Reflections from Europe | FEBRUARY 6, 2006
Winning Policy Battles, but Losing the War Against Economic Realities
The forward march of politics across the domain of economics was widely accepted as justified, mainly for two reasons. One, expressed in such mantras as 'Man matters more than the market' or 'In democracy, it is ballots that decide, not dollars' was based on the delusion that markets and dollars have one will, man another and the two pull in opposite directions. The other reason for welcoming the invasion of government into the economy was, and remains, the conviction that redistribution of income through taxation and targeted expenditure is an act of 'social justice', a good deed and a moral duty.
The future historian of these apparent triumphs over economic reality will very likely single out two phenomena that loomed more and more ominously and in fact began to signal that no matter how the battles went, the war was beginning to be lost. One was the growing severity of job protection policies that made firing employees so difficult and expensive that employers were frightened away from hiring them in the first place. New job creation fell to levels last seen in the Great Depression, for offering employment except on short-term contracts has become an act of reckless audacity. (One small but significant breach in job protection came just the other day when the highest French court of appeal ruled that terminating employees may be permitted not only when the enterprise is making losses threatening its survival, but also when terminating employees is necessary to prevent such losses).
The other ominous phenomenon was that the high level of unemployment, which would have seemed abnormal a decade ago, has come to be seen as a fact of life. It has resisted the multitude of attempted therapies governments of both Right and Left tried to apply to it. The diminishing band of diehard defenders of the 'European social model' still mutter that unemployment is high because the model is not 'social' enough, or not European enough, and all will be well when it is made more social and more 'harmoniously' European. Meanwhile, it is starting to be noticed that chronically high unemployment has almost wholly drained away the bargaining power of labour in the private sector. Union militancy is now confined to the public sector—essentially, to public transport workers, teachers and government clerks. Thirty-odd years of socialist economic policies have reduced the mythical, red flag waving 'working class' to passive impotence.
An anecdote bears eloquent witness to how workers 'benefiting' from the 'special model' now stand compared to those who are exposed to the 'caprice of the market'. Two years ago Toyota set up a car assembly plant in the industrially derelict region of Northeast France. More recently, the president of Toyota visited the plant, expressed his satisfaction and explained that the company has chosen to locate in France rather than in England (which was the runner-up candidate location) because 'English workers can afford to talk back, but French workers cannot'.
In fact, under the 'European social model' real bargaining has practically ceased. Labour addresses its demands not to the employer, but to the government that may or may not be able to bully the employer into making concessions. Increasingly, the latter is unable to achieve much in the face of the risk that capital and operations will be moved out to Central and Eastern Europe, Asia or Mexico. In actual fact, the volume of such movements is fairly modest, but their public echo is deafening and works havoc in politics and the labour movement.
In current labour union language, bargaining hardly exists. In its place have come 'meaningful negotiation' in which the employer meets union demands, and 'blackmail' in which the employer obtains concessions.
Over the past year, there have been a number of high-profile cases of 'blackmail' by European, chiefly German, flagship companies including Siemens, Opel, Bosch, Conti Gumi and Volkswagen, usually involving the lengthening of the work week and in some cases lower pay for new recruits, in exchange for commitments by the employer not to reduce the labour force or limiting the reduction to a minimum, as well as undertakings not to move production abroad. These cases obviously had a bad press and made much political noise. Unions agreed to them under protest, stressing that the cases were exceptional, involved a small fraction of wage-earners, while for the vast majority industry-wide collective contracts remained in force.
In the meantime, there was a mostly unreported groundswell of "blackmail" agreements between small and medium enterprises and their employees that departed from the official industry contracts. They involved longer hours, more flexible working arrangements, wage freezes or lower pay increases than the industry norm. They were concluded between the enterprise and the works council whose members were labour union officials who forbore from wearing their union hats. According to some estimates by industry associations, between 50 and 70 per cent of enterprises with less than 500 employees have concluded such agreements. Their cardinal feature was a promise of maximum discretion, so as to let labour organisations lose as little face as possible. Apparently, there was little opposition by the wage-earners themselves. Manifestly, there is more understanding and acceptance of realities in Germany than in France and Italy where labour and the parties of the Left still seem to believe that the basic facts of life can be made to go away if you call them "unacceptable" loud enough.
In 2000, German labour costs were about 25 per cent higher than French ones. By last year, the gap has practically disappeared. German forward economic indicators have been perking up since last spring, and unemployment has started to fall significantly even before the 'Merkel effect' has come into play. It will be interesting to watch how the other 'core' countries of the euro-zone will position themselves over the next year or two. Will they go on winning the policy battles and lose the war, or will they permit a gradual and discreet return back to basics?