Excuses for not doing what is needed- Europe

Reforming European economies. The cruelty of compassion.
Social cohesion has become an excuse for avoiding necessary reforms in Europe
Jan 28th 2010 | From The Economist print edition

SOCIAL cohesion is one of those values all decent Europeans can sign up to: less social conflict and less of the inequality that America and Britain (see article) put up with. Some countries, notably Germany, really do manage to marry social harmony and economic reform. In the past decade Germany has—thanks to good management and obliging unions—kept its public sector in check, partly freed its labour market, held down unemployment, and regained competitiveness. Elsewhere, though, the need to preserve social cohesion, parroted by European politicians from left and right, has become a self-defeating excuse to avoid reform.

In Greece, for instance, the hard-pressed Socialist government of George Papandreou talks up social cohesion as a reason to avoid unduly large public-sector pay cuts in its urgent fiscal retrenchment. Spain’s Socialist prime minister, José Luis Rodríguez Zapatero, touts it to justify the retention of labour-market laws that make it ruinously expensive to sack permanent employees. Italy’s right-wing government, under Silvio Berlusconi, is similarly loth to lift burdensome regulations on small businesses and services for fear of protests and strikes. Sweden’s centre-right leader, Fredrik Reinfeldt, is reluctant to be seen attacking his country’s generous social model by trimming benefits, pay and pensions. Even France’s conservative president, Nicolas Sarkozy, is unwilling to damage social cohesion (and risk trouble in the streets) by pushing hard for labour-market, pension and welfare reforms.

Two worrying common threads can be discerned in all this. One is that the natural desire for social cohesion is being abused to justify the protection of “insiders”—those in permanent jobs, in trade unions or in privileged professions. But the cost of protecting insiders falls largely on “outsiders”—the unemployed and those in temporary work, especially young people and immigrants. The gulf between insiders and outsiders destroys the very social cohesion that the policy is meant to preserve. And in the long run it is bad for everyone, because employers do not train temporary workers—a particular problem in economies like Italy and Spain, where new permanent contracts are rare. This lack of training is one of the main reasons why Europe’s productivity growth over the past two decades has persistently lagged behind America’s.

The second common thread is that social cohesion has become a reason to defend the privileges and perks of the public sector, which is also now the last bastion of trade unions. Across Europe many private-sector workers have seen their pay, pensions and other benefits frozen or cut by cash-strapped employers during the recession. Yet most governments, even Britain’s, have been reluctant to apply similar treatment to the public sector. One result is that the state is taking a rising share of GDP, which is sure to lead to heavier taxes. Another is that public-sector pay and benefits have shot ahead as a cosseted caste extends its privileges.

Follow the Irish—or Germans
Most governments seem too paralysed by their muddle-headed talk of social cohesion to act, despite the struggle to finance huge deficits. Yet they now have a striking example in Ireland. Faced with a gaping budget deficit and a recession, the Irish government has torn up its 30-year social compact with employers and unions. It has slashed public spending and made sharp cuts in pay. Indeed, pay is now falling across the whole economy. Not surprisingly, workers and unions are unhappy. This week, the public sector began a work-to-rule. But the harsh medicine seems to be working, as Ireland pulls out of recession, the public finances improve and the economy regains competitiveness lost inside the euro.

It is not always necessary to face down strikes. Italy and Spain could learn from Germany’s trick of reforming without strife. But that may be beyond deeply troubled countries like Greece, which probably has no alternative but to copy Ireland. What all European governments must grasp, though, is that many of the policies espoused in the name of social cohesion do not promote compassion over cruelty. Rather, they encourage decline, entrench divisions and thus threaten the harmony they pretend to nurture.