Analysis: After the Great Recession, the Great Regression?

After the Great Recession, Europe has embarked on a Great Regression.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The European Union, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

The prevailing philosophy is that people have been paying themselves too much in some countries and we should be more like Germany, where people didn't get a real pay raise for 10 years, says John Monks, head of the European Trade Union Confederation.

Unlike bankers and bondholders, the European social model is being given a haircut -- a light trim in Nordic countries but a brutal short-back-and-sides in some others.

The roll-back of wages and social benefits is toughest in Greece, Ireland, Romania and Latvia, which are under international bailout programs designed by the International Monetary Fund and the European Commission.

The messages are the same: cut wages, public sector wages, minimum wages, reduce benefits and raise retirement ages and also reduce employment protection in certain countries, Monks told Reuters in an interview.

WIDENING INEQUALITY

Under the banner of fiscal sustainability, Europe's mostly center-right governments are unwinding some cherished gains of the era of social progress that began after World War Two, at the price of widening inequality.

A competitiveness pact which German Chancellor Angela Merkel wants the European Union to adopt next month includes a greater harmonization of retirement ages and the abolition of inflation-indexing of wages, according to a leaked draft.

You cannot share a single currency with completely divergent social systems, Merkel told the World Economic Forum in Davos last month.

She and French President Nicolas Sarkozy ran into resistance when they put the proposals last week to fellow EU leaders, some of whom saw them as socially explosive.

Greek Prime Minister George Papandreou, one of Europe's few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labor standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

The question for Europe is: do we emulate that model? ... because what we are seeing is on the one hand a race to the bottom at the level of the middle class and working class, and at the other end a race to the top, Papandreou said.

Greece, rescued from the brink of bankruptcy last May, has adopted deep austerity measures in return for EU/IMF loans, including steep public sector pay and pensions cuts.

The conditions include a rewriting of its labor laws that trade unions and the labor minister say would gut workers' rights to collective bargaining and job security.

Ireland cut its minimum wage by 11 percent to 7.65 euros ($10.40) an hour under a 2011 budget that forms the basis of its EU/IMF assistance program.

Where such measures have not been directly imposed by the IMF and the European Commission, they are being adopted out of fear of having to request a bailout (Spain and Portugal), or of the loss of a top-notch credit rating (Britain and France).

Sarkozy forced through an increase in France's minimum retirement age to 62 from 60 last year over the resistance of trade unions which staged seven one-day strikes.

Spain and Portugal, under much fiercer bond market pressure, have avoided such labor unrest by negotiating social pacts.

The Spanish government, unions and employers signed an agreement last week that will gradually raise the retirement age to 67 from 65, with pensions based on the last 25 years' earnings rather than the last 15 years.

The accord included a reform of collective bargaining and measures to fight 20 percent unemployment, particularly targeted at young job-seekers and the elderly unemployed.

NO ALTERNATIVE?

In words that recall former British Prime Minister Margaret Thatcher, Merkel says there is no alternative to trimming Europe's entitlement programs, although Germans will be spared the harsher measures being enforced elsewhere.

But Monks insists that Berlin's own example proves there is an alternative.

Germany's booming growth, and the parallel recovery in the Netherlands and Austria, whose economies are intertwined with Germany's, is based on long-term investments in high-quality manufacturing industry, he said.

These are not low-wage countries. They have privileged public servants, strong employment protection laws, strong collective agreements.

These are not short-term, shareholder, value-driven, flexibilized economies. Their prosperity is driven by long-term investment in technology and innovation, Monks said.

Moreover, Germany subsidized companies to keep staff on the payroll working short-time when order books were empty, enabling them to retain a skilled workforce for the recovery.

(Editing by Susan Fenton)