The spectre haunting Europe: Record numbers are out of work and worse is to come. Alan Friedman, the American business journalist, went in search of explanations, and solutions

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ALMOST 18 million people in Europe, or 11 per cent of the workforce, are unemployed. By next year the number is expected to reach 20 million, a quarter of them between 18 and 25. Political, business and trade union leaders agree that unemployment is now the Old World's most dangerous problem.

'Europe is in a pathetic state,' says Francois Perigot, head of CNPF, the French employers' federation. 'We are living beyond our means. We have lost our technological edge. We are not prepared for the future, or for international competition.'

Even economic recovery will hardly help, for economists believe that annual growth of 2.5 per cent is needed just to stand still in a labour market expanding by about 0.5 per cent a year. And at the moment talk of growth at such a pace is pie in the sky. Two of the biggest European economies, Germany and France, are still stagnating while the recoveries in Britain and Italy are patchy at best. This year, Germany's economy will be lucky to grow by 1 per cent, and France's by slightly more. It will probably be 1996 before either economy grows enough to generate any jobs.

'Even if we could get back to growth of 3 to 4 per cent, which is extremely optimistic, that would still not create jobs for those now unemployed,' concedes David O'Sullivan, a senior adviser to the European Union's Employment Commissioner, Padraig Flynn.

In the view of Jean-Claude Paye, secretary-general of the Organisation for Economic Co- operation and Development (OECD), the problem is structural. For 20 years Europeans 'have gone on adding to the social safety net without taking into consideration fundamental changes in the world economy', he says. The result is that from cycle to cycle, unemployment has ratcheted upward, wages and social security contributions have increased, and European industry has found itself less and less competitive.

The contrast with the US is telling. Between 1970 and 1990, the US economy created 38 million jobs, against just 10 million in Europe. Real wages in the more flexible US market grew by less than half a per cent each year; Europe's real wage growth was three times as fast.

From conversations with more than two dozen government officials, corporate executives, union heads and economists, a bleak picture emerged. Europe, they say, probably has neither the time nor the political will to change enough to allow the private sector to compete globally and thus generate the number of new jobs needed to contain the unemployment crisis.

Almost everyone agrees on the desirability of slashing the red tape, taxes and the non- wage labour costs that support Europe's social protection programmes, but few believe it will happen soon. Theoretical solutions abound, from the job-creating infrastructure investment plan contained in the recent White Paper prepared by Jacques Delors, President of the European Commission, to the mantra-like chant about deregulating Europe's jobs market from the Conservative government in London. But there is little confidence that either will be implemented.

And Europeans acknowledge that if governments and business are unable to tackle the problem soon, they face the spectre of social unrest.

THE restructuring of companies to achieve greater efficiency, a process in which Europe lags well behind the US, may be necessary but it is bad for jobs, at least in the short term. Mr O'Sullivan voices the opinion of many: 'I have seen no evidence that achieving more competitiveness will solve unemployment. If we are honest with ourselves, the drive to restore industrial competitiveness is hostile to employment.'

In Germany, which only began serious restructuring two years ago, some 900,000 jobs have been lost since 1991. This year, another 450,000 are expected to go. Across the continent as a whole, the picture is no different. A recent study by consultants DRI-McGraw Hill suggests that, in 17 industrial sectors ranging from textiles to consumer electronics, up to 12.5 per cent of jobs will have to go by the end of the decade.

Konrad Seitz, an industrial policy expert who is also Germany's ambassador to Rome, says this will make some industries competitive again. 'But the price is clear: a massive reduction of the labour force, a massive rise in unemployment.'

The pain will be made all the greater by the trend towards transferring production outside Europe to places such as Southeast Asia, where wages are lower. As Carlo De Benedetti, the chairman of Olivetti, puts it, this is not a matter of choice: 'You either transport your assembly or lose your industry.'

One course thought to offer hope is for Europe to develop its service sector, but this would require cultural change, says Heino Fassbender of the management consultants McKinsey and Co. In retailing, for example, Europe will have to relax restrictions on store opening hours and zoning laws.

But the changes must go much deeper. Like most others in the corporate world, Mr Fassbender wants governments to tackle the welfare state and take action to reduce taxes and non-wage contributions, which in Germany, France and Italy can amount to nearly half of total labour costs.

There is resistance to this. Creating new jobs in the service sector or seeking part-time solutions may be possible, but they often point toward the creation of lower-wage jobs. 'No one in Europe wants to become Americanised,' says Horst Siebert of the Kiel Institute of World Economics. 'There is a feeling that we are in a high- wage environment and it should stay that way.'

Almost all of the Continent's political leaders see a need to cut Europe's bloated public sector, and its equally costly social safety net. Across the European Union, nearly one-fifth of the labour force consists of public sector employees, not counting the millions in state-owned companies.

Yet few politicians are willing to slash state jobs. 'With 3.3 million people unemployed in France we are playing with fire,' said Jean-Louis Giral, a prominent businessman. 'Our society is very nervous.'

'Unemployment,' says Werner Tegtmeier, state secretary at Germany's Labour Ministry, 'is the number one issue affecting Helmut Kohl's re-election chances. We are trying to come up with proposals.'

Much of European society, meanwhile, is unwilling to surrender its social benefits and other privileges. Nowhere is this more true than in the case of the German Beamter, or civil servant, who enjoys what has been called the ultimate cradle-to-grave protection scheme. Beamter status carries a wide range of health care, vacation and other benefits, and it applies not only to bureaucrats, but to doctors, professors and many other occupations.

Along with the public sector problem, European governments also face runaway spending on some of the most generous welfare state benefits in the industrialised world. EU states spend on average more than 22 per cent of their gross domestic product on social protection plans; in the US the proportion is 14.6 per cent.

'What we have in many cases are 1960s-style welfare states trying to operate in the high-unemployment 1990s,' says Robin Marshall, chief economist at the Chase Investment Bank in London. 'The social fabric is straining.'

'I don't want to be presumptuous,' says Robert Reich, the US Secretary of Labour, 'but the real question is whether the social safety net is a springboard for job creation or simply a safety net and nothing more. In Europe, it is a very generous safety net which is probably not well adapted to getting people into new jobs.'

This certainly seems to be borne out by the figures. Between 1970 and 1992 the EU created 3 million new private sector jobs, compared with 7 million in the public sector. In the same 22 years, the US saw 32.8 million new private sector jobs and only 6 million in the public sector.

Padraig Flynn, the EU Employment Commissioner, defends the concept of a safety net, but concedes that Europe must tackle its 'entitlement culture'. The public sector, he says, 'has to be controlled'. This can be done without drastic steps, he says, through wage moderation and attrition. But even this is easier said than done.

It was a Bundesbank council member, Horst Schulmann, who put his finger on the terrible reality that Europe is facing as it seeks to tackle the twin problems of public sector inefficiency and welfare costs. He spoke firmly of the urgent need to 'attack the problem at the root', but added: 'No major party is likely to act before next October's general election.'

Politicians across Europe face elections this year and as a result, their critics say, are failing woefully to take real action.

In France the government of Edouard Balladur, facing a record 12.2 per cent jobless rate, has spoken boldly of the need to cut taxes on employers and create a more flexible labour market. But since last autumn Mr Balladur has repeatedly caved in to union and worker demands.

When striking Air France employees caused air travel chaos in October, he quickly backed away from a plan that called for pay cuts and 4,000 job losses. After French fishermen burned the 17th-century parliament building in Rennes last month, the government offered cash benefits to keep them

happy. And, faced with trade union protests, the Balladur government watered down a planned law that was supposed to create jobs by allowing employers to pay young workers less than the minimum wage.

In Germany Mr Kohl, who is seeking to cut down on Germany's social costs, touched a raw nerve when he proposed new nursing care insurance that would be funded by depriving workers of two days' holiday pay. A compromise was agreed, but the debate showed the sensitivity of toying with the welfare state mentality.

In Italy, whose political direction will be decided in a general election in a week's time, Piero Barucci, the Treasury minister, admits there have been 'excesses in social coverage'. But he swears: 'Europe will never become like the USA and give up its social safety net.'

There is one political initiative that every European government favours as a means of raising money: privatisation, as pioneered by the British. But there is a drawback; like corporate restructuring, privatisation usually creates unemployment.

For example, Deutsche Telecom, a candidate for privatisation in Germany, has far too many workers, according to Konrad Seitz. The same is true of IRI, the giant Italian conglomerate that is currently privatising some of its bank subsidiaries. IRI employs 300,000 people, and to make it a competitive company 'you would have to shed half of the workforce, but what do you do with them?'

AS Europe's more thoughtful decision-makers ponder this worsening jobs crisis, a dark vision haunts them. They see the long-term unemployed - especially the jobless young - being shunted to the margins of society, causing many to turn to crime or drugs, or racism and the extreme political fringe.

'Impoverishment, growing violence, social and political instability - that could all happen,' says Mr Seitz.

The jobless, says Stephen Pursey, head of economic and social policy at the International Confederation of Free Trade Unions in Brussels, begin to lose faith in the institutions that surround them. 'They start to question whether it's worth voting in elections. They start looking for someone to blame, and turn to politicians with messianic solutions, often those who blame foreigners. We've been this way before in Europe, 50 years ago. Nobody wants to go back there again.'

Nearly half of the European Union's unemployed have been without jobs for more than a year. By contrast, in the US the long-term unemployed represent little more than 6 per cent of those without jobs.

Many in Europe expect a rise in urban violence by the year 2000, linking it specifically to the high levels of long-term unemployment among the young. In France almost a quarter of the unemployed are aged 18 to 25; in Britain it is almost a third; in Italy nearly half.

Bryan Gould of the British Labour Party says: 'Europe's policymakers are taking very severe risks.' He predicts permanently high unemployment and warns that the long-term unemployed in Europe will become increasingly alienated, both socially and politically. 'This is the classic seedbed for extremism and racism, and that is what happened in Europe in the 1920s and 1930s, when policymakers averted their glance from the social damage.'

This fear is by no means exclusive to those like Mr Gould who are left of centre. 'Governments are speaking about the unravelling of the social fabric,' says Mr Paye at the OECD. 'They are rightly alarmed.' A US diplomat said: 'Many European politicians need a wake-up call, or they will find their societies in big trouble. Even those who recognise the problem of long-term unemployment seem unwilling to act.'

Ursula Engelen-Kefer, deputy chairman of Germany's Trade Union Council, says it may only be later this decade that the alarm bells will finally ring. 'If measures are not taken, we are going to see a situation in parts of Europe that resembles the pattern of homelessness and crime in Manhattan. The rich will have expensive, well-guarded apartments and the unemployed will have a struggle to even have a home.'

Large numbers of long-term unemployed naturally have financial implications for governments. Unemployment benefits, initially designed as a form of insurance against income loss between jobs, are now being used as instruments for long-term income support. This does not happen in the US, where unemployment insurance benefits generally expire after six months and represent an average of 50 per cent of previous earnings. In Germany, by contrast, the benefit can be paid for up to 35 months and amounts to 63 per cent of previous income.

SPECIALISTS say there are constructive steps that can be taken. The position of the European Round Table of Industrialists is not far removed from the Delors White Paper on employment. They could probably agree on stimulating private sector investment in infrastructure projects.

Policymakers also agree on other possible lines of advance: as Europe's population ages, jobs may be created in the nursing and health-care sector. Environmental services and advanced transport systems could also be net job generators. Yet officials in Brussels complain the Delors White Paper is being ignored by most EU governments.

The reality is that short- term politics are a brake on action. Europe's leaders admit this much: things will have to get worse, they say, before bold but truly effective steps are taken to make them better.

This is an abridged version of articles that appeared in the 'International Herald Tribune'.

(Graphs omitted)