The pervasive welfare states of Western Europe and the frequent references to a ‘social dimension’ in the EU documents and treaties stand as eloquent testimony to the desire of people and governments to ameliorate the undesirable social consequences of economic life. Measures to address these concerns - social policy for short - can take a variety of forms: from workplace regulation, such as constraints on worker dismissal, to income transfers, such as unemployment benefits and pensions. For the most part, such social policy seeks to remedy market failures and protect the disadvantaged members of society from the consequences of their economic weakness. But sometimes, perversely, it ends up protecting better off groups within society.

A new CEPR Report, Social Europe: One For All?, explores the interactions between social policy, broadly interpreted, and economic integration. The impact of integration in its various forms - from trade liberalization to enhanced labour and capital mobility - on social policy can be summarized thus: while generally desirable, it usually has adverse consequences for relatively inefficient producers. The interaction between social policy and economic integration becomes particularly obvious whenever it is the poorer members of EU countries who lose out, integration is likely to lead to demands for greater social protection.

But integration also affects the supply of social protection: redistribution can become more difficult to accomplish when labour and capital are both more mobile. In these circumstances EU coordination may be required to make national social policies policies effective. Otherwise, governments could use policies strategically to benefit their own citizens at the expense of foreigners: by offering less regulation and lower social protection in order to encourage inflows of capital - what is known as ‘social dumping’. If unchecked, this will result in lower levels of social protection all round - though to the extent that current policies are ill-designed or fail to protect the most disadvantaged members of society, this could actually be a positive outcome.

Drawing on the lessons of past EU integration, the Report discusses the implementation of national and EU social policies in the context of the continued EU deepening associated with the single market and the euro, as well as the consequences of widening to the East. It concludes that continued integration will accentuate the pressure both for flexibility-oriented reform, and for greater social policy harmonization.

From the point of view of reducing the persistently high levels of unemployment in most EU countries, the Report argues that increased labour market flexibility would be a welcome development. The 'European model' has involved the maintenance of both a high level of labour market rigidity and a high level of social protection. In an environment of increasing competition, this model becomes increasingly more costly in terms of unemployment and it risks serious problems of sustainability of the welfare state. So a drive for harmonization should not stand in the way of reform.

What is more, the report contends, harmonization only makes sense between countries at similar standards of development and with similar social preferences in the trade-off between efficiency and redistribution to the poor. Income disparities are already large among the current EU members and will increase dramatically with the next enlargement. There are also large disparities in labour market regulations and in the organization of social policies. These constitute compelling evidence for different national preferences in the efficiency versus redistribution trade-off, which should be respected.

As a consequence, the report argues, policy-makers should strive for minimum standards, but only ones that are acceptable to all countries. What examples are there of desirable and undesirable measures? Most obviously, establishing a single minimum wage or a single unemployment benefit level throughout the EU would not make sense since an average level would be too low for the richest countries and too high for the poorer ones, with the potential of causing even higher unemployment.

In contrast, fostering a dialogue between the representatives of employers and employees at the European level is a good idea since it will help ensure EU social policy is based on consensus. It is also likely to mean that measures that are harmful to a firm’s ability to compete in increasingly integrated markets are rejected. But it should be kept in mind that European federations of unions, like their national counterparts, will tend to represent employees rather than the unemployed. Similarly, European federations of employers are more likely to represent the interests of large corporations than of small and medium-sized firms.

Measures fostering mobility are desirable, such as those suppressing any discrimination against migrant workers or any unwarranted formal or informal barriers to the mutual recognition of diplomas. By the same token, measures that clearly deter mobility for protectionist reasons, such as the 1995 Posted Workers Directive, are a bad idea.

Measures designed to overcome problems of imperfect or asymmetric information are also potentially desirable, for example, the obligation to provide representatives of workers with notice and information on collective redundancies or to foster exchanges of information among employees of multinationals in different countries. But if harmonization of social policies were to evolve into measures obstructing the shift of production sites across countries, then this would harm the competitiveness of firms and would be counterproductive. Imposing the same working conditions across countries in a way that runs counter to different national tastes and customs is undesirable.

The report concludes that while EU-level policies are not particularly binding at present, they may become a more significant force in the future. At some point as the competitive concerns raised by monetary union and the single market make reform more desirable and politically feasible – consequently, raising labour market flexibility and reducing social protection – the Social Chapter may become a binding floor, preventing a 'race-to-the-bottom'.