ALIBI IN AGONY: THE EUROPEAN WELFARE STATES DURING CRISIS

Kosta Josifidis, University of Novi Sad, Serbia[footnoteRef:1] [1: Corresponding author: josifidis@gmail.com]

John Hall, Portland State University, USANovica Supic, University of Novi Sad, SerbiaEmilija 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.

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 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 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 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. 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 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 EU-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:

(1)

(2)

(3)

from which the final formula is derived:, (4)

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

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:

(5)

where: is the coefficient of variation in the period t+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:

(6)

where: -social expenditure in the country i in the year t, - average social expenditure in the country i in the period t+T, - 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, 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-15Country% GDPEU-272007.% GDPEU-272012.%AARC2007-1995200720082009201020112012%AARC2012-2007

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Germany19,620,53,67 100100,493,099,9104,5107,61,48

France15,215,74,52 10099,896,1100,1103,3105,71,11

Belgium2,72,94,04 100100,897,2103,3106,7108,91,73

Austria2,22,44,18 100101,196,0101,8106,4109,81,89

Luxembourg0,30,37,81 10097,990,8100,5107,4110,21,97

CWR4041,84,84 100100,094,6101,1105,7108,51,64

Netherlands4,64,75,66 100101,994,798,5101,4102,70,54

Sweden2,73,24,84 10099,991,899,2105,4108,81,69

Denmark1,81,94,30 100102,395,7103,7104,8106,81,32

Finland1,41,55,62 100101,992,595,9100,0102,10,42

SDWR10,611,35,11 100101,593,799,3102,9105,10,99

Italy12,512,13,59 100101,195,096,898,698,5-0,29

Spain8,58,16,88 100100,694,795,497,097,9-0,43

Greece1,81,55,69 100103,198,995,189,185,3-3,12

Portugal1,41,35,19 10099,496,1100,499,698,7-0,25

MWR24,2235,34 100101,096,296,996,195,1-1,03

United Kingdom16,614,75,16 10097,490,695,396,699,1-0,18

Ireland1,51,39,33 10091,985,188,491,494,4-1,15

LWR18,2167,25 10094,787,891,894,096,7-0,66

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.

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 pre-crisis 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.

Table 2. The impact of the crisis on unemployment in EU-15CountryUnemployment2007 (000)Unemployment2012 (000)% AARC2007-1995200720082009201020112012% AARC 2012 2007

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Germany360123160,910087,189,681,869,564,3-8,4

France23823006-1,210093,6115,6118,7117,6126,24,8

Belgium353369-1,210094,4107,5115,098,3104,50,9

Austria185,61891,910087,4110,1101,496,4101,80,4

Luxembourg8,8125,2100119,3133,0120,5125,0136,46,4

CWR6530,458921,110096,4111,2107,5101,4106,60,8

Netherlands305,7469-4,410087,5106,8127,5127,1153,48,9

Sweden297,5403-2,2100102,4137,2142,9131,1135,56,3

Denmark110,8219-4,310091,5159,8197,0199,8197,714,6

Finland183,4207-5,910093,8120,5122,3113,8112,92,5

SDWR897,41298-4,210093,8131,1147,4143,0149,98,1

Italy15062750-4,5100112,3129,1139,6140,0182,612,8

Spain1833,95769-4,7100141,3226,3252,6272,6314,625,8

Greece406,912080,410092,9115,8154,5215,5296,924,3

Portugal491,48603,210095,6118,4133,9143,7175,011,8

MWR4238,210587-1,4100110,5147,4170,1192,9242,318,7

United Kingdom1622,82513-3,1100108,0145,6150,4156,1154,99,1

Ireland105316-4,3100139,0255,2288,6301,9301,024,7

LWR1727,82829-3,7100123,5200,4219,5229,0227,916,9

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 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 spendingCountrySPE/GDP2007.SPE/GDP2012.%AARC2007-1995200720082009201020112012%AARC2012-2007

123456781011

Germany25,126,3-0,501001001051061041040,94

France29,732,10,111001001051071071071,56

Belgium26,030,0-0,081001041111121131132,88

Austria26,328,3-0,081001021071091071071,51

Luxembourg20,323,3-0,191001041121141151172,79

CWR25,528,0-0,15100102108109,6109,2109,61,93

Netherlands21,124,3-0,981001001061091101102,83

Sweden27,328,2-1,311001001051061051080,61

Denmark26,530,5-0,741001011071101091102,88

Finland24,729,0-1,791001021101131131143,24

SDWR24,928,0-1,21100100,75107109,5109,25110,52,39

Italy24,728,11,871001021061061041032,60

Spain21,326,3-0,031001061171171141104,27

Greece21,623,11,7610010310910092831,41

Portugal22,725,02,73100101110111105971,93

MWR22,625,61,58100103110,5108,5103,7598,252,55

United Kingdom20,423,90,191001041111121111093,20

Ireland16,723,1-0,631001071201181141116,67

LWR18,623,5-0,22100105,5115,5115112,51104,94

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 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.

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.

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 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 EU-15 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 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-15Country% change 2007-1995Country% change 2009-2007Country% change 2020*-2007

Luxembourg-25,7Germany6,3Germany3,0

Netherlands-17,9Netherlands8,0Italy3,8

Ireland-17,9Greece8,2Greece13,6

Sweden-12,2France9,5France14,8

Denmark-10,8Denmark10,1Austria24,0

Spain-10,4Italy10,5Portugal25,9

Finland-6,0Austria10,6United Kingdom31,2

Belgium-5,4Belgium13,6Spain31,3

Austria-1,3Sweden14,6Sweden33,8

United Kingdom-0,5Portugal14,9Belgium48,3

Germany0,7Spain15,0Netherlands56,3

France4,3United Kingdom16,0Luxembourg65,1

Italy23,9Luxembourg17,0Finland69,5

Greece24,9Finland20,4Denmark94,6

Portugal49,0Ireland43,1Ireland152,4

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

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 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-15Country % change 2007-1995Country% change 2009-2007Country% change 2020*-2009

123

Sweden-0,71France0,16Italy-0,36

United Kingdom-0,68Belgium0,17Germany -0,26

Denmark-0,66Portugal0,19France-0,20

Netherlands-0,60Austria0,22Finland-0,18

Finland-0,59Germany 0,22Luxembourg-0,17

Ireland-0,53Sweden0,24Netherlands-0,12

Spain-0,43Netherlands0,27Austria-0,11

Italy-0,37Finland0,28Belgium-0,04

Germany -0,31Denmark0,37Sweden-0,03

France-0,24Luxembourg0,43Greece0,02

Austria-0,19Greece0,68Denmark0,04

Belgium-0,02United Kingdom0,70Portugal0,07

Greece0,07Italy0,80United Kingdom0,15

Portugal0,17Spain0,92Ireland0,19

Luxembourg0,80Ireland1,46Spain0,26

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 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 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 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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