Social inequality, climate change, demographic shifts, global migration and digital transformation are the biggest challenges facing the governments of EU and OECD states. How forward-looking are their responses? How are increasing political polarization and nationalist populism affecting policymaking?

The prospects for sustainable national policymaking and internationally coordinated policy solutions have recently diminished to a dangerous extent, found this year’s Sustainable Governance Indicators (SGI) from the Bertelsmann Foundation. This international monitoring tool sheds light on the future viability of all 41 countries in the OECD and EU. We assess government actions and reforms on the basis of 136 indicators, involving more than 100 international experts.

There are always wide variations in the performance of states. However, these have increased given how differently states have managed the consequences of the global financial crisis, and whether in a socially and ecologically sustainable way. International cooperation is also stagnating, especially around climate protection. Alarmingly, our indicators show states to be drifting even further apart in the quality of their democracy and the development of the rule of law.

The Nordic states, led by Sweden, continue to be best equipped for the future. But even they face a whole series of difficult tasks, such as rapidly growing income inequality and the ongoing integration of refugees into the labour market. Moreover, Finland is struggling with a faltering labour market. Its unemployment figures are now just 31st out of all 41 OECD and EU countries. Of the largest economies, only Germany and the UK still occupy top ten positions in the Policy Performance Ranking.

States’ employment policies perform differently

Most OECD and EU countries continued to recover economically from the consequences of the economic and financial crisis during the reporting period. This is especially true for what used to be called the ‘crisis countries’ - the United States, Ireland, Italy, Spain and Portugal - where the structural reforms made to economic policy in recent years are now having a positive impact on the labour market.

Ireland, in particular, has been enjoying an impressive economic policy comeback since 2015. Its debt-to-GDP ratio shrank from 120% in 2013 to 76% in 2016. Strong economic growth caused unemployment to fall to 7.2% in December 2016 and led to an increase in employment, particularly among highly skilled workers.

By contrast, recent developments in the Austrian and French labour markets have been anything but satisfactory. In response, French president Emmanuel Macron has undertaken a series of structural reforms. In addition, he recently gave a keynote address in support of fundamental EU reform, with the goal of deeper European integration in economic and social policy.

Austria’s new chancellor Sebastian Kurz, on the other hand, is taking the opposite path, striking a Eurosceptic, nationalistic tone. He is apparently focused on limiting European integration rather than deepening it.

Few improvements in social sustainability

Progress has been comparatively poor across countries at giving more of their populations better access to the labour market and participation in the upcoming economic upswing, for the long-term. In the area of social sustainability, the vast majority of industrialized countries are either treading water or only making moderate improvements. This stagnation has been especially stubborn in the realms of sustainable healthcare and future-proof old-age security. This is an extremely alarming development, given the fact that the baby boom generation will retire in many countries during the next few years.

In addition, social sustainability is stagnating or even declining in countries such as Poland, the United States, Mexico, Slovakia, Bulgaria, Romania and Hungary. These countries were already doing poorly in this area, and their political landscapes have recently been highly polarized or marked by the advance of nationalist populism. These negative trends are most apparent in critical areas such as access to high-quality, universal education and family policy. This development further widens the gulf in social policy between these countries and the leading group of Nordic states.

Little movement in international cooperation

There is also a deep divide in ecologically sustainable policy. Countries that already had a poor environmental policy balance, such as the United States, Mexico, Poland, Australia, South Korea, Israel, Turkey and Greece, have declined even further or have not improved enough. The gulf between countries that show a high degree of international engagement and countries that opt only for isolated, uncoordinated engagement has become more firmly established too.

Whereas France and Germany have further expanded their engagement in this area, the majority of industrialized countries have further curtailed their climate policy engagement as a result of the economic and financial crisis. Canada is an honourable exception here, having introduced environmental taxes, created new jobs in the renewable energy sector and championed the Paris climate agreement.

Growing discrepancies in the development of democracy across countries

The states in the study have been implementing democratic processes and standards to varying degrees. There have been very alarming developments in Poland, Hungary, Turkey and Mexico. Turkey and Hungary, in particular, have significantly distanced themselves from the rest of the OECD community during the survey period.

Observers in both countries have noted extremely worrying tendencies in terms of government support for the rule of law, with essential principles such as judicial independence, freedom of the press and the effective protection of minorities being most affected. Societies in both countries can no longer automatically assume that they will be able to effectively restrain their government through the media, social groups or parliament.