Clinging To The Safety Net

Most nations want to streamline their economies slowly

If Karl-Heinz Jacobitz were American, he would probably support Pat Buchanan. In January, after 35 years of service, the 58-year-old Berliner lost his job instructing workers at a tile and marble company, which closed its doors for lack of funds. Jacobitz says the shutdown came as a total surprise, and he isn't sure what caused it. But like bitter workers all over the world, he thinks Germany's economic angst has something to do with competition from lower-paid employees. "The big problem is that this country lets too many foreigners in," he grumbles.

There's no question that open borders, free trade, and economic globalization are causing deep anxiety for workers in the rest of the industrial world as well as the U.S. And in many countries, populist politicians are calling for a Great Leap Backward from free-for-all competition. In Britain, Anglo-French financier Sir James Goldsmith has put $30 million of his own money into the fringe Referendum Party, which aims to keep Europe from integrating further. France's extreme-right Front National, led by Jean-Marie Le Pen, advocates strict limits on immigration and rails against a common currency for Europe. In Italy, the far-right Alleanza Nazionale wants to slow privatization of state assets.

FINE-TUNING. Like Buchanan's, such movements play to insecurities bred by global capitalism. But they are mostly splinter groups unlikely to garner wide support. Rather than turning to isolation and protectionism, mainstream politicians in Continental Europe and Japan are trying to fine-tune their economic models to cope with the challenges of a world market. And they don't want to follow in America's footsteps. "Countries don't react the same way [to global competition], even though the economic realities are similar," says Peter Berger of the Institute of Economic Culture at Boston University.

Europe and Japan for decades have had a more paternalistic corporate culture and much wider social safety net than the U.S. And most countries have opened their borders and deregulated their industries more slowly. That's not about to change. Rather, Europe and Japan will probably try to limit further damage from global competition. In Europe that could mean a delay in monetary union, a rise in regulatory barriers to keep out cheap imports, and carefully orchestrated central-bank moves to avoid currency overvaluation that price up exports. In Japan, deregulation is likely to be gradual, and companies will keep downsizing by attrition rather than through huge layoffs.

Germany's attitude is typical of the non-Anglo-American approach. Still one of the world's highest-cost producers, the country is bleeding jobs abroad, resulting in unemployment of nearly 11%. Structural problems, including overregulation and steep tax rates, keep economic growth stubbornly low: just over 2% in 1995 and projected at barely 1.5% this year. Although Germany has cut more than 1 million manufacturing jobs in the last five years, it was late to jump on the bandwagon of corporate downsizing. And while Chancellor Helmut Kohl is the standard-bearer for European monetary union, keeping Germany's debt within the required levels will be tough without reducing social benefits such as high unemployment insurance, early retirement awards, and medical coverage.

But Germany has no intention of radically speeding up deregulation and layoffs. Klaus Friedrich, chief economist at Dresdner Bank, believes German leaders should continue trimming the social safety net, cutting taxes, and reducing labor costs--but not too fast. "We want some sort of middle way" between the U.S. approach to restructuring and Germany's generosity, he says. Germans are proud of the social order bought by high public spending and corporate largesse--and point with horror to the crime, poverty, drug use, homelessness, and poor public education that Americans endure. "We would not trade places with the U.S.," says Friedrich.

The Italians agree. Angst is running high in a country that enjoyed nearly four decades of spectacular postwar growth. After a crippling recession hit in 1993, many private-sector companies have slimmed down, racking up productivity gains of close to 4.5% a year while real wages barely budged. Now, Italy is under pressure to shrink its bloated public sector, which accounts for 44% of economic output. Yet while Italy's economists agree that government must shrink, they don't believe the U.S. model of cutting the welfare state to the bone is a viable one for the Old World. "In Europe, the hard line doesn't work," says Giuseppe Roma, director of Rome-based think tank Censis.

Fears of public-sector downsizing run especially deep in France. When the French last December paralyzed the transit system with a 21-day strike, it wasn't the 12% unemployment rate they were protesting. Their great fear is destruction of the welfare state as France tries to reduce its public deficit, which hit 5.5% of GDP last year, to meet the 3% requirement for European monetary union. In fact, France's private sector has responded well to the challenge of globalism. After Britain, France was the first European country to get corporate restructuring in high gear in the mid-1980s.

But as the winter strikes show, the French are balking at the next step. Indeed, resistance to deep cuts in public spending seems likely to postpone European monetary union--the next step in integrating Europe's markets. Warns Edward E. Yardeni, chief economist at Deutsche Morgan Grenfell in New York: "If the Europeans persist in blindly trying to meet the Maastricht [debt and deficit] requirements, they'll drive their economies into deeper recession." Politicians seem likely to choose slower progress toward EMU rather than risk further disruptions at home.

Japan, too, is approaching globalism from an economic culture vastly different from America's. That's not to say the Japanese aren't suffering. Under pressure from a still-high yen and stiff labor cost competition in Southeast Asia, manufacturing companies are moving jobs offshore. The official Japanese unemployment rate of 3.4% could be 5% or higher when people still job-hunting after six months are included. Lifetime employment is mostly a fond memory.

"PHILISTINE INDIVIDUALISM." But most corporate downsizing is occurring by attrition. And in the service sector, companies still employ vast numbers of barely productive workers to maintain stability. In Japan's managed economy, "we believe gradualism is better than rushing," says Shinichiro Kobayashi, a senior manager at Bank of Tokyo. Instead of the ruthless layoffs favored by their U.S. counterparts, Japanese CEOs are pushing for flat wages. They are also taking pay cuts, even though at around $558,000, compensation for the average Japanese corporate chieftain is nearly half the $927,000 average a top boss makes in the U.S.

One reason non-Anglo companies can afford to take more time to restructure is that they are less subject to the scrutiny of shareholders breathing down their necks for quarter-by-quarter profit and dividend increases. Now even Britain, which slashed and burned its way to corporate competitiveness after the boom-bust cycle of the 1980s, is rethinking the U.S. model of pursuing profitability at all costs. "I think you can have free markets without aggressive, philistine individualism of the kind that America believes in," says London Business School Professor John Kay. Kay is the main thinker behind Britain's "stakeholder" movement, urging the private sector to retrench from pleasing financial markets at the expense of employees and of long-term investment.

The banner has been taken up by political front-runner Tony Blair, who believes the stakeholder model should be extended to government. Blair says he would enact a minimum wage, require companies to set up worker councils, and improve social services. "The purpose is to get a long overdue cultural change," he told BUSINESS WEEK.

It remains to be seen whether Blair will get his stakeholder economy, and whether Buchanan will goad Corporate America toward a form of competitiveness that's easier on workers. What's certain is that the economic pressure from the fast-growing emerging economies will continue to challenge the First World well into the 21st century. More pain is surely ahead for the workers of the industrialized nations. Yet national economic styles are unlikely to disappear. It may well be that rather than follow the Americans' lead, Europe and Japan will find a different way to serve the harsh taskmaster of global capitalism.