Farewell to Welfare

By JAY BRANEGAN/BRUSSELS

You've fallen for Sally, but Linda's name is tattooed on your forearm. No problem if you live in Britain, where the overburdened National Health Service will obligingly pay to remove it -- cost $53 -- as often as your shifting affections require. You want to take that package holiday to Mallorca, but you haven't got the cash. In Germany most unionized and salaried workers are given extra "vacation money," usually half their regular monthly pay. Such is the solicitous treatment Europeans have come to expect. But not for much longer.

In a country just beginning to debate universal health care, Americans have long wondered how their allies across the Atlantic have managed to enjoy government benefits far beyond U.S. dreams. Now Western Europeans are discovering a brutal truth: they can not afford them either. Everywhere on the Continent, the public and private welfare system is under assault. Governments are seeking to cut back womb-to-tomb protection for workers and the jobless, for mothers and children, for pensioners, the sick and the disabled. Companies pressed by global competition are trimming benefits. The steadily expanding safety net that had been one of the Continent's proudest achievements is starting to shrink. As the Maastricht Treaty set the European Community on the road toward a single currency and harmonized social policies, citizens were worried that the new Europe might be a good deal less kind than the old.

Business leaders and conservative politicians contend overhaul is overdue in a system that has made labor too costly and laborers too lazy. German Chancellor Helmut Kohl sharply criticized his countrymen for undermining the work ethic that forged the postwar economic miracle. "We cannot organize our country like one big recreation park," he said. Although Europeans still treasure their blanket of social protection, "they now see its tendency to crush the economy," says French economics professor Jacques Bichot.

But they are not about to cast off these "rights" so easily. Attempts to cut back on benefits and job security have resulted in violent labor protests in Italy and massive demonstrations in Germany. A crippling walkout by Air France employees forced the government to back down on plans to cut 4,000 jobs. "We are on a dangerous road," warns Rudolf Dressler, the deputy party whip of Germany's opposition Social Democrats. Yet even welfare's staunchest defenders concede that fixes are needed. The system is going bankrupt. The huge sums Europeans pay to support it -- taxes average more than 40% of gross domestic product, vs. only 30% in Japan and the U.S. -- are not sufficient to prevent big budget deficits in many countries. Welfare expenses are soaring because the prolonged recession, the worst since the early 1970s, is pushing joblessness across Western Europe toward 12%, or 23 million people.

These countries face far more chronic unemployment than the U.S., and double-digit jobless rates are common even in good years. Roughly half of those on the dole have been out of work for more than a year, as opposed to 6% in the U.S. The social-protection system designed to help people through the rough patches "suddenly is needed massively and for a long time by millions of jobless," says Lothar Stock, who heads a social-welfare organization in Frankfurt. "The system cannot cope with these new conditions."

Some Europeans argue that the safety net actually strangles job creation by sapping incentive and making it too expensive to hire and fire. The 12-nation European Community saw virtually no addition to private-sector work rolls during the 1980s, despite healthy economic growth, while millions of jobs were created in the U.S., where job security is less entrenched and benefit costs are roughly half the E.C.'s. Europe must "contain its costs and free up labor markets," argues Kenneth Clarke, Britain's Chancellor of the Exchequer.

As the recession batters Germany, where the industrial labor force is the highest paid with the fewest working hours, debate over the future of the "social market economy" dominates the headlines. While the Federation of German Industry, the umbrella management association, is calling for a "fundamental reorientation" of the pay and benefits system, the metal and electrical industries have served notice that they will not renew expiring contracts on pay and holidays. The government spent a record 33.1% of GDP -- $633 billion -- for social programs in 1992 but hopes to squeeze $26 billion from households this year by raising retirement contributions and paring payments for social welfare.

% At troubled Daimler-Benz, which will carve 43,000 from its worldwide payroll over the next 14 months, 3,000 salaried employees agreed to mild concessions. They would accept Christmas bonuses at 60% of a month's wages, instead of 100%, and give up a cornucopia of fringe benefits such as reimbursement for a child's first Communion outfit. But getting real sacrifice is not so easy. To address the needs of an aging population, Kohl sought to finance long-term nursing care by dropping up to six days of the sick pay workers get. The idea provoked a minicrisis in his coalition, forcing him to back off; an alternate plan to slash holiday pay 20% was passed by the Bundestag over strike threats.

France's government has enacted measures to lower monthly pension payments, and quietly eroded the institution of "retirement at 60" by raising to 40 the number of years that must be worked to receive a full pension. Now Prime Minister Edouard Balladur is faced with a medical system that will be $17.9 billion in debt by year's end -- and an annual medical bill of $1,906 a person. To cover it, he has raised payroll taxes, reduced coverage for medications and told doctors to ease up on prescriptions and physical therapy.

France's mighty unions are ranging themselves against any changes in the labor codes, while Balladur has broached modest alterations: allowing firms the flexibility to use extra employees at busy times and fewer off-peak and letting businesses hire young workers at less than the minimum wage if they funnel the savings into training. The government is also considering legislation to encourage companies to adopt a four-day week, which it hopes would put more people back on the payroll. Citizens are being urged to set up their own personal retirement accounts, easing the burden on employers who pay an extra 54% of a worker's salary in social-security contributions. "This is the first clear step away from the pension system we have ever made," says economist Bichot.

In Madrid the minority Socialist government has presented a tough austerity budget calling for below-inflation wage increases for the next three years in the public sector. The British welfare system -- with costs rising 3% annually -- must be reformed to target the "truly needy," according to Britain's Tory government. Under scrutiny is $13 a week paid to all mothers for each child under 16, regardless of wealth. The government has already modified an income- support program that in one notorious case gave an unemployed insurance executive $2,750 a week for mortgage payments on a $1.5 million mansion.

Yet Britain, with Europe's loosest labor laws and no minimum wage, shows that flexibility is no cure-all: its jobless rate of 10.3% is similar to Italy's, which has some of Europe's tightest worker protections. No one in Europe much admires the American model, which is equated with slums, homelessness, crime and drugs. As they see it, the U.S. job-creation machine of the 1980s produced millions of "working poor" in service jobs and cost low-skilled workers a 20% drop in the real wages. Europe, through its high minimum wages and other rules, saw a rise in real pay for those lucky enough to have jobs -- at the price of chronic unemployment for the unskilled. It is beginning to look like a trade-off that is no longer affordable, or acceptable.

With reporting by Bruce Crumley/Paris, William Mader/London and Rhea Schoenthal/Bonn