Strategic conversation with Sven Smit on a new social contract

The COVID pandemic has shown how quickly governments and the private sector are able to react when they really need to, in order to safeguard lives and shield people from the effects of huge and unexpected shocks. At the same time, it has cast a stark light on deep-seated vulnerabilities in social safety nets that have been festering for years.

The health and economic crises combined with the scale of taxpayer bailouts of the private sector has brought to centre stage questions about the roles and responsibilities of the state, the private sector and citizens. Is the notion of a ‘social contract’ more important than ever?

The social contract is how “citizens feel about what their contract with society is, in terms of their lives and livelihood, and the sense of security around that” (2:10). It is also the delicate ratio between income and access to goods and services at a reasonable price (3:47). With these words, Sven Smit, Chairman and Director of McKinsey Global Institute and Senior Partner of McKinsey & Co., set the scene for our 2021 ‘State of Europe’ series of Strategic Conversation debates that will culminate into the annual flagship roundtable in October.

The COVID-19 crisis has triggered the largest exercise of the social contract, perhaps ever. Reversing a two-decade-long trend, governments have massively overspent in guarantee schemes, buffering risks faced by individuals—especially by the middle and lower classes, who were hit the worst by the pandemic (3:26). By protecting employees, the private sector has also been both conduit and initiator of measures that are strengthening the social contract.

As we see the light at the end of the tunnel, what can we expect for the upcoming years?

Don’t take the foot off the pedal too quickly
It is paramount to exit in the right way and at the right time. After a shock like this, states need to have the growth to pay back what has been invested in society (9:10), or else bankruptcies and unemployment will increase (11:30). SMEs (representing 99% of the EU industrial landscape and employing 100 million people) should keep up the learning curve and scale up best practices (15.28).

Look out for the next two years’ growth
There are two scenarios for recovery from a deep recession: after ten years, you can expect either a 20% or 40% recovery (9:40). Past experiences show that what is done in the next two years will shape such recoveries and how they will impact the social contract (12:00).

Follow the trends
Shaping recovery consistently alongside ongoing trends that have drastically accelerated over the past months, like digitalisation, e-commerce and digital healthcare, will guarantee sustained growth (13:08).

The future of the social contract is ‘made in Europe’
While the US and EU have had three quarters of decreasing GDP growth, China has gained four quarters on the rest of the world (17:33). Europe should however find its own path to recovery — this will positively impact the sense of security granted by the social contract (18:18). For example, take the future of work: half of the people who have lost their jobs could be re-skilled: this is a unique opportunity to transform economies and the nature of work (18:45).

Health is a key driver for growth
To sustain prosperity in Europe, governments need to invest in ‘healthy life expansion’ (20:50). For every dollar spent on healthcare, four more are generated: this is the largest investment that governments can make at societal level (21:56). And who wouldn’t want to get an extra 10 years of healthy, productive life? (21:27)

Energy makes the world go around, as long as its price goes down
Climate, energy and sustainability are high on the recovery agenda too, and rightfully so (23:30). To maintain a legitimate role for governments and the private sector – and with it, the social contract – it is essential that the price of energy, a basic service, doesn’t go up (23:57).

Inequality of opportunities: how to close the gap?
Offering access to high-quality, basic services (such as health, housing and education) at reasonable prices will re-balance the income/access equation, and release some societal tensions (27:20). Let’s also look at input costs: digitalisation and technology could play a great role in bringing down the costs of goods and services. For instance,  robotic production of houses in the not-so-distant future could quickly decrease housing prices (28:12).

Harnessing the power of speed
To end on a positive note, Smit asserted that if we are able to maintain the speed of change of the past months, we could expect the best outcomes for the social contract in terms of healthcare, education and other services (29:57).

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