ANALYSIS - Austerity protests may curb euro zone reform

PARIS Tue Sep 28, 2010 5:03pm IST

Coal miners prepare a barricade to block the A-64 road between Lieres and Oviedo in northern Spain September 26, 2010. REUTERS/Eloy Alonso

Coal miners prepare a barricade to block the A-64 road between Lieres and Oviedo in northern Spain September 26, 2010.

Credit: Reuters/Eloy Alonso

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PARIS (Reuters) - Anti-austerity demonstrators are back on the march across much of Europe, fuelled by anger at crisis-induced spending cuts, pension and labour market reforms that will hit the old, sick, poor and public employees hardest.

Yet despite strikes and protests called by shrinking trade unions, there seems little prospect of any euro zone government abandoning structural reforms or savings measures driven by financial market pressure, the European Union and the IMF.

"Public opinion and the unions are fighting a rearguard action and they know it," said Ronald Tiersky, professor of European politics at Amherst College in the United States.

"Cutting back welfare state benefits has been on the agenda for a few decades and the financial crisis has brought additional public awareness of the limits to sweet deals."

Spanish unions have called the first general strike in eight years on Wednesday against public spending cuts and easier hire-and-fire laws enacted by the Socialist government. The umbrella organisation of EU unions plans Europe-wide protests against austerity on the same day.

Neither action is likely to be big or sustained enough to seriously trouble governments, analysts say.

On Europe's fringes, a backlash against cuts may hasten the fall of burned-out governments in countries such as Ireland and Portugal. However, bond market vigilantes are likely to ensure that their successors continue or even accelerate retrenchment.

Irish trade union leader Jack O'Connor told Reuters in an interview in May that he opposed a prolonged strike because it would undermine the credibility of government bonds.

For a PDF special report on Europe's unions, click on: link.reuters.com/bam75p

Looking ahead, the unpopularity of fiscal and economic reforms may make it hard for leaders in Spain and France to win re-election when the time comes, even though French President Nicolas Sarkozy's plan to raise the minimum retirement age to 62 is mild compared to most European neighbours.

UNFAVOURABLE CLIMATE

As Jean-Claude Juncker, chairman of the Eurogroup of finance ministers of the countries that share the euro single currency, famously said in 2007: "We all know what to do but we don't know how to get re-elected once we have done it."

The big exception for now is Greece, the country that triggered the euro zone debt crisis earlier this year.

Fear of default and the external discipline of an EU-IMF loan programme have brought about painful, radical reforms and budget cuts without destroying the popularity of Socialist Prime Minister George Papandreou, despite frequent protests.

But as economist Hans-Werner Sinn of Germany's Ifo institute told a conference in Italy this month, political fatigue with austerity policies typically sets in in the second year and could yet push Greece to default or the brink of civil war.

In the longer term, economic liberals fret that a mood of anti-capitalist discontent will make it harder for the EU to push on with the kind of bold, market-opening reforms they say are essential to boost Europe's anaemic economic growth.

"The danger of social protest is real but more subtle," said Charles Grant, director of the Centre for European Reform think-tank.

"I don't think it will lead governments to fall, but it is changing the intellectual climate in Europe to make further moves towards market liberalisation less likely, and hence the long-term stability and survival of the euro less likely."

He cited recommendations by elder statesman Mario Monti for reviving the European economy by completing the single market in key areas such as services and energy, where regulatory barriers and the interests of local incumbents still impede competition.

The European Commission is due to issue proposals based on Monti's report in the coming weeks, but EU sources say they have been watered down for fear of triggering a backlash in France and Germany, which emasculated earlier reform efforts.

"Social protests reflect a shift in the Zeitgeist (mood of the age) that will damage economic efficiency and productivity and lead to slower growth in Europe," Grant said.

Sarkozy has said that the pension reform going through parliament, designed to restore the financial balance of France's pay-as-you-go system by 2018, will be the last major reform of his five-year term, which runs till May 2012.

German Chancellor Angela Merkel's centre-right coalition has also scaled back ambitions for tax reform and faces a growing protest movement over its decision to extend the life of the country's nuclear power stations.

Even in non-euro Britain, where the centre-right coalition has a relatively permissive political environment for radical budget cuts, Ed Miliband's narrow upset victory to lead the opposition Labour Party may have been partly due to growing hostility to looming austerity.

(Editing by Jon Boyle)

(For more business news visit Reuters India)

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