French travails
Macron must deal with his nation’s hallowed labour laws Ambrose Evanspritchard
It is a ritual. Every two or three years a French president unveils a package of “radical” reforms to bring the venerable modèle français kicking and screaming into the 21st century. The departed François Hollande had two such new dawns. He pushed through a raft of business tax cuts in 2012 in a concordat with capitalism, earning paeans of praise from Brussels and Berlin.
This was followed by his “electroshock” of 2014, aimed at shrinking the elephantine state. In a nod to Anglosaxon Blairism, Hollande even spoke heretically of “supply-side” measures. Societe Generale called it the most drastic change in French economic policy since the early Eighties.
It was no such thing. France is still ranked 51 in the World Economic Forum’s index of labour market efficiency, nestled with Benin, Bulgaria and the Congo.
This time it is the turn of the young Emmanuel Macron. He, at least, has a clear mandate for reform and a crushing majority in parliament, even if his “bel esprit” (smart Alec) style is starting to grate on nerves. The latest Ifop poll shows his approval rating has crashed to 40pc, from 64pc in late June. No French leader in the post-war era has seen such a brief honeymoon.
Macron unveiled the first five decrees of his labour reform yesterday, part of his assault on the antique code du travail, a door-stopper of 3,000 pages. Next he will tackle a thicket of 360 separate taxes, some pre-dating the French Revolution.
The latest measures will decentralise wage bargaining, making it easier for firms to deal directly with their own workers. The anomaly in France is that unions retain a legally enshrined lock-hold, even though their members make up just 7.7pc of the workforce.
“It will be possible to bypass the trade unions. The philosophy of the reform is to shift the locus of negotiation from sectors to individual companies according to their needs,” said Eric Dor from the IESEG Business School in Lille.
The hard-line CGT union has already called for nationwide street protests on Sept 12.
There will be more flexibility on working hours. Awards by labour tribunals for “unfair’ dismissals – a catch-all term in France – will be capped at three months’ pay for every two years worked. Companies will still be constrained from laying off staff if their French operations are in aggregate profitable, but this will no longer apply if they are making money worldwide. The unemployed will lose part of their dole earnings if they refuse two job offers. The plethora of worker committees will be merged into one body.
“It is at least a start, but the main cause of high unemployment in France is the lack of job skills. Until we change that, labour flexibility is not going to be very fruitful,” said Dor.
France’s jobless rate was lower than Germany’s 10 to 15 years ago, before the German economy began to reap the gains of its Hartz IV labour reforms under Gerhard Schroder, chancellor at the time. Today the French rate is 9.8pc (Eurostat); the German rate has dropped to 3.7pc.
“France is the only major economy in the European Union that has not beaten mass unemployment,” said Macron as he unveiled the reforms, curiously forgetting that the jobless rate is 11.3pc in Italy and 17.1pc in Spain.
The French leader has a daunting economic mountain to climb. The International Monetary Fund estimates that France’s real effective exchange rate is 21pc overvalued against Germany, yet the two countries are locked together in the euro. France had a current account surplus of 2pc of GDP in the Nineties.
‘For all his new plumage, president Macron remains at heart a defender of the sacred French model’
This has swung to a deficit of around 1pc and it has become a structural trap, with the loss of 60,000 industrial jobs each year – though the cyclical recovery since mid-2016 has masked the rot for now.
Macron is in effect copying Germany’s Hartz IV reforms but in entirely different circumstances. Opinions differ starkly over whether he can pull off the same feat. Florian Hense, from Berenberg Bank, said France could lift its trend growth rate from 1pc to 1.5pc to a far more dynamic pace of 2pc as the cascade of reforms kept building, with the full benefits clear within five years.
Berenberg thinks France is on the cusp of a “golden age”, poised to snatch the baton of economic leadership and displace Germany as the anchor of the continental system by the mid-2020s. This is partly a tale of demographic decline in Germany, where the old age dependency ratio will jump from 34pc today to 52pc in 2030, and 65pc in 2060 – with all the corrosive effects this has on creativity and risk-taking.
Keynesian critics counter that Hartz IV chiefly worked by compressing wages. Volkswagen used its new flexibility to browbeat workers into de facto pay cuts by threatening to relocate plants abroad. Unit labour costs in German manufacturing fell by 4.4pc in the single year of 2005, just as costs were shooting up in the Club Med bloc during the carefree boom years.
They accuse Germany of stealing a march through beggar-thy-neighbour policies – an “internal devaluation” at the expense of the south. There were other factors. Germany’s engineering sectors were perfectly geared to the rise of China. But the critique has a grain of truth.
France has to claw back competitiveness against a German economy that continues to keep wages compressed. The French would have to freeze or even cut pay – as the Spanish have done in the car industry – to make much headway. Such policies would set Macron on a collision course with French society. What is more likely is glacial improvement that leaves France locked in stubbornly high unemployment for years.
Prof Brigitte Granville, a French economist at Queen Mary University of London, said the paternalist French state has noble aims but it basically finances the welfare system – and protection for incumbents – by taxing employment and by borrowing.
Macron’s decrees do not yet grasp this nettle. “Flexibility without reforming the education and fiscal system will not solve the problem,” she said.
The president aims to reduce the French state from 56pc to 53pc of GDP over his tenure. A Thatcherite he is not.
He emerged from the Socialist Party, and for all his new plumage he remains at heart a defender of the sacred French model.