Europe trims generous perks to spur economy

France approved pension changes last week in the Continent's latest reform.

In and of itself, the news may not mark a revolution: The German state will soon stop paying for its citizens to visit health spas whenever they feel the need to reinvigorate themselves.

But the move heralds a much wider shift, as Germany and other major European nations join a wave of reform sweeping the Continent, and start to overhaul the social safety net they can no longer afford.

And even as they say farewell to cherished benefits, European citizens appear resigned to their disappearance. Stuck in a low-growth rut for the past three years - the worst such stretch in a decade - they say they are ready to relinquish some of their perks if that will set their economies right.

"Some fundamental changes are going on," says Ulrich Schröder, chief European policy analyst at Deutsche Bank in Frankfurt. "There is a similar tendency across the Continent, an increasing readiness for reform."

Not that anyone is proclaiming the death of the welfare state, which has characterized Western Europe since the end of World War II. German workers still enjoy twice as many holidays as their American counterparts, mandatory state insurance schemes guarantee everyone almost cost-free healthcare from Britain to Greece, and French government pensions will remain generous however they are reformed.

"The reforms are not an attack on the welfare state so much as an adjustment," says Willi Leibfritz, a senior economist at the Organization for Economic Cooperation and Development in Paris. "They are adapting the welfare state to new challenges."

The fact is, though, that in the face of an economic downturn and the need to keep budget deficits under control, big European governments have begun to follow their smaller neighbors down the path of structural reform that bankers and businessmen have been urging for years.

In France, parliament voted last Thursday to approve a contentious pension reform that will bring public sector employees - who account for more than 25 percent of the workforce - into line with the private sector, and make them work for 40 years to qualify for a full pension, up from the current 37.5 years. By 2020 everyone will have to contribute to the pension system for 42 years.

Without the reforms, Prime Minister Jean-Pierre Raffarin had warned, the pension fund would be bankrupted within 20 years.

In Germany, where workers have traditionally enjoyed the firmest job security, the highest wages, and the most comfortable social benefits in Europe, Chancellor Gerhard Schröder has spent the past six months cajoling his Social Democratic Party and the trade unions into accepting a broad package of reforms dubbed Agenda 2010. They cut unemployment, pension, and health benefits, and make it easier for companies to hire and fire, in what amounts to a policy U-turn by the center-left government.

Already the government has set up agencies to hire out temporary workers to businesses at well below normal trade-union wage rates. And a bill now before parliament would slash full unemployment benefits to 12 months from 32 months. In hopes of spurring private initiatives, the government has cut taxes and red tape for people wanting to set themselves up in business - prompting 33,000 Germans to do so this year.

Under an agreement the government reached with the opposition last week, Germans will have to start paying small sums toward their medical costs, such as an $11 a day charge for in-patient hospital care. Overall, the reforms should save the national health insurance system around $25.5 billion by 2007, the government says.

Also on the agenda is pension reform, and Economy Minister Wolfgang Clement recently dared suggest that Germans ought to work longer hours and take fewer holidays.

That sparked predictable outrage, but in general the German trade unions have come to terms with the government's plans. They, like Mr. Schröder, have taken note of public opinion polls that show most ordinary Germans agree that things cannot go on as they are.

With the economy stagnant for the past three years, young people struggling to find jobs, and a general mood of depression, "the government is up against a wall; it has to act," says Mr. Leibfritz.

Crisis as opportunity

"In some countries, only a sense of crisis allows structural reforms," he adds. "It is often easier for politicians to impose reforms during a downturn, because that is when people feel that fundamental changes have to be made."

The public mood became clear last month, when Europe's biggest trade union, IGMetall, was forced to call off a month-long strike aimed at shortening the workweek in eastern Germany.

Fearful of the country's 10.7 percent unemployment rate, even IGMetall members opposed the strike, which marked the union's first failure to win its demands since 1954.

In France, the government's job of pushing through pension reform was eased somewhat by the fact that the country's biggest union supported the plan. Unusually for France, public opinion lost patience with the strikers who brought public transport to a halt earlier this summer in their bid to thwart the reform, and the protest movement petered out.

But it has not died, and some union leaders are promising more strikes in the autumn, when the government is expected to unveil its proposals for reforming the social security system, which is due to lose $9 billion dollars this year.

"Social security and pensions represent the choice we made in 1945, as a result of the war," Marc Blondel, head of the radical Workers' Strength union, told French radio last week. "We have to defend these fundamentals, it is indispensable."

Mr. Raffarin, bruised by the angry conflict over his pension reform, has clearly taken some lessons to heart. In future, he said Thursday, his government will make "social dialogue" a "national priority," and he hinted that he might take longer than initially planned to carry out some of his reforms, so as to make them more palatable.

That sort of caution would be anathema to Italian premier Silvio Berlusconi, who has been pressing ahead with labor-law reforms, and brushing off opposition from some unions. In doing so, he has been aided by Italian voters, who have shown sympathy for his policies.

In June, only 23 percent of Italians bothered to vote in a referendum, promoted by Italy's largest trade union, that would have increased job security for workers at small companies.

In Austria, meanwhile, another center-right government has been forthright about its goals as it makes citizens work longer for their pensions and cuts back on social benefits.

Finance Minister Karl-Heinz Grasser told a conference of business managers 10 days ago that he intends to turn Austria's welfare state into "a modern, social, performance-oriented society" through "privatization, liberalization, and deregulation."

Some observers, however, caution that the new enthusiasm for reform in Europe may fade as elections loom, especially since it could take a year or more for the reward of higher growth to make itself felt. And more remains to be done, says the OECD's Leibfritz.

Small trailblazers, long trail

"What is happening is certainly promising, now that the big Continental countries are following the smaller ones" such as the Netherlands, Spain, and Scandinavian nations, which have already reformed pension schemes, relaxed labor legislation, and trimmed aspects of their social security systems. Leibfritz says. "But I wouldn't overemphasize things: more moves have to come."

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