The Holiday's Over

All around her, Caroline Blet can see signs of the slump that has beset the once-flourishing town of Ris-Orangis (pop. 25,000), 15 miles south of Paris, for more than two years. Things went from bad to worse in March, when the big LU cookie factory closed, taking 412 jobs with it. Shopkeepers complain of declining sales, and on May 25, five buses carried protesters from the town hall to antigovernment demonstrations in the capital. Blet, 41, runs a small real-estate agency that has so far escaped the downturn, as falling interest rates continue to boost house sales. But she has no illusions about her longer-term future. "My parents' generation was very lucky. They bought property cheaply before inflation came, they benefited from huge advances in health care and they retired at 60," she says. "I know I won't be able to retire at 60: I'll have to work two, three or four years longer."

That sentiment is echoing throughout Europe: the holiday is over. During the past quarter-century, workers have grown used to ever-rising wages and ever-shorter working lives. They enjoy long vacations and reduced workweeks, and retire well before 65; the French strikers last month were marching to protect full-paid retirement in some positions at the not-so-ripe-or-old age of 52. European countries were proud to provide free education and health care and generous pensions. Those benefits were affordable as long as a buoyant economy made up for the costs. Governments have whittled away at them, but now the one-two punch of a shrinking population and dwindling productivity means the perks are no longer sustainable — and makes an imperative of deep reform.

Yes, a recovery will come, and it's greatly anticipated: in last week's TIME/CNN poll, economic growth tied with the war on terrorism as Europeans' No.1 priority. But if the past is any guide, the next upturn will be weak. The average per-capita economic growth in the E.U. dropped steadily from 2.6% annually in the 1970s to 2.1% in the 1980s and just 1.7% in the 1990s. The falloff will likely be even steeper over the next decades. Women in the E.U. are having on average 1.5 babies, well below the 2.1 required to keep the population stable. At the same time, the proportion of people over 65 is rising sharply. If these trends continue and policy is left unchanged, the E.U.'s working-age population will drop by about 40 million by 2050.

All that will widen an already yawning gulf between Europe and the U.S., where long-term growth has remained constant and birthrates high, thus replenishing the workforce. U.S. workers on average spend 475 hours more on the job per year than they do in the Netherlands. But now the economic decline is forcing governments in France, Germany, Italy and elsewhere to become more — gasp! — American in their approach to labor policy. Reluctantly, they are embracing unpopular measures they ducked for decades — and that's enraging labor union members, who turned out in the hundreds of thousands in Paris late last month. Public-sector workers crippled transportation and shut schools to protest a change in pension rules that would require them to work for 40 years, rather than 37.5 years. In other words, they were protesting the same new reality that confronts Blet and many others: if European economies are to fight off long-term stagnation and unemployment, then Europeans will have to work longer or harder — or for less pay. No wonder so many people have been marching; who would want this sort of holiday to end?

For workers like Rüdiger Hass, it already has. He took a 10% pay cut last year to save his job. Hass is a 19-year veteran of Dienes Werke, a company in Overath, near Cologne, that makes industrial knives and other cutting equipment. Sales fell last year to j35 million, and the ceo, Bernd Supe-Dienes, the grandson of the founder, is doing all he can to cut costs. A decade ago he started moving some production to Hungary, where labor costs are one-quarter what they are in Overath. Since then, he's created 200 jobs in Hungary, and just 40 in Germany. Last year he reached an agreement with German employees to reduce working hours by 10% in return for a cut in pay.

Hass accepts the push into Hungary: it wouldn't be possible for the same products to be made as competitively in Germany. "It's better to give up some jobs to keep the company alive," he says. He's not thrilled about earning less, but it's better than being out of work.

Many other German firms have been moving production abroad. Last week, a survey showed nearly one in four German firms intends to transfer some facilities out of the country over the next three years. The exodus is not just in high-wage manufacturing, but also corporate operations such as administration or R and D. The oft-cited reasons are high labor costs and inflexible rules.

But shifting production isn't enough for Supe-Dienes, who is now trying to shrink his Overath workforce from 200 to 175. That's happening mainly through attrition, but he's laying off six people. It's a cumbersome process that requires giving formal notice and often going before a labor tribunal. The procedure can take about four months, and usually ends in an out-of-court settlement. Once, when he didn't settle, the ruling went against him and he ended up having to reimburse a government agency for the months of unemployment pay the dismissed worker had drawn while the case was being considered. "I won't risk that again," Supe-Dienes says.