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."
- Part 1: Belated Reforms Cut Deep in Southern Europe
- Part 2: Fighting for Survival