CWS 3.0: February 29, 2012

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Europe: Austerity Measures Lead to Radical Labor Reform

Amid the ongoing economic crisis, a number of countries in southern Europe are re-evaluating their employment laws and are proposing, passing or enacting major reforms.

The reforms follow the failure of successive governments in the region to spur economic growth and to shape an enterprise culture which encourages employment. Unemployment in Europe is currently running at an average of 9.5 percent, but rates are considerably higher in Portugal (12.5 percent), Greece (16.1 percent) and Spain (20.8 percent). Youth unemployment has become a particular concern as it is in danger of consigning a whole generation to an uncertain and precarious future.

While some see the reforms as an opportunity to unshackle the region’s rigid labor markets, others are concerned about the wider implications to Europe’s social model. A number of commentators also wonder why public sector workers and lower-paid workers, in particular, are being asked to bear the brunt of labor reforms while highly paid workers in the financial sector (who created the economic crisis in the first place) remain relatively unaffected and in receipt of generous bonus packages. Not surprisingly, unions have been quick to spring to the defense of their members’ existing employment rights and strikes and protests are likely to continue into the spring.

Nevertheless, all governments in the region have decided that labor reform is an urgent necessity, some of their own volition (Spain and Italy) and some in order to comply with the terms of financial bailout packages (Portugal and Greece).

The Pain in Spain
 In Spain, the Royal Decree-Law has approved very important and radical changes to Spanish labor legislation. The government insists the reforms will create a more flexible system for businesses and workers, in a country with a stagnant economy that needs to start creating jobs. Spain’s job market favors an older generation of workers with robust benefits who are very expensive to let go, but gives few rights to younger workers, many of whom are employed on temporary contracts. (Twenty-one percent of Spain’s  workforce is employed on temporary contracts, by far the highest rate in Europe; however, only a small minority are employed through temporary agencies.)

The Royal Decree-Law is now being processed in Parliament where amendments may be made. In its present form, the Royal Decree will lead to the following changes.

  1. More freedom to defend the fairness of employment termination
  2. Decrease in severance pay to 33 days’ salary for each year worked from the current 45 days
  3. Simplification of the causes of redundancy
  4. Removal of the administrative authorization for collective dismissals
  5. Granting employer rights to temporarily suspend employment contracts and/or decrease the workday where there are “objective reasons”
  6. Arbitrary reduction or extension of working hours by 5 percent
  7. Easier process to changes in working conditions
  8. Prioritization of company collective bargaining agreements over sector agreements
  9. Support for “entrepreneurs” (rebates for companies with less than 50 employees)

On Feb. 19, unions organized mass protests condemning the reforms, suggesting they would only encourage companies to cut jobs and potentially deepen the recession. Unions claimed half a million protesters marched through Madrid, though police put the turnout at a more modest 50,000. Spanish media report that protests also took place in 57 other towns and cities. The motto of the protests was: “No to the labour reform that is unfair to workers, inefficient for the economy and useless for jobs.” There have been calls for a general strike from some quarters and some fear this is likely to be the unions’ next step.

Italian Martyrs to Labor Reform
In response to the economic crisis, the Italian government has passed a €33 billion ($43.5 billion) package of spending cuts, tax hikes and pension reforms and has put forward a separate package of deregulation measures. However, labor reform is widely considered to be the most difficult and potentially important component needed to put the country back on track.

Mario Monti’s government, which was elected last year, faces a considerable challenge as labor reform does not come easily to Italy. In fact, the country has its own martyrs to the cause; Professor Massimo D’Antona, who was working on plans for greater labor flexibility, was assassinated in 1999 by the Red Brigade; Marco Biagi, who followed in D’Antona’s path, was murdered by the same group three years later.

And political rhetoric abounds. On Feb. 1, Prime Minister Monti controversially decried the “monotony” of holding the same job forever. Employment Minister Elsa Fornero said that anyone offering an indefinite contract was selling “illusions,” while Interior Minister Anna Maria Cancellieri said her compatriots were stuck in an era when employees worked “in the same city alongside Mummy and Daddy.”

Unemployment is not as high a concern in Italy compared with other southern European markets — surprisingly, its 8.2 percent unemployment rate is below the EU average (and the U.S. rate, for that matter). However, youth unemployment is running rampant at more than 30 percent, and young Italians are finding themselves trapped in the lower tier of a two-tier labor market — created in 2003 by Silvio Berlusconi’s government — which allows employers to offer short-term contracts with few of the benefits or guarantees received by permanent employees.

Talks on labor reform among the government, the unions and employers resumed on Feb. 15, and a number of compromises have been floated. Attention has largely been focused on Article 18, a section in the labor law that obliges companies with more than 15 workers to rehire workers judged by the courts to have been unjustly laid off. The provision has become symbolic of the battle for a system unions defend as offering much-needed protection for workers but critics say shields only some privileged categories while condemning others to precarious, short-term jobs with few benefits. Employers argue that the courts have proved so generous in their definition of what is unfair, and so slow in reaching decisions, that workers are almost unsackable.

The prime minister has set March 31 as the deadline for an agreement and has pointedly told unions that reforms will be passed with or without their consent. Labour Minister Elsa Fornero said, “There is a dialogue, but the government will not miss the opportunity; if we do it together, then we’ll be happy, but if not, the government will still seek to do it”  Intriguingly, so far the largest and most radical of Italian trade-unions, CGIL, has remained uncharacteristically quiet on the issue. It would not surprise anyone, however, if the coming months led to widespread industrial unrest.

Portugal “Not Like Greece”
In Portugal, labor reform and the right-wing coalition government’s austerity measures have already provoked mass opposition.

Labor reforms have slashed holiday entitlement, redundancy pay, overtime rates and unemployment benefits. They have increased flexible working, made it easier for employers to sack workers and also undermined collective bargaining processes that have been a long-established part of the Portuguese labor system. These reforms come on top of earlier austerity measures that have cut wages and pensions,  privatized remaining public companies, introduced charges for healthcare, increased fares in public transport and increased tuition fees.

On Feb. 11, 300,000 people took part in a demonstration in Lisbon organized by the Communist Party-led General Confederation of Portuguese Workers (CGTP) to protest measures framed to meet the dictates of the EU, the International Monetary Fund and the European Central Bank. The rally took place just four days before officials began their quarterly review of Portugal’s compliance with the requirements of last year’s €78 billion ($103 billion) bailout.

In order to meet the terms of its bailout, the Portuguese government claims that it has successfully cut its budget deficit from 9.8 percent of GDP in 2010 to the agreed target of 5.9 percent in 2011 and is on course to meet its 4.5 percent target in 2012. However, at the same time, the economy shrank by 1.9 percent last year, ending up in a double-dip recession and estimates suggest that it will shrink more than the official 3 percent forecast in 2012. The ratio of Portugal’s debt to GDP is also expected to increase from 107 percent at the time of the bailout to 118 percent next year.

Communist Party (PCP) General Secretary Jerónimo de Sousa said the demonstration was a “historic event,” the biggest in terms of popular support for more than 30 years. He was “confident that it was possible to shift, to stop this aggression pact, this attack on workers’ rights.” Instead of austerity, De Sousa called for an alternative based on “a country of progress, economic growth, full employment, one that responds to the younger generation.”

However, not all unions agree with the CGTP and the PCP. The Socialist Party-aligned General Union of Workers (UGT) did not take part, having already agreed in January to the labor reforms. After signing the agreement, UGT General Secretary João Proença declared that Portugal was not like Greece. “Greece is clearly a failure, its measures were not adjusted to reality and therefore they could not deal with the situation. ... There is a total absence of political dialogue, weak traditions of dialogue have radicalized the situation in Greece.

“Fortunately, this is a reality which we do not have in Portugal,” he continued. “Our behavior is totally different. We have no strife for strife’s sake and there is usually a specific negotiation goal in protests.”

Greece Forced to Make Cuts
 Meanwhile, earlier this month discussions among Eurozone finance ministers to agree to a second bailout for Greece were held up when Greek unions and employers’ associations rejected the private-sector wage cuts demanded by the country’s international bailout lenders. Greece’s two major labor unions, GSEE and ADEDY, went further and called a 48-hour strike.

While the second bailout was eventually approved on Feb. 21 (worth at least €130 billion — or US$170 billion — in loans and subjecting Greece’s economic management to permanent monitoring by eurozone experts), both unions and employers objected to proposals to slash the minimum wage and further cut annual salaries and pensions. Private sector workers have already suffered a rather brutal 14 percent loss in income due to emergency taxes imposed since the beginning of 2010.

Greece’s creditors argue that cutting labor costs further is essential to making the Greek economy more competitive. However, both the unions and employers’ associations counter that the move will only further depress consumer spending and result in lower tax revenue.

Dutch Finance Minister Jan Kees De Jager says he and his finance colleagues “are not satisfied with Greece’s progress. … We want a serious commitment from the Greek government and the opposition. They need to show concrete action as soon as possible.”

Greece’s finance minister, Evangelos Venizelos, warned parliament that, while the situation was difficult now, the alternative the country faced was catastrophic. “Yes, the people have become poorer,” he says. “Yes, we are living a drama. Yes, our standard of living has gone down. Yes, it is dramatic to be obliged to cut wages and pensions. But what we could live through, and we are trying to avoid, is indescribable.”

Officials say the Greek economy will contract by 4.5 percent this year after a fall of 7 percent last year and will stagnate in 2013 before growth resumes in 2014. To meet its obligations under the bailout deal, the current government or its elected successor will have to find savings equivalent to 5 percent of GDP by the end of 2014.

There is no doubt that all countries in southern Europe are currently suffering as a result of the adjustments necessary to fix their economies. And individuals who have lost their jobs or who are unable to find a first job are suffering the most. Nevertheless, as painful as these labor reforms are in the short term, there is the prospect that the longer-term benefits will be worth the pain. If labor markets can be liberalized and made more flexible, then it should be possible to reduce unemployment and European economies can be put on the path to a healthy recovery. We just have to hope that the medicine doesn’t kill the patient first.  

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