The European social question concerns both the past and the future of the EU. Compared to other countries in the Organization for Economic Cooperation and Development (OECD), European citizens enjoy the highest level of social protection in the world. Yet, over the past three decades, social cohesion in Europe has been tremendously challenged by economic, technological and demographic change. All European countries are experiencing the degradation of the welfare state (albeit at different paces), the persistence of old and new forms of poverty and the rise of social inequality. The re-commodification of social rights has affected all advanced capitalist economies in the wake of finan¬cial capitalism. Against this background, how should we assess the role of the EU and what does it suggest going forward? Has the EU enhanced or, on the contrary, undermined social cohesion? Should its competences in this realm be strengthened or curtailed?

“Solidarity”, “equality between men and women” and “full employment and social progress” feature as main principles in the Treaty on the European Union (TEU). Incrementally, the European Community – later the EU – has created new transnational rights for mobile workers and citizens, and it now has a con¬siderable body of regulation based on the principle of non-discrimination. At the same time, the coming of age of a social union in its own right has remained elusive, and the promise of upward convergence was not kept. As the latest financial crisis has shown, what we have been witnessing is a widening of the gap between the continent's wealthy core and its peripheries. The humanitarian crisis provoked by the austerity pushed by the Troika in Greece (see Chapter 3) will remain a dark episode in Europe's history. With the outbreak of Covid-19 in January 2020, Europeans have had to face new challenges. The circulation of the virus led to the suspension of some fundamental liberties granted by the EU, such as the freedom of movement across countries. Although governments and the EU alike have rediscovered the importance of robust healthcare and educations systems – among other collective goods and welfare services – they have had to learn to act jointly vis-à-vis international pharmaceutical corporations to ensure the vaccination of the European population.

Contrary to national welfare states, social policy at the EU level focuses pri¬marily on regulation rather than redistribution. However, the EU does pursue a redistributive policy in the form of EU funds, notably the European Social Fund (ESF). Generally, a redistributive policy consists of transferring resources from the wealthiest territories, social groups or individuals to those who are the least well-off, with the aim of reducing inequalities and ensuring a sufficient level of social and territorial cohesion. Typically, this occurs as fiscal revenue is being collected in a central budget, which can then be redistributed in different ways. In the case of the EU, with a budget capped at around 1 per cent of the GDP over recent decades, its redistributive capacity has nevertheless remained very limited. This reflects the fact that, unlike national states, the EU does not enjoy strong legitimacy to act as a redistributive authority.

As early as 1957, Article 123 of the Treaty of Rome establishing the EEC had forecast the creation of an ESF that “shall have the task of promoting within the Community employment facilities and the geographical and occupational mobility of workers”, particularly for those from the poorest regions of the six member states. Today an integral part of European “cohesion policy”, the ESF is enshrined in Title XI TFEU. It has been the main social policy instrument of the EU, amounting to approximately 10 per cent of the total EU budget since the 1990s. Along with four other funds, the ESF has been integrated into the European structural and investment funds, thus underlining that it should serve as a tool to implement a broad socio-economic strategy rather than as an instrument of unconditional redistributive solidarity. Two smaller funds with social objectives deserve to be mentioned here. The European Globalization Adjustment Fund (EGF), created in 2006, provides support to people who lose their jobs as a result of firms relocating production activities outside the EU. Since 2014, the Fund for European Aid to the Most Deprived supports national programmes providing food and material assistance to people in need. All three funds have undergone recent reforms, and they have seen their resources increased and their missions enlarged to help alle¬viate the social consequences of the coronavirus pandemic.

The European social question arises from a shared diagnosis among most scholars and (arguably) political and social actors that there is something wrong with the social dimension of European integration. In other words, the European Union (EU) exhibits a social deficit in the sense that its law and policies, the action of its institutions and its politics fall short in addressing the pressing social issues faced by individual citizens and national societies. Although Europe remains one of the most developed and wealthiest regions in the world, and the birthplace of institutionalized welfare states, one in five people – over 92.4 million or 21.1 per cent of the population – are still at risk of poverty in the 27 member states of the EU. And inequality levels have remained virtually static since the 2008 crisis. A total of 19.4 million children – representing 23.1 per cent of the population – are at risk of poverty across the EU, an exceedingly high number for developed country standards (De Schutter 2021).

Against this background, this book addresses the following overarching question: does the EU serve to enhance social cohesion at the scale of the con¬tinent?1 Any attempt to answer this question almost inevitably begs for a second, related interrogation about whether addressing the social question should be the role of the EU. In order to guarantee a satisfactory level of social cohesion moving forward, should the competences of the EU in the field be enhanced or, on the contrary, curtailed? To be clear, the European social question is therefore not about whether European societies are suffering from serious social issues (the assumption being that they do), but whether the EU does, can or should do something about it. Surely social cohesion has been at the heart of the very project of regional integration ever since its origins after the Second World War. In fact, claims of a need for a stronger “Social Europe” have been a key compo¬nent serving to legitimize the unification of the continent. Economic integration, and the intertwined European social policy, have been presented by European elites as a strategy to guarantee ever-higher levels of welfare for all Europeans.

The European social dialogue is arguably one of the most emblematic aspects of the EU's role in the field of socio-economic governance. Originally, in the late 1980s, the aim was to foster negotiations between employers and trade union organizations at the supranational level in an attempt to replicate the neo-corporatist logic shaping industrial relations in continental and northern Europe (see Box 6.1). In these countries, the regulation of working conditions through collective agreements concluded independently between employers and trade unions is the cornerstone of the social model. From a Polanyian perspective (see Chapter 1), therefore, the purpose of the European social dialogue is to re-embed the economy in social relations in a way that reconciles economic efficiency and social justice. As will be explained in this chapter, however, the European social dialogue is very different from neo-corporatism at the national level.

As a new political constellation has arisen out of the recovery agenda, we see the EU building its role in socio-economic governance. Brexit, the Covid-19 pandemic and the climate emergency not only make the European social question more acute, they also pose it in new ways that emphasize the interdependency binding European societies together. Over the past few years, EU institutions have operated a non-negligible relaunch of their social agenda, stressing the need for social cohesion; ventured into new social territories such as minimum incomes; strengthened their regulatory and bureaucratic capacities, as in the field of health; and significantly increased the budgetary resources of the EU, looking to introduce new sources of fiscal revenue in the near future. All of this, however, happened without much debate in national arenas. The role of the EU in the social realm remains a political taboo and even more so a formalization of such a role in legal terms. Yet, in order to allow the EU to address the European social question in an effective and legitimate fashion, generating a widely shared understanding of what the EU is actually doing and what it should do in the future constitutes a key endeavour. To conclude this book, it is therefore argued that the normative basis of EU social policy needs to be strengthened, from a conceptual and democratic point of view.As a starting point, it is useful to consider the four ideal-typical models distinguished by Claassen et al. (2019)

to rethink the role of the EU in social policy. First, the EU could be a passive spectator if both the formulation of norma¬tive ideals and consequential institutional arrangements were to remain exclu¬sively with national governments. Yet, as this book has shown, the state of EU integration has already overtaken this model and a return to full national sover¬eignty in social policy would require deconstructing all existing EU instruments and resources, as some “defenders of nation states” have claimed (see the Introduction). Against the backdrop of the pandemic, however, Europeans are currently moving in the opposite direction by endowing the EU with more tasks and resources.

After four decades of European integration, the coordination of national social policies emerged in the late 1990s as an alternative to EU-binding regulation. In several areas (labour markets, social protection, healthcare, elderly care and the fight against poverty and exclusion) European leaders felt the need for coordinated responses without transferring new competencies to the EU institutions. Voluntary non-legally binding coordination thus emerged as an alternative to regulation. Inspired by the broad economic policy guidelines established in the run-up to the monetary union, soft coordination was then applied to employment policy and progressively formalized and extended to a larger range of public policies under the so-called open method of coordination (OMC). The OMC is therefore based on the willingness of national governments to implement policies aimed at reaching objectives that have been defined at the European level. The implementation of these policies is also monitored on the basis of indicators set out by national civil servants who meet in Council working groups and committees in Brussels. Coordination occurs through a forum aimed at forging a shared consensus on policy problems and adequate solutions or policy recipes. This environment creates incentives and pressures that can potentially be exploited by domestic governments to implement reforms. In the aftermath of the 2008– 10 financial and debt crisis, existing OMC processes were consolidated into the European Semester, an all-encompassing governance framework combining binding regulation and soft coordination. The European Semester serves as the basis for the review of national budgets, the control of fiscal discipline (the Stability and Growth Pact), the monitoring of macroeco¬nomic imbalances and monitoring issues around social cohesion.

At its inception, the OMC triggered great interest and enthusiasm from academia. Many specialists of social policy saw it as a means to tackle common problems while preserving national sovereignty in the social realm. Since member states could not agree on transferring competences to the EU, nor on a single policy model for addressing social cohesion, monitoring and benchmarking, a system of ongoing dialogue was set up to resolve disagreements (Radaelli & Borras 2010: 24). The OMC was also depicted as a form of “experimental governance” (Sabel & Zeitlin 2008), epitomizing a modern way to tackle the difficult dilemmas involved with welfare state reform based on learning (Dunlop & Radaelli 2016) and peer review.

Previous chapters have addressed controversies surrounding European social policy by looking at developments in governance, politics and policies following the creation of the EEC in the aftermath of the Second World War, with a par¬ticular emphasis on the contemporary period. The purpose of this chapter is to look to the future and assess whether the EU is well-equipped to enable Europeans to manage collectively the social challenges that have been posed most acutely since the turn of the twenty-first century. Since 2008, the EU has experienced a period of turbulence described by political actors (notably Jean-Claude Juncker) and social scientists alike as a “polycrisis”. The financial and debt crisis of 2008– 10, the sudden influx of migrants in 2015, the protracted Brexit, recurrent conflicts over democracy and the rule of law and the ongoing Covid-19 pandemic have all questioned the capacity of the EU to sustain its multi-level social, economic and political order against the backdrop of ever-more polarized societies. Reacting rather than acting, Brussels technocrats and national leaders have mostly “improvised” new policy instruments and procedures while for¬ging hard-fought compromises in emergency situations (van Middelaar 2019). In many ways, the European social question lies at the heart of those moments of existential crisis. Successive crises have exacerbated social challenges as young people, women, immigrants and the self-employed are hit hardest by the second historic recession faced by Europe in just over a decade.

Can the EU take the lead in the struggle for social cohesion? Is it fit for pur¬pose in a post-Covid-19 world with simultaneous challenges? Or is it doomed to be a powerless spectator of deteriorating national social models? To address these questions, this chapter looks at three particular issues that, while they can at first sight seem peripheral to the social policy agenda, nevertheless contribute to shape it in important ways. First, this chapter will attempt to draw from the lessons of the Brexit referendum by analysing the links between social policy and the UK's decision to leave the EU. Second, the coronavirus pandemic has placed health at the centre of the social policy debate.

Liberalization is rarely addressed as one of the components of social policy. On the contrary, political discourses about the EU depict liberalization policies as the embodiment of a “neoliberal Europe” incompatible with the project of a “Social Europe”. Moreover, previous chapters have stressed how social policy at the European level has developed as an “add-on” (Copeland & Day 2015) aiming to facilitate market creation. Yet, one should go beyond simplistic oppositions to understand the complex effects of liberalization on social cohesion and inequal¬ities. Liberalization can be defined as the broadening of markets. It therefore stimulates cross-border trade by allowing competition between domestic and foreign economic operators. To do so, two types of barriers to cross-border trade must be lifted: tariffs, on the one hand, and on the other hand, national regulations that do not match the standards of foreign operators, therefore preventing them from offering their goods or services in a particular national market. For this reason, liberalization often comes with deregulation, which can, however, be offset by the establishment of new rules at the European level (re-regulation). Liberalization is at the very heart of the European integration process, which is built from its outset on the four freedoms enshrined in the Treaty of Rome. If the free movement of goods and capital only affects social policy to a limited extent, the free movement of persons and services, in contrast, raises a number of issues that are addressed in this chapter.

There are basically two contrasted ways to conceive of liberalization in rela¬tion to social cohesion. A central belief driving EU integration is that liberal¬ization creates opportunities that can enhance social cohesion both nationally and cross-nationally. The founding fathers of the EEC believed firmly that the opening of national markets would drive not only growth but also wages and living standards upward, a recurring theme in the 1957 Treaty of Rome. The free circulation of workers, in particular, has been conceived as a source of opportunity for people from economically depressed regions to seek a better life elsewhere in Europe. Liberalization as opportunity remains a main frame of reference used by the EU institutions to legitimize the pursuit of the comple¬tion of the single market, especially in the area of services.

Banks do not really exist. They are constructed. Banks are always and everywhere determined, defined, and constituted by the legal permissions they are given by whichever the public authority may be: Royal Charter, Act of Congress or Parliament, or regulatory rules of thumb, preference or requirements. Differently to a physical good or type of service which does exist outside of its regulation (for example a haircut or legal advice), banking is not an activity or object on which regulation or rules can be imposed but rather one which is created by these regulations, rules and requirements. Change the rules, change the activity, change the bank.

These rule-changes – and therefore the changes to what banks do and so what banks are – happen all the time. And for various reasons. Banks, like any profit-maximizing institution, will always try to innovate beyond their explicit permissions so that they can increase their returns. By definition these new activities are outside the original scope of the banking regulation. Public authorities have a choice: to try to fill this regulatory gap or to leave it. So regulators often change rules to bring these new activities that banks undertake into their scope.

Sometimes banking regulation changes because political ideas change and so what society at large wants from its banking sector changes. Sometimes there is a greater focus on the safety of the sector, sometimes on its competitiveness, sometimes on its contribution to national production, and sometimes on the ease of access for consumers. There could be any number of political aims for the banking sector. When that changes, so do the rules imposed on banks and thus what banks can do: and what banks are.

But one thing that banking regulation does not seem able to provide is financial stability; even though this is frequently (perhaps always) stated as one of its core objectives. Despite frequent regulatory change, financial instability persists. This book argues that this is as a result of the regulatory nature of banking, of the fact that banking is constituted through regulation but operates in the market.

Banking regulation is created for political reasons (in its broadest sense) but banks operate according to market principles – in other words the attempt to maximize profits within a structured market. The gap between political inputs and market outputs is where financial instability springs up.

The narrative so far has shown how regulation in the UK has been changed for political reasons and has had (negative) market impacts. The regulatory changes, be it C&CC or the Banking Act, have come about for numerous causes, as we have seen, and to an extent followed on from each other: the 1979 Banking Act happened because of the secondary banking crisis which happened because of the failures of C&CC (which is not to say there were not other factors involved, as we have seen).

In the introductory chapters we looked at the political definition of banks. We argued that the institutional form of a “bank” (what an entity can do in a market) represents the political compromise of a given time and place, and one that can therefore change frequently. It is not stable and only indirectly reflects developments in the market. A “bank” derives from permissions granted by the state, for its own reasons. But they operate in markets, according to market principles, to maximize profits. This misalignment causes financial instability through the disembedding of financial markets from wider society (following Polanyi; see Figures 1.1 and 1.2).

Banking does not exist apart from the regulation that defines it. Banks are defined by their permissions, and their activities are conditioned upon what they are authorized to do, or forbidden from doing. The search for profits encourages the growth of activities outside of the regulated sector which, because of the inherent instability of finance as shown by Minsky, tend toward financial crises. Following the crisis there is a mop-up operation to recover the financial sector (and often the wider economy as well) which has the practical effect of, at least minimally, re-embedding finance to some extent: at the very least by reimposing additional conditionality and constraints on the financial firms that require support and the wider banking system (such as through the forced purchase of the firm, such as with JMB, or the lifeboat operation).

The first cause of this overall narrative was the introduction of the policy of competition and credit control (C&CC) by the Bank of England in 1971.

The Banking Act 1979 was the first statutory banking law in the UK. It marks a fundamental change in the approach to banking regulation and supervision. Despite this, there was little controversy when it was introduced. Most market participants and public officials accepted the need for a law. This was in large part because of the supervisory failures that led up to the secondary banking crisis. Two questions arise with the Banking Act, however: why did it take more than five years to get into law after the fringe crisis, and why did it take the twotier form that it did?

The answer to both questions lies in the political process; that is, the relative influence between the interests of different institutional actors. As events caused different actors to gain or lose influence, they became more or less able to advance their interests in creating a bank law. The Banking Act 1979 reflects the final outcome of this round of contestation. It represents a compromise whereby the government managed to force a statutory banking law onto the Bank of England, “compensated” by legal backing for the Bank of England's authority over banks and the Bank's ability officially to separate “proper” banks from other non-bank financial institutions (called “licensed deposit takers”). Similar to the outcome of the 1946 nationalization of the Bank of England, the Bank formally accepted a subordinated role to the government while insisting on its operational independence.

As a short-term strategy the law favoured the status quo in the Bank's interest, but created longer-term tensions. In the case of the Banking Act 1979, these emerged in 1984 with the “Johnson Matthey Bankers affair”. This “affair” revealed significant shortcomings in the Bank's approach to bank supervision, laying bare a fundamental problem with the two-tier banking system. This would lead to a redrawing of the law in 1987 as an add-on to the City's deregulation in “Big Bang” and to the UK's third banking regime in less than eight years. The JMB crisis also highlighted tensions between the Bank of England and the government which undermined one of its two sources of legitimacy.