Bitter Medicine: Belated Reforms Cut Deep in Southern Europe

Mired in ongoing crisis, several countries in southern Europe are seeking to rapidly push through German-style labor market reforms to breathe life into their struggling economies. Yet they may not be enough to save the region’s lost generation.

Assunta Linza, a petite 33-year-old, and her father Giovanni, 60, graying and with the build of a bulldozer, are sitting on the family sofa in a northern suburb of Rome. Assunta is an old Catholic name that her father picked out. It represents the ascent into heaven of the Virgin Mary, and it translates as the Accepted One, or, as the case may be, the Employed One. “My name is a joke,” Assunta says with a weary smile.

She is holding a letter in her hands. It’s been official since this morning: She is unemployed and, beginning in June, will no longer receive government support.

It’s Wednesday evening of last week, the news is on television and the traders at the Milan Stock Exchange are staring at their screens in disbelief. The risk premium on Italian government bonds has risen to 5.6 percent, the highest it’s been since Christmas. The father and daughter sitting on their living-room sofa in a Rome suburb; they are the faces of the crisis. It is a society split into two classes, the one outfitted with open-ended contracts and fat pensions, the other with no future prospects despite a better education.

When Assunta Linza signed her first open-ended employment contract five years ago, she wept with joy. After studying psychology and graduating with honors, she worked for years in the gray economy and completed dozens of internships. Finally, she was about to start work at a call center, where her job consisted of helping customers of an Italian energy firm with questions about their gas and electric bills.

She earned €850 ($1,105) a month in a strenuous job that had nothing to do with psychology, but at least it was fulltime — until the call center began shifting its operations to Albania two years ago. Assunta will receive €600 a month in government unemployment benefits until June, but after that she’ll be dependent on her father Giovanni once again.

A Rude Awakening

After working as an electrician for the government-owned railroad for 23 years, Giovanni Linza retired in 1994. He was 42 at the time, and by going into early retirement, he was supposedly making room for a young worker to take his place. He received a generous severance payment and a pension of €1,200 a month for the rest of his life. This is more than his daughter has ever earned, and yet Giovanni, the son of a farmer from the Calabria region of southern Italy, had only completed elementary school and then went to work in his father’s fields.

There are countless stories like that of Assunta and Giovanni Linza in Europe’s crisis-ridden south, and not just in Italy. They exist in all of the countries in which, until recently, the economic elites, the labor unions and, most of all, the politicians behaved as if globalization had simply passed their countries by.

The euro debt crisis came as a rude awakening to countries like Italy, Spain, Portugal andGreece, which are now firmly caught in the chokehold of their creditors and are forced to sharply cut back government spending. For many people, it is the biggest political and social turning point in decades.

But these countries were already having trouble staying competitive before the current crisis. It was only possible for them to ignore China’s spike in exports or the new competition from Eastern Europe because of prospering national markets, generous transfers from Brussels and the existence of the euro. Because of the common currency, Portugal, Italy, Spain and Greece benefited from historically low interest rates, promoting a boom based on borrowed funds. It was suddenly cheaper than ever before to build a house or order a bigger car — or for governments to distribute generous welfare payments.

It was an extended party for those in southern Europe who had work, as real wages rose sharply. In Germany, on the other hand, wages stagnated. Beginning in 2003, Chancellor Gerhard Schröder began a series of labor market and welfare reforms — known collectively as Agenda 2010 — which completely reorganized the welfare state. It is the kind of reform that now seems to be in the future of several southern European countries.

Boom on Borrowed Funds

Schröder’s labor market reforms remain controversial today in Germany. They included the combining of unemployment and welfare benefits, drastic cuts for the long-term unemployed, the deregulation of temporary work and the creation of mini-jobs, essentially limited part-time work that has no effect on welfare payments. Critics say the changes meant primarily that the unemployed were now expected to accept poorly paid jobs.

Some 41 million people have a job in Germany today — the highest employment figure ever, which could provide Schröder with some delayed satisfaction. But the flip side of the coin is that 23 percent of them work in the low-wage sector, and that real wages have in fact declined by 3 percent in the last 11 years.

By contrast, no one in the southern European countries was asked to make any sacrifices in the years leading up to the crisis. The boom on borrowed funds led to wage increases, but it also ensured that rigid labor market laws remained unchanged.

A de facto ban on dismissals persisted in southern Europe until recently, usually benefiting the individual, but not society as a whole. The unpleasant truth that employers only create jobs if they are also permitted to lay off workers in times of crisis was ignored.

Italy is a case in point. Even today, unlimited full-time employment and protection against dismissal are practically sacrosanct in Italy. A number of governments on the left and the right have already tried to tackle Italy’s big taboo, a deregulation of the labor market, but have always ended up yielding to public opinion.

Protection against dismissal is codified in Article 18 of the labor code, a symbol in the struggle between employer and unions for years.

Bodyguards for the Labor Minister

It is a struggle that has not been without violence. The New Red Brigades terrorist group shot and killed two government advisors and proponents of labor market reforms in 1999 and 2002, sending the threatening message that anyone who touches Article 18 could suffer the same fate. Elsa Fornero, 63, Italy’s new minister of welfare and labor, is now constantly accompanied by six bodyguards since she received a letter bomb in January — and since protesters were first spotted with T-shirts reading “Fornero al cimitero,” or “Fornero in the Cemetery.”

Italian Prime Minister Mario Monti, 69, wanted to relax Article 18 to achieve more flexibility. The goal was to enable companies with more than 15 workers to dismiss employees with open-ended contracts for economic reasons, without facing the prospect of a labor court ordering the company to rehire the employees in question, even after several years, and pay them compensation of up to 27 monthly salaries. The brutal alternative, which no one embodies more clearly than Assunta Linza and her father Giovanni, was to be put to an end. The situation whereby older employees were protected while younger workers suffered a more precarious existence was to be eliminated.

But Monti, like his predecessors, eventually capitulated. Under his new draft bill, which he unveiled shortly before Easter, court-ordered rehiring remains possible. As a result, Monti’s reform policy is not nearly as comprehensive a program as Germany’s Agenda 2010, which many in Italy admire. Instead, it is a compromise that will continue to be contested.

Once again, young people will likely pay the price for the lack of reform. Because dismissals of longstanding employees are either impossible or extremely costly, young people are given short-term contracts at best. As a result, the problem of youth unemployment threatens to wear out an entire generation.

Such is the situation in Portugal as well. When Nídia Cruz, 33, talks to girls who are beaten by their boyfriends in the low-income Odivelas neighborhood on the outskirts of Lisbon, she encourages them to take their futures in their own hands. She says that the girls should “make a contribution for their country,” so that they can “feel useful.”

Fighting for Survival

This sounds defiant coming from the mouth of the ambitious young woman, who hardly feels at home in her own country anymore. When Cruz lost her last job with a Spanish company, which declared bankruptcy as a result of the crisis, she became unemployed and received welfare benefits. She eventually managed to complete a commercial training program with the help of a continuing-education grant from the European Union.

After that, Cruz applied for every job that came up, but the employment agencies in Portugal, she says bitterly, “don’t place workers in jobs, they just manage the growing army of the unemployed.” She is thinking of emigrating to her birthplace Angola, a former Portuguese colony and a booming African country.

Portugal, one of the poorest countries in the euro zone, is economically depressed, and many of its residents feel that they are the ones now being colonized. Last year, the government had to ask Europe for help to meet its obligations. But the approval of a €78-billion bailout package was tied to harsh austerity measures and structural reforms, with the troika consisting of the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB) monitoring compliance. “The Portuguese haven’t even realized yet what’s in store for them,” says the chairman of the supervisory board of a group of companies.

The financial crisis and the recession are creating more pressure on the state to economize. The government estimates that the economy will shrink by more than 3 percent this year, which is probably the worst decline since the end of the dictatorship in 1974.

In fact, EU member Portugal has never managed to build a stable economy. When trade barriers with China were removed in 2000, the country’s leading textile and shoe industry was no longer competitive. Many international corporations left the country when the EU expanded into Eastern Europe. In addition, private households had acquired large amounts of low-interest debt.

Based on the German Model

Now the conservative government of Prime Minister Pedro Passos Coelho is focusing on efforts to increase productivity. In March, four public holidays and three paid vacation days were eliminated and the government also decided to introduce so-called hour accounts. The practice, which is common in Germany, allows workers to work up to 50 hours a week when order books are full, and to go home early during slow months. The Coelho government also wants to make it easier for companies that are losing money to lay off workers. And starting in November, the current unemployment benefit — the payment of 70 percent of a worker’s salary for two years — will be drastically reduced, also based on the German model.

So far, hardly any companies are making investments during the crisis. Nevertheless, Werner Hoyer, the president of the European Investment Bank, is sanguine about the measures, which the Socialist opposition supports. “The situation in Portugal differs markedly from that situation in Greece,” he says. But by the time the Portuguese economy is back in swing, Nídia Cruz is likely to have already left the country.

The situation in the labor market in neighboring Spain is even more dramatic than in Portugal. At 24 percent, the country has Europe’s highest unemployment rate. The reason for Spain’s woes is mainly to be found in the real estate crisis, a sector that brought the country both miraculous growth and a nightmarish crash. Because Spain was part of the euro from the very start, mortgage rates dropped to all-time lows at the beginning of the last decade. Even blue-collar workers were able to buy their own homes and apartments for each of their children, but it was all done with borrowed funds.

About 800,000 new housing units were built each year until 2008. To cope with the boom, the Spaniards brought millions of immigrants into the country. It was a profitable time for people like José Ignacio Recoder, 66, who, until recently, ran a family business that makes industrial cutting machines for marble and other stones used in construction. In 2006, the company had 60 employees and €12 million in sales.

When the construction business collapsed during the real estate crisis, Recoder had to let 45 workers go and pay €2.8 million in severance payments. This was so hard on the Madrid native that he decided to retire. Today his youngest brother and Recoder’s eldest son are fighting for the company’s survival. ’Not Good’

In Spain, the first people to lose their jobs in the crisis were unskilled workers, followed by employees with fixed-term contracts. Those with open-contracts who were let go received a golden handshake: one-and-a-half months’ pay for a maximum of 42 months, a relic from the days of former dictator Francisco Franco.

As a result, permanent positions have become a rare commodity, and 93 of 100 employment contracts are short-term. To help Spain’s small businesses hire people again, the government of Prime Minister Mariano Rajoy enacted an extensive labor market reform on Feb. 12.

Under the new rules, business owners can change working hours and relocate workers. They are also freed from the obligation to abide by wage agreements negotiated with unions. The employers can even lay off workers and reduce their severance payments during difficult economic times without the unions’ approval. The only requirement is that they prove that they have suffered losses in three consecutive quarters. For employees, the only recourse is to sue the employers in a labor court.

The Spanish prime minister expects unemployment figures to rise again in the coming months. 2012 will “not be good,” Rajoy predicts. He forecasts that the army of unemployed will grow to six million by the end of the year. Experts fear that Spain’s labor courts could face a flood of lawsuits. Even though they are not trained to do so, they will have to decide, on the basis of corporate financial statements, whether to find in favor of the employee or the employer. Whether these measures will lead to new jobs is more than uncertain.

In Greece too, the horizon will remain dim for a long time to come. Few have described the situation in darker terms than the country’s interim prime minister, Loukas Papademos. “We will have to give up something so that we don’t lose everything,” Papademos said resignedly before meeting with representatives of the EU, IMF and ECB in January. Structural reforms were on the agenda, once again: labor market reforms required by the troika.

They include plans to eliminate special payments and to temporarily suspend gradual salary increases based on seniority. A reduction in the minimum wage to €585 per month has already been approved.

Flushing Money into the Coffers

The liberalization of the labor market in Greece is only one of many construction sites where the government is hard at work. The biggest of those sites is the government itself, and its inefficient administration. The country is crippled with a thicket of rules and regulations that even has experts scratching their heads.

This excessive regulation is one of the reasons the labor market is in such bad shape and the country is now in the fifth year of recession. At a current unemployment rate of 21 percent, the drastic wage and salary cuts are primarily a simple austerity measure to quickly flush money into government coffers.

The structural reforms in Greece also include the deregulation of previously closed professional guilds, like those for taxi drivers, lawyers and pharmacists. With about 30 draft bills, the government has already tried to unravel the tangle of interests that has developed over decades, but its efforts have been unsuccessful so far. “They can hand out licenses for free, as far as I’m concerned,” says taxi driver Athanasios Trakalas. But that would achieve nothing, he adds, because the market is oversaturated. There are about 14,000 taxi drivers in Athens today, compared with 8,000 only a few years ago.

With less disposable income, people are walking more or taking the subway. In the past, Trakalas could earn up to €6,000 a month in the summer, but now he makes no more than €1,500. The deregulation of his industry is pure political window dressing, he says. “Let’s talk about football instead,” says Trakalas. He’ll be voting for the extreme right in the parliamentary election on May 6 — “in protest,” he says.

When it comes to wage levels, Greece has lived beyond its means in recent decades. It was not the low-wage country it should have been, given its economic output. Salaries were constantly on the rise, paid for with borrowed money.

Nevertheless, the troika’s radical cost-cutting diktats are not enough to resolve the Greek tragedy, because there has not yet been much talk of real measures to promote growth.

’Who Will Support My Children?’

A specter is haunting southern Europe. Or could it ultimately turn out to be a friendly ghost? “Europe,” preaches German Chancellor Merkel, “can only prevail in the international competition with up-and-coming powers like China and Brazil if it becomes as competitive as Germany.” But a chancellor who currently wants to introduce generous tax gifts like the childcare subsidy is a relatively poor role model. In fact, the debtor nations are paying closer attention to the reform policies of her predecessor Gerhard Schröder.

But what exactly can they learn from the Germans? The protections against dismissal that are gagging many small companies in southern Europe were never quite as rigid in Germany.

Whether the reforms will ultimately go far enough and induce businesses to create more jobs will only become apparent after the crisis. It’s also unclear where these jobs are to be created, because the industrial base that has fueled Germany’s economic growth is significantly weaker in the southern part of the continent. All that’s clear is that the southern countries will dismantle their social welfare states, because they simply can no longer afford to pay for them.

Resistance is practically guaranteed. For Assunta Linza, the Italian psychologist, her country’s fossilized labor market is a serious problem. Nevertheless, she is opposed to the abolition of the controversial Article 18, without which she would never have received her short-term support of €600 a month.

She and her father recently attended a demonstration on Piazza Venezia in Rome. Linza knows that the real battle begins with the next generation. “In Italy, the family is the social welfare state. My father supports me. The question is: Who will support my children?”

Translated from the German by Christopher Sultan

URL: