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In Europe, shock therapy swings from theory to brutal necessity

Brutal shock therapy can reshape industries and agencies virtually overnight.

It happened in 1981, when U.S. president Ronald Reagan fired the air-traffic controllers. After that, American union power was never the same. On a much larger scale, Maggie Thatcher buried the British coal workers alive, essentially destroying one of the country's biggest, though uncompetitive, industries. (Before the 1984 coal strike, there were 140,000 coal workers; the figure is now about 8,000.) In 1986, Rupert Murdoch clobbered the print unions in Britain when he hustled his newspaper operations from Fleet Street to Wapping, in East London. The move triggered a newspaper renaissance.

Greece may have had its Reagan-Thatcher-Murdoch moment last week, when Prime Minister Antonis Samaras, leader of the centre-right New Democracy party, pulled the plug on Hellenic Broadcasting Corp. (ERT), putting about 2,700 employees on the dole.

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The mass cull of state workers, the first of its kind in a country struggling to meet its austerity commitments, was swift, vicious and impolite – it was done without consulting New Democracy's junior coalition parties, Pasok and Democratic Left. ERT's shutdown triggered mass protests and a general strike, and may yet result in an early election. On Friday, Democratic Left abandoned the ruling coalition, though the remaining two parties will retain a majority, barely.

It's too early to say whether Mr. Samaras's napalm strike on ERT will succeed – it could still cost him his job if Greece makes a premature trip to the polls. But if his government survives, and ERT remains shut while a new, slimmed-down version is designed, watch out. Greece could be on its way to a revolution that would see bloated, profitless state companies and industries shut or radically overhauled. All the main parties in Greece had agreed that ERT, a dumping ground for political hacks, needed a shake-up. Mr. Samaras just decided to speed up the process (bizarrely, the junior coalition and opposition parties want the ERT workers back on the job during restructuring, giving the poor souls the rare opportunity to get fired twice in the same year).

Turning industrial Greece on its head has gone from nice idea to necessity. Ditto Italy, the euro zone's third-largest – and most indebted – economy, whose fortunes will make or break the common currency. These two countries, plus Spain, which has the highest jobless rate in the Western world, are in sore need of radical industrial overhauls.

The reason: To help preserve their middle classes, which are being bled dry by ever-rising taxes as austerity programs grind their way through the system. If the middle class is to survive in an era of zero growth, the burden of supporting uncompetitive, money-losing industries will have to stop. ERT became unaffordable in a country with a deep, job-shredding recession.

While Italians and Greeks have supposedly turned tax evasion into national sports, the reality is a wee bit different, partly because so much taxation is automatic, and high, like the value-added tax (VAT) and fuel taxes. The Italian tax haul as a percentage of gross domestic product is 43 per cent, according to 2009 OECD figures. That's high by any measure. The equivalent figures in Germany are 37 per cent, in Britain 36 per cent, in Japan 27 per cent, in the United States 24 per cent and in Canada 31 per cent (Greece is mid-pack, at 30 per cent).

The high Italian taxes mean that the middle class is carrying most of the freight for the Italian government. Italian corporations typically pay little tax and wealthy Italians are experts at avoidance or evasion. As the Italian economy shrinks, manufacturing jobs disappear and the country becomes a baby-free zone – the birth rate is one of the world's lowest, at 1.4 per woman – the middle class will pay even more tax, until they reach breaking point. Already, there are signs that they're tapped out. The traditionally high Italian savings rate is plummeting. At the same time, the lack of jobs means that parents are supporting children they cannot afford. About half of young men, many of them with university degrees, are crowding their parents' apartments. Meanwhile, new armies of pensioners have to be supported too (no wonder Italy leads the world in pension reform).

Italy, in spite of its recession, debt-to-GDP ratio of close to 130 per cent and a prime minister, Silvio Berlusconi, who did essentially nothing to reform the economy during his three stints in the saddle, had dodged a lot of bullets. For that, it can mostly thank the European Central Bank, which flooded Italian banks with liquidity and unveiled a program to backstop the sovereign bonds of struggling countries.

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Italy may not get lucky again. The Greek bailouts are testing Germany's patience and Germany would have no patience for a copy-cat performance in much larger Italy. That means both countries, and Spain, will have to get their own acts together. Greece made a bold, though far from crazy, move by shutting ERT. Other state-controlled companies and agencies can expect similar treatment if the government of Mr. Samaras survives. Italy will have to do the same with its burdensome state enterprises. The alternative is to tax the job-creating middle class into oblivion.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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