Europe Gets In Shape By Pushing Out Pink Slips

The chairmen of Germany's Big Three auto makers didn't pull any punches in a Bonn meeting on Feb. 12 with Chancellor Helmut Kohl. Car sales in their huge home market, they told him, may plunge 15% this year. At the same time, they're under the gun to improve productivity as Europe opens to Japanese imports. That adds up to one thing, the executives told Kohl: job cuts on a scale Germany has rarely seen. BMW will lop off 3,000 workers, while Daimler Benz may dump 20,000, industry sources say. And Volkswagen will follow in a year or two, cutting 10,000 or more.

Across Europe, companies are facing a new round of painful restructuring. They are stepping up the cutbacks that started when European economies softened more than a year ago. Now, the pressures to streamline are even stronger. Punishing German interest rates and weak exports to the U.S. have prolonged Europe's economic slump. Corporate profits are in a slide. And going into the home stretch to the single market, competition from Japan and even Eastern Europe is building. That means the jobless rolls will continue to rise even if most European economies manage to turn upward in coming months (charts).

RIPPLE EFFECT. A unified Europe was supposed to create jobs, not destroy them. Over the long pull, it probably will. But Europe is discovering there's a near-term price to pay. "We think all the restructuring is going to slow growth for a couple of years," says Jeff M. Fettig, a vice-president of Whirlpool Corp.'s European arm. Workers who lose their jobs, Fettig notes, won't buy washers and refrigerators.

Most troubling are the cutbacks in Europe's powerhouse economy, Germany. Largely immune until now from Europe's restructuring wave, German auto makers plus such blue-chip giants as chemical producer BASF and steelmaker Hoesch are suddenly chopping jobs with a vengeance. With the post-unification consumer spree fading, so is optimism for a second-half pickup in the German economy, which has declined for three quarters.

That's bad news for Germany's trading partners. German demand has been the main safety net keeping the rest gf Europe from following Britain into recession. The Bundesbank doesn't even seem disposed to offer lower interest rates--something Germany's partners have long clamored for. German inflation, still a shade above 4%, won't permit that soon, Bundesbank officials indicate.

For many European companies, the ultimate reason to cut jobs is Japanese competition. High-wage Germany is going through a wrenching debate on its world competitiveness. Similar soul-searching is under way in other countries. Ford of Europe Inc., for example, says its British plants are 33% less productive than its Continental plants, which could just as easily supply the British market. So Ford recently announced 2,100 new layoffs in Britain.

Now, another region poses a threat to EC workers as well: Eastern Europe. Eager to form political ties with former East bloc countries and to boost their economies, thus heading off a tidal wave of immigrants, the EC is lowering barriers to Eastern goods. Steel, for example. In March, EC quotas on Eastern European imports will start falling. Facing a flood of cheap steel, EC producers are rushing to boost efficiency. Europe's biggest steelmaker, France's Groupe Usinor Sacilor, has announced plant closings and investments in new technology that will idle 8,000 employees. "Eastern Europe is a serious menace," says a Usinor executive.

The same is true in machine tools--Germany's No. 2 industry after autos. Already fighting Japanese and South Korean imports that undersell them by 20% to 30%, German manufacturers now fear a flood of cut-rate basic machine tools from Czechoslovakia and Poland.

RESTLESS UNIONS. The restructuring binge is hitting white-collar workers harder than in the past. They're the main victims of 2,350 job cuts announced in February by British Aerospace PLC, which lost $274 million last year. Europe's young workers are also suffering. Unemployment among Italians and French under age 25 is about 25%.

With so many jobs disappearing, Europe's unions are demanding government action. "We want spending on infrastructure--housing, schools," says Jacques Bass, economist of a big French union, the Confederation Francaise Democratique du Travail. In Italy--Europe's unemployment leader--labor pressure has won government jobs for 1,000 employees being laid off by Olivetti, plus $3.75 billion in promised state orders for the money-losing company.

But most governments are hanging back. They fear inflation, and they also sympathize with industry efforts to boost efficiency. The risk is that out-of-work voters may rush toward extremist parties--such as France's National Front. Others may question whether a united Europe is such a great idea after all. That could complicate approval needed by every EC country of the new Maastricht union treaty, with its stiff rules on inflation, debt, and deficits. Politicians such as Kohl face a tough selling job in the months ahead, persuading displaced workers to withhold judgment on the new Europe for a while longer.