TCS Daily

The Butterfly Effect

By Joshua Livestro - August 17, 2004 12:00 AM

The new European Commission, which starts its five-year term in November, is probably the most free-market-friendly ever to be appointed. On the core portfolios, the incoming President José Barroso has appointed people with a distinctly Anglo-Saxon economic outlook. Competition has gone to Neelie Kroes, the former Dutch transport minister and current president of Nijenrode Business School. The internal market portfolio is the new preserve of the architect of the Irish economic miracle, Charlie McCreevy. And the trade post will be filled by the British former Trade and Industry Secretary Peter Mandelson. With taxation going to the openly eurosceptic Ingrida Udre from low-tax Latvia, Barroso has staffed all the economic policy-making posts with people that can be trusted to push through his program of ambitious economic reforms.

Obviously, the Commission on its own can do very little to convince Old Europe of the need to implement its reform measures. If it wants to be successful, it needs the support of the Council of Ministers and the European Parliament. In both institutions, Old Europe still wields enormous power. Without a real change of heart on economic matters at the national German and French level, Barroso and co are unlikely to succeed in implementing their ambitious free-market plans.

What is needed is some sort of event, completely beyond anyone's control, that could start a chain reaction that would eventually force the likes of France and Germany to come to terms with the new economic realities of the 21st century - a sort of butterfly effect if you will. It seems such an event may in fact have already taken place. In early June of this year in the towns of Bochum and Kamp-Linfort in the German province of North Rhine Westphalia, electronics company Siemens signed an agreement with the powerful union IG Metall to save 2,000 jobs at the local mobile phone factories from being moved to lower cost Hungary. Siemens estimated that a move to Hungary could help it save as much as 30 percent on its wage bill. In order to compete with this, German workers would have to be willing to increase their working hours from 35 to 40 per week - without any increase in pay. Faced with the choice between no work and more work for no extra money, they obviously chose the latter.

At first sight this may seem an innocent event, a one-off attempt to save a local factory by use of extraordinary means. The chairman of IG Metall, Jürgen Peters, was quick to put this spin on events. According to him, this deal could in no way be interpreted as a precedent for similar agreements elsewhere. He even warned that a Europe-wide move towards a 40-hour working week could prove to be catastrophic, triggering "the biggest job destruction program since World War II." It is difficult to see quite how that would work, by the way: if companies can produce more products at the same cost, that inevitably leads to increased profit margins, which in turn leads to further investment and, eventually, job creation.

Peters' economic reasoning seems fatally flawed. His prediction that this would be just a one-off deal proved equally faulty. As it happens, it took just two weeks for the butterfly's flutter in Bochum and Kamp-Linfort to cause a storm across Europe. In a secret ballot, workers at office supply distributors SMEAD in Groningen, The Netherlands, and at machine part manufacturers Robert Bosch in Lyon accepted extra working hours without extra pay in order to save jobs from being outsourced to Eastern Europe. Within a month, companies across the continent have started demanding similar concessions from their own staff - from Dutch banking giants ABN-AMRO to the Swiss food producers Nestlé.

One small event at a plant in Bochum has set in motion a chain of events that may yet end in the final collapse of the moribund European welfare state. In a matter of weeks, a tradition of 100 years of continued working time reduction is itself reduced to rubble. And all that happens without a word of protest (apart from the unions, who obviously recognize a threat to the sclerotic European welfare state when they see one). A recent poll by German polling organization Ipos, published in Die Zeit, showed that 57 percent of respondents thought it was inevitable that all German workers would have to accept longer working hours, even without extra pay. For the first time ever, a plurality of respondents was even willing to accept that free-market policies might be the only way out of the German economic quagmire.

If it's true that politicians usually follow where the people lead, expect a stampede of German legislators into the free-market camp in the near future. If that happens, President Barroso might want to consider sending a little Thank You note to the butterflies that made it all possible: the management and workers of the two Siemens factories.


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