EC: ALL OVER EUROPE BELTS ARE BEING TIGHTENED AND BENEFITS REINED IN. - EC countries prepare to do battle over welfare bills and labour costs.

by Peter Wilsher.
Last Updated: 31 Aug 2010

EC countries prepare to do battle over welfare bills and labour costs.

Contrary to popular belief, Britain is far from being the only single market country that worries about its soaring welfare bills. All over Europe governments are taking a cold-eyed (not to say panicky) look at the financial and competitive costs of their various benefit systems. Almost without exception they now agree, however reluctantly, that these already almost unsustainable expenditures are still increasing and must, as a matter of urgency, be diminished. Now that Maastricht is no longer the Community's dominant issue (and indeed is now set to stay on the back burner for months or even years) the wrenching readjustment of ideas about safety nets and personal responsibility is likely to become the EC's next major political battlefield.

In some areas the pruning (and the resulting chorus of anguished protest) is already well under way. Scandal-torn Italy has taken time off to persuade its once all-powerful unions to accept the end of wage indexation and the temporary suspension of collective bargaining while it tries to reform its costly and inefficient health service, introduce private pension schemes, and start privatising the state industries where swollen payrolls provided such a spectacularly inefficient alternative to unemployment. Holland, traditionally super-benevolent in its welfare arrangements, is at last setting tighter limits on social housing and workers' disability payments, and unhappily recognises that the belt-tightening process will soon have to go a great deal further.

In Germany, where the Federal Labour Office has managed to run up an £8-billion deficit on its unemployment and retraining programme, there is stark talk about cutting the present elaborate job-creation programme, lifting the hard-fought-for ban on weekend working, sharply raising the minimum age (currently 58) at which people can start drawing their official old-age pensions, and curtailing, or possibly even eliminating, benefits for those not prepared to move home in search of available work.

France, too, is beginning to wield a mean axe. Since the May elections, state employees (of whom there are several million) have faced not only yet another pay freeze but a systematic attack on their most treasured privilege, the status of fonctionnaire which has effectively guaranteed its possessors a job for life. Civil servants, and those state industry employees not already facing privatisation and the harsh rigours of free-market competition, find themselves suddenly and previously unthinkably required to work nights and weekends, and all citizens will soon find themselves committed to making several years' worth of extra contributions before they qualify for a full pension.

Only Spain, where the combination of 20% unemployment and a furious debate over the exploding welfare budget (up 72% in five years) nearly ousted Felipe Gonzalez's Socialists from office this year, has so far managed to avoid any serious attack on the country's social spending. But that immunity is unlikely to last very much longer. Nor will the others be able to continue indefinitely with their present programme of limited and often cosmetic economies. Sooner, rather than later, they will be forced, whether they like it or not, to storm the central bastions of a social security system they can no longer remotely afford.

French welfare spending, for example, is currently running at almost one third of the country's gross domestic product (as against just one fifth in the 1970s) and any serious attempt to rein back will cut straight to the heart of an already pretty fragile consensus on national priorities.

But the task, however unpleasant, will have to be faced. Europe's labour costs, on average, are presently running around 50% higher than those of its main developed-world rivals (not to mention its even more rampant competitors in East Europe and along the Pacific Rim) and the largest part of the discrepancy is attributable, not to daily wages, but to a lethal combination of shorter hours, longer holidays and above all employers' social security contributions.

The effect on industrial efficiency is startling. Unit labour costs have been rising faster in Europe than elsewhere for the best part of two decades, and the discrepancy is, if anything, still growing. For 1992, the latest year for which full OECD figures are available, the average EC increase was 4.1%, with no real off-setting productivity advantages, while Japan was able to hold its equivalent down to 2.4% and the US to a mere 1.4%.

This is a large part of the reason that crack German manufacturers like BMW feel impelled to move production (in that case from Bavaria to South Carolina) and the implications, if such differentials are allowed to grow even wider, are sufficient to frighten even the most overtly 'caring' EC leader. In the words of industry commissioner Martin Bangemann: 'The first goal in 1993 and for the next 10 years has to be to improve the competitiveness of European industry.' Peter Lilley, Virginia Bottomley and Kenneth Clarke will not be left alone much longer in the painful task of grasping the welfare nettle.

Peter Wilsher is a freelance consultant and writer.

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