Waltraud Schelkle (EUI) and Tommaso Guilla (UdeSA)
Based on ongoing research into EU solidarity and insurance unions led by Prof. Waltraud Schelkle.
Solidarity in times of crisis is often said to be beset by moral hazard concerns. But EU public opinion data show a surprising willingness among Europeans to support those beyond their own state’s borders. How do we make sense of this trend? The notion of ‘inter-state insurance’ offers some clues.
Many social phenomena are chicken-and-egg problems. Do we live in safer, less violent environments because we stopped carrying swords and guns, or did we stop carrying weapons because we live in safer environments? Those who think it is the former point to evidence that knife and gun crime tends to be significantly higher in areas, and countries like the United States, where people carry knives and guns. Those who argue the opposite resort to evidence that connects declining numbers of police officers to a rise in such violence.
Solidarity in the EU, which has recently raised a lot of interest, poses a similar chicken-and-egg problem. Are the attitudes of EU citizens towards supporting residents in other member states determined by the nature of crisis that hits them? So does a pandemic make us more likely to support others than a sovereign debt crisis because it is not the fault of a particular government or national institutions and we sympathise when we all sit in the same boat? Or does any bad fortune make citizens feel they owe some support to others in the EU because we have the means and one day it could be us?
Insurance as hazard or opportunity
Our interest in EU solidarity stems from recent evidence, a YouGov-EUI poll on ‘Solidarity in Europe’. The annual survey, conducted since 2018, shows overall a surprisingly high willingness of citizens to help others, sometimes in striking contrast to what we know is the traditional stance of their government. When asked about their views on their government’s spending to help other EU countries in contrast to “their own people”, the average response was in favour of a balance, with little dispersion across countries. A preference toward national spending was recorded in France, Finland, Sweden, and Denmark. In Germany, it was balanced and became more supportive of solidarity when instruments like an emergency fund were specified. In the other ten countries, the average respondent including those in the Netherlands, were more in favour of solidarity with those in need than those of the same nationality. Support does vary by the type of crisis but it has generally been on the rise since 2018.
The evidence from this survey is compatible with both interpretations. But we would arguably not see such balanced responses if respondents were extremely concerned about deservingness and the problem that with mutual support schemes available, everybody takes more risks, offloading the downside on others through the support scheme. This is, however, exactly the worry about pervasive ‘moral hazard’ that the scholarly, predominantly economic literature and some governments repeat ad nauseam whenever risk-sharing, mutual insurance, and solidarity is discussed. We think there may be more to the chicken interpretation of EU solidarity than conventional wisdom has it: we help others because we can.
We think there may be more to the chicken interpretation of EU solidarity than conventional wisdom has it: we help others because we can.
But how can we explain this notion, namely that institutions of solidarity make people more willing to support solidarity? Deborah Stone asked that question with respect to insurance in an article more than 20 years ago. Her point of departure is the puzzle of a secular expansion of private and social insurance, which should not happen if concerns over moral hazard are justified. Stone explains it by identifying mechanisms that make insurance generate political opportunities for community building, thus ratcheting up the standards for what can and should be insured. For instance, liability or third party insurance instils in those whose activity can harm others unintentionally, for example by driving a car or employing workers for hazardous jobs, that they must consider these effects. Most people would accept that they owe potential victims compensation and would rather pay for insurance than give up the potentially harmful but valuable activity.
From individual to inter-state solidarity
The essence of Stone’s argument and the mechanisms she identifies for inter-personal insurance can be adapted for the case of inter-state insurance. Even a divisive institution like the European Stability Mechanism (ESM) that bailed out governments with quite severe strings attached – the infamous conditionality of Troika programmes – can be understood as paving the way for more solidarity.
The legal basis of the bailout fund acknowledges that there are cases in which a country and its government may get into serious difficulties for circumstances beyond their control. A systemic banking crisis may worsen public finances and tip vulnerable countries, as different as Greece and Ireland, over the edge. This then recognises that even high-risk growth strategies may be valuable to other members, e.g. through trade and the expansion of export markets. In this sense, the unfortunate and the fortunate are interdependent, members of a community of risk. At the same time, it is unlikely that those member states, which pursue risky growth strategies, can expect full insurance. They reap the benefits of a boom and must therefore also bear a sizeable co-payment to the insurance they receive in the bust. The stipulation of budgetary reforms can be justified in this way.
The practice of insurance leads to the development of harm-alleviating technologies that then raise the standard of what is possible to insure. The financial crisis in 2008 saw a massive expansion of central bank interventions to rescue entire economies, notably their banking systems, businesses and governments. This changes the notion of macro-economic stability and stabilisation. The inequality of monetary conditions, for instance higher risk premia on debt in some member states, becomes an adverse event that calls for intervention and is no longer accepted as the more or less efficient operation of ‘market discipline’. As soon as interest rates started to diverge at the onset of the pandemic, the European Central Bank (ECB) intervened with a very large asset purchasing programme that, in contrast to previous such programmes, could be targeted at governments under particular pressure.
Insurance creates stakeholders. In the case of inter-state solidarity, they are created in the guise of institutional actors in countries that are vulnerable to insurable risks: national central banks and Treasuries in particular while elected governments rarely survive the intervention politically. Then there are ‘career altruists’ installed to support governments in trouble: Commission officials and other supranational bureaucracies like the IMF are the obvious examples. Repeated crises can also bring the more moderate opponents of inter-state insurance on board, realising that the political backlash against a union in permanent recession can escalate and bring down institutions they value, like the Single Market.
Finally, insurance is able to maintain the norm of equality between member states, which is strong between formally sovereign nation states. However, the actual conditionality of ESM programmes seemed to deny programme countries such formal equality. This made the fund such a divisive institution. The conditions stipulated and the close surveillance of compliance seemed to create a regime of second-class membership. This overshadowed the fact that the ESM dwarfs the IMF in actual sovereign funding and offers more favourable financial terms. The risks for the guarantor countries are higher because the volumes are much higher. The opposition against ESM involvement in the Covid-19 pandemic flared up at the first potential instance of economic-fiscal turmoil. This arguably drove a more equitable and empathetic response. The ESM introduced a contingent credit line to the tune of 2% of GDP for every member state, with the only stipulation that the credit is spent on health care costs. This innovation lends credence to Deborah Stone’s analysis that insurance becomes a moral opportunity if it creates communities of risk that respect the equality of its members.
Like in the chicken-and-egg problem, solidarity might prompt the introduction of insurance schemes, while the same solidarity might be a by-product of existing insurance schemes.
In sum, while the ESM was a very ambiguous signal of solidarity, its very limitations triggered efforts at strengthening solidaristic institutions in the EU. Like in the chicken-and-egg problem, solidarity might prompt the introduction of insurance schemes, while the same solidarity might be a by-product of existing insurance schemes.