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Layoffs, perks, labor costs trap French govt

Tuesday - 10/30/2012, 2:50am  ET

From left to right, Chairman of the International Labour Organization Guy Ryder, International Monetary Fund (IMF) Chief Christine Lagarde, OECD General Secretary Angel Gurria, France's President Francois Hollande and World Bank President Jim Yong Kim take part in a group picture following a meeting at the OECD headquarters in Paris, Monday Oct. 29, 2012. (AP Photo/Bertrand Langlois, Pool)

Associated Press

PARIS (AP) -- The 35-hour work week? Untouchable. The social safety net? Untrimmable.

So how on earth can France's Socialist government keep its promise to make this country, and Europe, more competitive in the global marketplace? Slowly and carefully, President Francois Hollande says.

After meetings with world finance chiefs Monday, he acknowledged "there are measures to take" on reducing the cost of labor in France, among the world's highest -- but said they "should be spread out over time."

Many economists say France could be running out of time, however, and that could have repercussions beyond its borders. Geographically and economically between Germany and Spain, France has allied with its northern neighbor to manage the eurozone crisis, but its huge state debts and chronic unemployment are making it look increasingly like struggling Spain.

The head of the World Trade Organization said that "it's particularly urgent" for France to loosen up its economy. "This link among growth, competitiveness and jobs ... is the major problem of France and to a certain degree Europe right now," Pascal Lamy told Hollande at the Monday meeting.

The French government is hoping that gradual change is the way to go, and that a series of private meetings and cautious public statements in recent days will mollify both fearful workers and employers who say it's no longer worth the cost to hire.

"It's not going to be a question of shocking or brutalizing the French economy," Economics Minister Pierre Moscovici said Friday. "It's going to be continuous action, spread over our entire mandate."

The WTO promotes free trade and has criticized government intervention in big French companies, saying France should stop protecting its industry.

But after Hollande was elected in May, the Socialists' first response to France's lagging economy was to create an agency essentially dedicated to meddling: the Ministry of Industrial Recovery. That failed to keep unemployment from rising, or some of France's biggest corporations from announcing thousands more layoffs -- including carmaker Peugeot Citroen, Air France and retail giant Carrefour.

Hollande then asked one of the country's most respected businessmen, former Airbus chairman Louis Gallois, to spend months drawing up plans to make France more competitive. But as reports leaked over the past week about the report's recommendations -- rethinking the controversial 35-hour week, shifting some of the tax burden to workers, cutting public spending -- the government swiftly distanced itself.

"I'd advise against the idea of a shock, which has more of an attention-getting effect than a real therapeutic effect," Hollande said Thursday. Without offering details, he said he would prefer a "pact" among the government, workers and employers.

France has only to look south to neighboring Spain for reasons to go slowly with major labor reforms. Spain, facing the possibility of default, had little choice but to impose stark reforms, but the results have been dire: Tens of thousands of people joined anti-government protests as unemployment hit 25 percent.

France isn't in as bad shape as Spain -- borrowing costs remain low and the jobless rate is just over 10 percent. But it faces many of the same long-term problems: Rigid work rules, including the 35-hour week, high administrative costs, strict government oversight of layoffs and generous severance when job loss is inevitable. The upshot is that corporate profits end up being taxed more than 60 percent.

Since 1984, French unemployment has been below 8 percent for only 16 months.

The government, and the French, hope Germany's more robust economy is ultimately a better comparison. And some say there are signs that the French are ahead of their government in realizing that something has to give.

Despite the official length of the French work week -- it's equal with the Democratic Republic of Congo as the shortest in the world, according to World Bank figures -- French employees actually labor on average about 40 hours weekly, according to several polls. Other surveys have found that even on vacation, a sizable number check in to the office even while on vacation.

"There's a maturation that is happening in French society, even if we still have leaders who can't admit it," said Gerard Dussillol of the pro-market Thomas More Institute.

But the French themselves have their limits, especially when it comes to taxes. According to recent surveys, six in 10 French think the cost of labor is hurting the economy, but fewer than three in 10 think the burdens should shift to workers.

"When you take a paystub in France and one in Germany, and you see it costs 25 percent more in France than in Germany, you don't need a study" to know which country will come out ahead, said Dussillol. Meanwhile, Hollande and others fret about France's eroding share of global GDP, which has been cut in half to about 2 percent since 1990.

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