the GDP in relation to 1995), while in other models of the welfare state the trend of
GDP growth was almost even, approximately 5% per year.

10

The crisis of 2008 was strongly reflected in the GDP of member countries. This is illustrated by the
fact that in 2009 not one of the countries had achieved the value of production from 2007. In
relation to the models of the welfare state, the crisis hit MWR and LWR the hardest, in which all
countries marked a negative trend compared to the pre-crisis situation. Particularly vulnerable are
economies of Greece and Ireland, which have, on average, declined annually by more than 1%
compared to the base year 2007. In contrast, other countries and models of welfare states, after three
years from the outbreak of crisis, have brought their economies back to the initial state, however,
regarding the tempo of GDP growth, they are several times below the values achieved in the precrisis period.
It is useful to note that the crisis led to a change in the position of particular countries in the creation
of GDP EU-27. Decrease in the share of GDP EU-27, in 2012, compared to 2007, is most obvious
in LWR countries (- 2.2%), following are MRW countries (-1.2%), while the share of CWR and
SDWR countries increased (+1.8% and +0.7% respectively). This indicates a redistribution of
economic power from the periphery towards the center and the north of EU-15.
4.2. Unemployment - Interweaving of Economy and the Welfare State
The dual nature of the crisis, the crisis of economy and the welfare state in EU-15, derives from the
interdependence of economic and social problems. Economic problems cause social problems,
while social problems further burden the economy. The link between economic and social problems
is most evident when observing unemployment. Unemployment is the main economic problem of
the EU-15 countries, as well as the root cause that influences the level and the dynamics of poverty,
social exclusion and economic inequality.
The pressure of unemployment on the labor market and the welfare state is not temporally
synchronized. The consequences of unemployment spill over to the welfare state more slowly than
is the case with the labor market. The institutions of the welfare state are characterized by a higher
degree of rigidity in relation to the institutions of the labor market which is why social problems, in
the short term, may be disguised through the inertial application of existing generous welfare state
programs. Consequently, the rise of unemployment does not have to be directly manifested through
the rise of poverty or social exclusion, but the decline in economic activity in the long term and
persistently high unemployment rates bring about future exhaustion of the welfare state and the
explosion of social problems.
In accordance with these findings, as the most appropriate indicator of social problems, we chose
the number of the unemployed. In this regard, one might ask why the number and not the
unemployment rate. We believe that the unemployment numbers, rather than the unemployment
rate, better reflect the dimensions of social problems based on the assumption that anyone who is
unemployed has an actual or potential social problem, the nature of which can be disguised when
the unemployment rate is used as an indicator. To this, the psychological aspect may be added, in
the sense that each number can be identified with a single individual, which gets blurred when using
relative values.

11

Table 2. The impact of the crisis on unemployment in EU-15

Country

Germany
France

Unemploymen
t
2007 (000)

Unemploymen
t
2012 (000)

% AARC
20071995

3601

2316

0,9

2382

3006

-1,2

Belgium

4
100
100

2008

2009

2010

2011

2012

11

87,1

89,6
115,
6
107,
5
110,
1
133,
0

81,8
118,
7
115,
0
101,
4
120,
5
107,
5
127,
5
142,
9
197,
0
122,
3
147,
4
139,
6
252,
6
154,
5
133,
9
170,
1
150,
4
288,
6
219,
5

69,5
117,
6

64,3
126,
2
104,
5
101,
8
136,
4
106,
6
153,
4
135,
5
197,
7
112,
9
149,
9
182,
6
314,
6
296,
9
175,
0
242,
3
154,
9
301,
0
227,
9

-8,4

93,6
100

353

369

-1,2

Austria

94,4
100

185,6

189

1,9

Luxembourg

100
8,8

12

5,2

CWR

87,4
119,
3

100
6530,4

5892

1,1

Netherlands

96,4
100

305,7

469

-4,4

Sweden

100
297,5

403

-2,2

Denmark

87,5
102,
4

100
110,8

219

-4,3

Finland

91,5
100

183,4

207

-5,9

SDWR

93,8
100

897,4

1298

-4,2

Italy

100
1506

2750

-4,5

Spain

100
1833,9

5769

-4,7

Greece

93,8
112,
3
141,
3

100
406,9

1208

0,4

Portugal

92,9
100

491,4

860

3,2

MWR

100
4238,2

United
Kingdom
Ireland

200
7

10587

-1,4
100

1622,8

2513

-3,1
100

105

316

-4,3

LWR

100
1727,8

2829

-3,7

%
AARC
2012
2007

95,6
110,
5
108,
0
139,
0
123,
5

111,2
106,
8
137,
2
159,
8
120,
5
131,
1
129,
1
226,
3
115,
8
118,
4
147,
4
145,
6
255,
2
200,
4

98,3
96,4
125,
0
101,
4
127,
1
131,
1
199,
8
113,
8
143,
0
140,
0
272,
6
215,
5
143,
7
192,
9
156,
1
301,
9
229,
0

4,8
0,9
0,4
6,4
0,8
8,9
6,3
14,6
2,5
8,1
12,8
25,8
24,3
11,8
18,7
9,1
24,7
16,9

Source: The authors' estimation based on AMECO 2013 data.

For a number of years, economies and the welfare states of EU-15 countries have been faced with
the problem of unemployment, especially regarding socially vulnerable groups: young people,
women and immigrants. The pressure of unemployment has enhanced with the appearance of the
2008 crisis. In the pre-crisis period, in most countries a tendency of the reduction of unemployment
had been present. Thus, in 2007, compared to 1995, the number of the unemployed was higher in
only 5 countries out of 15: Greece, Germany, Austria, Portugal and Luxembourg. In terms of
12

models of the welfare state, the trend of a slight rise in unemployment numbers, in the pre-crisis
period, had been recorded in CWR, along with the fact that the average values of MWR hide within
them a relatively good position of Italy and Spain, which compensated for the negative trends in the
labor markets of Portugal and Greece.
The crisis of 2008 has dramatically changed the dynamics of unemployment in EU-15. In
comparison to 2007, the trend of decrease in unemployment numbers has only been present in
Germany, while negative trends have been observed in all other countries. The largest increase in
unemployment was recorded in LWR and MWR. Compared to the pre-crisis situation in 2007,
unemployment numbers grew during the crisis on average by 18.7% and 16.9% annually in LWR
and MWR countries. Particularly affected were Ireland, Spain, Greece, where the number of
unemployed in 2012 was almost two times higher than in 2007.
In comparison with MWR and LWR countries, the situation in CWR and DRW is certainly better,
but is still far removed from the pre-crisis situation. Stabilization in the sense of returning to the
starting values is present in Austria and Belgium, while Germany registered less unemployed people
than was the case before the crisis. The average of the group is lowered by poor results in France for
CWR and Denmark for SDWR countries that are slowly approaching the Mediterranean or Irish
scenario in the area of unemployment.
4.3. Social Public Expenditure - Expression of the Welfare State
Similar to economic problems, social problems observed during the crisis are comparable in
appearance between countries but differ in intensity. Using the logic of the convergence theory, it is
possible to define a hypothesis according to which countries that belong to the same model of the
welfare state shall apply convergent anti-crisis measures in the field of social policy, while the same
measures, observed between models, will be divergent in accordance with the institutional
specificities particular to different models of the welfare state. Accepting the hypothesis works in
favour of the argument on the existence of a strong link between institutional design of the welfare
state and economic shocks, while its rejection would mean that: (i) there is a common basis, a
constant for different models of the welfare state, which is relatively independent from economic
shocks and/or, ii) there is no willingness to modernize the existing social programs in accordance
with the changed economic situation.
Table 3. The impact of the crisis on social public expenditure in EU-15. SPE/GDP ratio and real
social public spending
Country

Germany
France
Belgium
Austria
Luxembourg

SPE/GDP
2007.

SPE/GDP
2012.

2
26,3
32,1
30,0
28,3
23,3

25,1
29,7
26,0
26,3
20,3

%
AARC
20071995
3
-0,50
0,11
-0,08
-0,08
-0,19

2007

2008

2009

2010

2011

2012

4
100
100
100
100
100

5
100
100
104
102
104

6
105
105
111
107
112

7
106
107
112
109
114

8
104
107
113
107
115

10
104
107
113
107
117

%
AARC
20122007
11
0,94
1,56
2,88
1,51
2,79

13

CWR
Netherlands
Sweden
Denmark
Finland
SDWR
Italy
Spain
Greece
Portugal
MWR
United Kingdom
Ireland
LWR

25,5
21,1
27,3
26,5
24,7
24,9
24,7
21,3
21,6
22,7
22,6
20,4
16,7
18,6

28,0
24,3
28,2
30,5
29,0
28,0
28,1
26,3
23,1
25,0
25,6
23,9
23,1
23,5

-0,15
-0,98
-1,31
-0,74
-1,79
-1,21
1,87
-0,03
1,76
2,73
1,58
0,19
-0,63
-0,22

100
100
100
100
100
100
100
100
100
100
100
100
100
100

102
100
100
101
102
100,75
102
106
103
101
103
104
107
105,5

108
106
105
107
110
107
106
117
109
110
110,5
111
120
115,5

109,6
109
106
110
113
109,5
106
117
100
111
108,5
112
118
115

109,2
110
105
109
113
109,25
104
114
92
105
103,75
111
114
112,5

109,6
110
108
110
114
110,5
103
110
83
97
98,25
109
111
110

1,93
2,83
0,61
2,88
3,24
2,39
2,60
4,27
1,41
1,93
2,55
3,20
6,67
4,94

Source: The authors' estimation based on OECD 2013 data.

Table 3 shows the changes in social public expenditure in EU-15 countries in the pre-crisis and
crisis period. We observe two indicators, the SPE/GDP ratio and real social public expenditure.
Countries are grouped according to the models of the welfare state. Within individual models,
countries are ranked based on the size of the economy (in terms of the % share of GDP in EU-27)
so that the specificity of the definition and implementation of anti-crisis measures in large and small
countries could be indicated in the discussion of results.
Based on the data from columns 1 and 2, we can conclude that the abundance in social expenditure,
in relative terms, is not directly related to the size of the economy. Thus, in 2012, France had the
most generous social expenditure, as measured by the SPE/GDP ratio, 32.1%, and Ireland and
Greece the lowest, 23.1%. As observed according to the models of the welfare state, the differences
are even smaller: 28% in SDWR and CWR, in relation to 25.6% in MWR and 23.5% in LWR.
In the pre-crisis period, the trend in social expenditure, as measured by the SPE/GDP ratio, has been
negative in most of the welfare state regimes. On average, each year, the share of social expenditure
in the GPD was lower by 0.15% in CWR, 1.21% in SDWR and 0.22% in LWR. The exceptions
were MWR countries, in which allocation from the GDP towards social expenditure increased by an
average of 1.58% annually. It is interesting to note that the countries with the lowest share of the
GDP directed towards social expenditure had a growth of the SPE/GDP ratio, while countries where
social expenditure had the largest share of the GDP, reduced the SPE/GSP ratio. An exception in
this regard is France, where the SPE/GDP ratio increased during the pre-crisis period, despite the
high initial SPE/GDP ratio.
The Great Recession of 2008 had a significant influence on the size of the economic resources
absorbed by the welfare state. Data from column 11 shows that in all countries the share of social
expenditure in the GDP had increased. The upward trend was most pronounced in LWR 4.94%,
then MWR 2.55%, and SDWR 2.39%, while the allocations for social expenditure least increased in
CWR 1.93% annually. Compared to the pre-crisis period, we can notice that MWR countries
remained on the path of high social expenditure, while other countries changed their trajectory from
reduction to the increase of allocations for social expenditure. Does this mean that the crisis had
14

effected the change in generosity of the welfare state in EU-15 as expressed by the trend that
countries where social expenditure decreased the most in pre-crisis would become countries where
social expenditure has been growing the most during crisis?
When interpreting data on the share of social expenditure in the GDP, it is necessary to take into
account that in the conditions of a downturn in economic activity, the SPE/GDP ratio can increase
for two reasons: i) because social expenditure remains constant or increases to meet the growing
need for programs of the welfare state (for example, assistance to the unemployed), and ii) due to
the stagnation or slowdown of GDP growth. Therefore, in order to indicate the nature of change in
social public expenditure, it is necessary to analyze, parallel with the SPE/GDP ratio, the changes in
real social public expenditure.
The dynamics of real social public expenditure, from 2007 to 2012, reveals a different picture
regarding the intensity of changes in the generosity of the welfare state. Although real social
expenditure has increased in most countries, its growth is slower than the growth of the SPE/GDP
ratio. In this context, particularly illustrative are the MWR countries in which, in 2012, real social
public expenditure was lower than was the case in pre-crisis 2007. In other models, the growth of
real social expenditure is steady and approximately 10% compared to 2007. The explanation for the
decline in real social expenditure in MWR countries should be looked for, except in the more
pronounced decrease of GDP compared to the EU-15 average, in the slashing of monetary social
transfers (in particular, the example of Greece). High levels of real social expenditure in the
conditions of the narrowing of the real basis for redistribution are the result of the existence of
inherent inertia of institutional rigidity of the welfare state.
5. Discussion
5.1. General Observations
Comparative analysis of the changes in GDP, unemployment and social public expenditure, caused
by the Great Recession of 2008, prejudges inevitable adjustments of the existing models of the
welfare state in the context of the mechanisms, as well as the institutions of the welfare state. Facts
derived from such predictions are:
i) The economic crisis reduces the scope for redistribution through the welfare state. GDP reduction
in MWR and LWR countries on one hand, and the declining of the trend of its growth in SDWR and
CWR, on the other hand, point to a decreasing real basis for redistribution in EU-15.
ii) The unemployment crisis spreads and deepens social problems. In all EU-15 countries, except
Germany, the crisis has been accompanied by an increase in unemployment numbers. A
consequence is the intensification of the existing and the emergence of new social problems which
creates additional pressure on social expenditure and generates a crisis of the welfare state in the
conditions of decline of real funds for redistribution.

15

iii) The crisis in social expenditure threatens the generosity of the welfare state programs.
Maintaining the current SPE/GDP ratio and the stagnation or decline in real social public
expenditure present indicators of slow adjustment of the welfare state to economic shocks, due to
greater institutional rigidity of the welfare state in relation to the labor market and public finances.
Experience of previous crises suggests that the status quo of social expenditure is not sustainable in
conditions of permanently present high rates of unemployment and low GDP growth rates.
The need to reform the welfare state towards achieving greater efficiency in social expenditure
presents itself as inevitability. In the short term, it is reasonable to expect adjustments in the context
of higher input efficiency (better results in combating social problems with unmodified resources of
the welfare state), while in the long term cuts in terms of output efficiency seem inevitable (to
achieve existing results with decreased resources of the welfare state). CWR and SDWR countries
incline towards the first scenario, while for LWR countries the second one seems more certain, and
in MWR countries it is actually taking place.
Taking into account the presented current economic and social context of the European welfare
state, the question arises of whether the awareness on the need to modernize the welfare state
resulted in concrete actions, in the domain of the mechanisms, as well as the institutions of the
welfare state, and to what extent is institutional heritage an indicator for convergent or divergent
adjustments? In an attempt to provide an answer to this question, we shall be focusing our attention
on social expenditure as a key manifestation of the welfare state, endeavoring to more closely
pinpoint the obvious changes and redirections.
The starting point in highlighting the response of the welfare state to the crisis was to test whether
the effects of the economic crisis led to comparable - convergent changes in disbursements for
social expenditure regarding the models of the welfare state.
Figure 1. Sigma convergence SPE/GDP in the EU-15 welfare state models, 1995-2012.
0.25
0.2
0.15
0.1
0.05
0

CWR

SDWR

MWR

LWR

Source: The authors' estimation based on AMECO 2013 data.

According to Figure 1 it is evident that prior to 2007, all models of the welfare state, in the average
of the period, manifested convergence towards higher levels of social expenditure. The CWR
countries were an exception, in this regard. In the early years of the crisis, this situation remained
unchanged until 2010, when the movement of social expenditure in LWR MRW countries slowly
16

began to take on divergent characteristics. One possible explanation is the decline in real social
public expenditure in LWR and MRW countries due to the high pressure of austerity measures.
However, the decline in social public expenditure did not have the same intensity. Countries most
affected by the crisis: Greece, Portugal, within MWR, and Ireland, within LWR, have largely
reduced social giving. This is especially true for Portugal and Greece, where real social expenditure
in 2012 was lower compared to 2007. In contrast to these two countries, the decline in social
expenditure below the levels from 2007 was not registered in any other country of EU-15.
Institutional legacy remains a factor of convergent expressions in countries towards social risks
within the same welfare state regime and an acceptable explanation of the divergence between
countries belonging to different regimes. Deviations from such a course, in recent years, are
noticeable in smaller member countries of the Euro-Zone, where national austerity measures have
been formed under the strong influence of the Troika.
The analysis of sigma convergence of social expenditure offers a very general overview of trends in
social expenditure during the crisis. In order to get a more complete picture, it is necessary to
indicate the changes in key programs of the welfare state. The largest problem for welfare state
models in EU-15 are the most generous programs - the systems of pension and health care insurance
that create increasing pressure on budgets and as such shall be hard to sustain in the coming years.
The emergence of new social risks that need to be covered by the welfare state should be added to
the existing problems. In other words, parallel with the efforts to increase the efficiency of existing
social policies, new social policies for new social risks are needed, as well. New social risks and,
consequently, new social policies provoked by the crisis, are primarily recognizable in the forms of
i) active labor market policies that should enable workers to adapt quickly to changes in the
economic structure, ii) family policies which are expected to reduce the gap between family and
work obligations, iii) education policies that are supposed to reduce youth unemployment in the
labor market.
In addition, our review will be limited to the single largest component of social expenditure - the
pension system, and the component for which it is assumed that, in the future, will be the focus of
economic and social policy regarding neutralizing economic shocks - the system of unemployment
benefits.
5.2. Focus 1. The Pension System
Pension expenditures represent the largest single component of social public expenditure in all EU15 countries, with an average share in the GDP of 13% (Eurostat data for 2010). In the period from
1995 to 2007, in most countries, pension share in the GDP had been reduced. In terms of models of
the welfare state, the decline was most pronounced in SDRW, on average over 10%. The exceptions
were the Mediterranean countries Italy, Greece and Portugal where spending on pensions increased
by 30%. In the crisis period, all countries had increased pension spending, as measured by the share
of pensions in the GDP. In addition, countries which in the pre-crisis period had the highest increase
in pension expenditure, in the crisis period register below average increases. Projections by 2020
17

suggest that the trend of increasing social public expenditure on pensions shall continue in the
future with no clear rule when a countrys belonging to particular welfare state regimes is taken as
criteria.
When interpreting the obtained results one should take into account that different values are
obtained when analyzing absolute instead of relative indicators. The explanation for the more rapid
growth of pension expenditures in MWR countries compared to EU-15 average in the pre-crisis
period should not be interpreted according to differences in generosity regarding pensions of a
particular model of the welfare state, rather by factors that are more of an institutional-statistic than
economic nature. In our opinion, it concerns the activity of three factors i) MWR countries are
characterized by a lower absolute level of pensions compared to the EU-15 average, which resulted
in the tendency of their rapid increase, particularly in the pre-crisis period, due to good economic
results and the absence of problems regarding financing of public expenditure ii) the level and rate
of growth of the GDP in MWR was lower than the EU-15 average, therefore, with the relatively
unchanged or slightly rising pension expenditures, there has been a significant statistical effect of
increase of pension share in the GDP. The correctness of this interpretation can be corroborated by
the example of Ireland, which, in the period 1997-2007, was at the penultimate position according
to the share of pensions in the GDP, and with the advent of the crisis and the decline in GDP it
reached the position of a country that allocates most of the GDP on pensions, iii) CWR and SDWR
countries have built, over time, a relatively stable and reliable system of financing public pensions
that is less sensitive to economic fluctuations, as evidenced by smaller variations in pensions before
and during the crisis than in MWR and LWR countries.
Table 4. The change of social public expenditure on pensions as % of GDP, EU-15
Country
Luxembourg
Netherlands
Ireland
Sweden
Denmark
Spain
Finland
Belgium
Austria
United Kingdom
Germany
France
Italy
Greece
Portugal

% change
20071995
-25,7
-17,9
-17,9
-12,2
-10,8
-10,4
-6,0
-5,4
-1,3
-0,5
0,7
4,3
23,9
24,9
49,0

Country
Germany
Netherlands
Greece
France
Denmark
Italy
Austria
Belgium
Sweden
Portugal
Spain
United Kingdom
Luxembourg
Finland
Ireland

% change
20092007
6,3
8,0
8,2
9,5
10,1
10,5
10,6
13,6
14,6
14,9
15,0
16,0
17,0
20,4
43,1

Country
Germany
Italy
Greece
France
Austria
Portugal
United Kingdom
Spain
Sweden
Belgium
Netherlands
Luxembourg
Finland
Denmark
Ireland

% change
2020*2007
3,0
3,8
13,6
14,8
24,0
25,9
31,2
31,3
33,8
48,3
56,3
65,1
69,5
94,6
152,4

Source: The authors' estimation based on OECD 2013 data.

Note: The forecast value for 2020 is taken from OECD Pensions Outlook 2012, p. 210.
CWR
SDWR
LWR
18

MWR

The rigidity of social public expenditure on pensions in conditions of the fiscal crisis enhanced the
awareness of the need for institutional reforms of pension systems. Consequently, during the crisis,
pension systems have been reformed in many countries. Institutional reforms are directed in two
ways: i) lowering of replacement rates, and ii) extension of retirement age. The intensity of reforms
is most pronounced in MWR countries where pension systems are facing the problem of
sustainability even in relatively short periods of time, with a high risk of failure in old age poverty
prevention. However, data from the fRDB-IZA database, shows that a number of reforms of pension
systems in EU-15 countries during the crisis follows a pattern from the pre-crisis period. This
suggests that the crisis was not actually the trigger of reforms, however, that it affects their intensity
(Armingeon Klaus 2012).
The explanation of this situation, in addition to the institutional rigidity of the welfare state to
economic shocks, should also be sought in the factors that determine the dynamics of social public
expenditure on pensions. According to the European Commission 2012 report (The 2012 Aging
Report) in a predominant number of EU countries the dependent ratio (the ratio of the population
aged 65 and over to the population aged 20 to 64) is the only factor that contributes to the growth of
pension expenditures in the GDP, while in most cases the coverage ratio, the employment effect, as
well as the benefit ratio give a downward tone to the growing trend of pension expenditure. Viewed
in interrelation, the effect of an increasing number of the elderly population has a stronger influence
on the dynamics of social public expenditure on pensions in relation to the cumulative effect of
other determinants that are traditionally regarded as guidelines for pension systems development
(Coverage Ratio Contribution, Employment Effect Contribution, Benefit Ratio Contribution and
Labor Intensity Contribution). As the growth of the dependent ratio is an independent variable in
relation to economic shocks and other variables analyzed are dependent variables, it follows that the
primary motivation for reform should be found in factors whose dynamics are not caused by the
crisis, noting that the intensity of the changes depends on the intensity of the crisis, as indicated by
examples of MWR countries.
5.3. Focus 2. Unemployment Benefits
Unemployment benefits have a relatively small share in the total social public expenditure of EU-15
countries. On average, the EU-15 countries allocate for these purposes less than 2% of GDP,
including both components: i) unemployment insurance, and ii) unemployment assistance, and both
forms of benefits: i) cash benefits, and ii) benefits in kind, which is many times less compared to
the costs of the pension and health care systems. Small amounts, however, do not diminish the
importance that the system of unemployment benefits has in the prevention of social risks,
particularly risks that come from the labor market.
The system of unemployment benefits provides an individuals income for the period of duration of
temporary unemployment, i.e. provides social assistance during the period of long-term
unemployment. Consequently, it is a key instrument of the welfare state in coping with labor market
19

risks. Unemployment benefits gain special significance in conditions of crisis by acting as

automatic stabilizers in mitigating the effects of economic shocks.

Table 5. The change of social public expenditure for unemployment benefits in % of GDP, EU-15
Country

Sweden
United Kingdom
Denmark
Netherlands
Finland
Ireland
Spain
Italy
Germany
France
Austria
Belgium
Greece
Portugal
Luxembourg

% change
20071995
1
-0,71
-0,68
-0,66
-0,60
-0,59
-0,53
-0,43
-0,37
-0,31
-0,24
-0,19
-0,02
0,07
0,17
0,80

Country

France
Belgium
Portugal
Austria
Germany
Sweden
Netherlands
Finland
Denmark
Luxembourg
Greece
United Kingdom
Italy
Spain
Ireland

% change
20092007
2
0,16
0,17
0,19
0,22
0,22
0,24
0,27
0,28
0,37
0,43
0,68
0,70
0,80
0,92
1,46

Country

Italy
Germany
France
Finland
Luxembourg
Netherlands
Austria
Belgium
Sweden
Greece
Denmark
Portugal
United Kingdom
Ireland
Spain

% change
2020*2009
3
-0,36
-0,26
-0,20
-0,18
-0,17
-0,12
-0,11
-0,04
-0,03
0,02
0,04
0,07
0,15
0,19
0,26

Source: The authors' estimation based on OECD 2013 data.

Note: The forecast value for 2020 is taken from The 2012 Ageing Report, p. 274.
CWR
SDWR
LWR
MWR

The effect of unemployment benefits as automatic stabilizers is evident from Table 5. In periods of
GDP growth and lowering of unemployment numbers there is a noticeably smaller allocation of
funds intended for the unemployed and vice versa, during crisis, due to GDP decrease and rising
unemployment, there is an increase in unemployment benefits. Thus, in a period of expansion,
activity is directed towards reduction, while recession is followed by stimulation of aggregate
demand. The described pattern can be identified in the examples of EU-15 countries, columns 1 and
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2. Times of economic prosperity have been accompanied by a reduction, and the crisis by an
increase in the allocation of funds for the unemployed.
In the pre-crisis period, the exceptions from the rule were Austria and Germany, which, despite a
slight rise in unemployment, have not increased the share of unemployment benefits in the GDP.
However, the explanation of this situation should primarily be sought in the institutional design of
the unemployment benefits system, characteristic for CWR countries, rather than in the deviation
from the general principle of their role as automatic stabilizers. Namely, in CWR countries, the
mechanism of unemployment insurance is dominant, with respect to the mechanism of
unemployment assistance, which results in a lower sensitivity of the system of unemployment
benefits to economic shocks, for the system is based, to a great extent, on horizontal rather than
vertical redistribution.
The period of crisis, as well as post-crisis projections, also support the arguments on the anti-crisis
expression of the unemployment benefits system. In the period from 2007 to 2009, the share of
social public expenditure designated for unemployment benefits has increased in all EU-15
countries. The largest increase in percentage compared to 2007 was in LWR and MRW countries,
where the crisis had its most pronounced effects on the labor market. Moreover, the countries with
the worst dynamics of unemployment numbers during the crisis, LWR and MWR, are categorized
as a group of countries with a prediction of the most intensive growth of public spending aimed at
reducing the risk of the labor market in the next decade. On the other side, there are CWR and
SDWR countries, for which it is realistic to expect that in the following years will slowly return to
starting pre-crisis frameworks, in terms of the GDP trend and unemployment. As a result of the
restoration of pre-crisis relations, a gradual reduction of the share of public spending in the GDP
aimed at the unemployed is also predicted. All this points towards the existence of a strong
correlation between changes in expenditure designated for unemployment benefits and estimates on
the movement of unemployment numbers.
Expectations that the crisis will leave more lasting consequences on the labor market of the EU-15
countries, in the form of persistently high unemployment rates in the post-crisis period, as well as
the extension of the average duration of unemployment, also make institutional reforms of the
system of unemployment benefits inevitable. The direction of the reforms should be sought in the
tendency to establish a balance between social security, incentives for the unemployed, and fiscal
costs (Stovicek and Turrini 2012).
The tendency to increase the efficiency of social public expenditure through the introduction and
strengthening of corporate logic in welfare state programs will increasingly be expressed in the
coming decades. The current architecture of the welfare state in EU-15 renders the system of
unemployment assistance the only productive element of social expenditure in the short term. A
more flexible labor market, along with the simultaneous dominance of targeted and conditioned
unemployment assistance will be increasingly recognized by economic and social policy creators as
the only remedy, from the perspective of sustainability of social expenditure, regarding the
problems of poverty and social exclusion. If we add to this an arguably lesser institutional rigidity
of the welfare state in this area, since the unemployment situation is not related to acquired rights
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according to the system of social security, as well as an easier establishment of a social consensus
between workers, corporate capital, and the state on issues regarding integration and re-integration
in the labor market, precisely in the area of unemployment benefits should we expect, firstly, an
institutional, and then a redistributive redirection of focus of the welfare state.
In view of these arguments, institutional changes in the system of unemployment benefits as well
as the repositioning of the welfare state in the direction of solving the problem of unemployment,
seems certain to the extent that changes in fluctuation of social public expenditure caused by the
crisis are discernible today.

Conclusion
The Great Recession of 2008 in EU-15 countries, from the financial, through the economic, to the
fiscal crisis, signals and prejudges recent reforms of the European welfare state in the context of
both anticyclical, as well as structural changes. This viewpoint stems from the results of empirical
study of social public expenditure consequent to the level and dynamics of the GDP and the
unemployment rate, in the pre-crisis and crisis period, as well as an understanding of institutional
design of the welfare state, according to the theories of welfare state regime typology and concepts
of inherent inertia and institutional rigidity of the welfare state.
The findings, contained in the work, indicated that the Great Recession of 2008, expressed, firstly,
through the decline in levels, and later, in the loss of the pre-crisis dynamics of production, has
narrowed the real basis for redistribution, and hence the expression of the welfare state. The
manifestation of the crisis in the sharp increase in unemployment numbers has expanded and
deepened social problems by creating additional demand for welfare state programs. The status quo
of social expenditure, derived from the inherent inertia and institutional rigidity of the welfare state,
turns out to be unsustainable in conditions of persistently high unemployment and low growth rates
of GDP.
In the new crisis circumstances, the initiation of future orientation of European welfare states is
recognized in the reforms for greater efficiency, firstly, in the context of input, and later, in the
context of output re-leveling and re-institutionalization of the welfare state. The final outcomes,
reflected in pessimism (dismantling of the welfare state) or optimism (the welfare state as an exit
strategy for the crisis) have not been considered, however, they are questioned in the work.
Examples of MRW and LWR countries show that scenarios of reducing the welfare state, as a
reflection of the crisis, have already become a reality in countries where the welfare state was
residual or undeveloped and where room for maneuvering in anti-crisis action is limited by the
dependence on the Troika.
Narrowing of the focus of analysis on the pension system and the system of unemployment benefits,
for more specific highlighting of the future trajectory of the European welfare state, showed that the
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crisis was not a turning point for the reform of the pension systems, but that it affects their intensity
and dynamics, while the changes in the unemployment benefits systems, due to less institutional
rigidity and an easier establishment of a social consensus, are a point of reference for institutional
and redistributive redirection of the welfare state. Although the institutional heritage, according to
the theories of welfare state typology, still determines the convergent (divergent) expressions
towards social risks in countries of the same (different) models of the welfare state, in recent years
there are noticeable deviations from such a course, especially in MWR countries.

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