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Will France Undertake 'Shock' Job Market Reforms?

One of France's most high-profile business figures has released a report which could be the wake-up call many believe France's economy needs – or could end up gathering dust on an Elysee shelf.

Employees in the rest of Europe often look on in wonder at France, with its enshrined 35-hour working week, and a recent move to lower the retirement age to 60, for some, as the rest of the continent gloomily eyes an ever-increasing pensionable age. Its social security net is known for how widely it is cast, but this comes at a cost. Its export share has been falling as companies relocate to places with cheaper labor costs.

While big businesses such as energy provider EDF and luxury goods giants Louis Vuitton Moet Hennessey and PPR have survived the downturn in relative health, France's small and medium-sized enterprises (SMEs), more dependent on the domestic economy, are in worse shape. Many economists blame this in part on profit margins squeezed by the cost of labor.

"Locked in survival mode, with an insufficient accumulation policy and a greater sensitivity to economic shocks, SMEs face a considerable risk of disappearing," Axelle Lacan, economist at Credit Agricole, argued. "After five years of crisis, the structure of SMEs is extremely fragile and their financial difficulties are growing."

Louis Gallois, the former chief executive of EADS called for 30 billion euros ($38.54 billion) worth of cuts to payroll taxes and job market reforms to kickstart France's competitiveness in a report released Monday. He has previously spoken of the need for a "competitiveness shock" to the country, which many believe needs structural reforms urgently.

President Francois Hollande's government is readying a response to the report. Hollande's socialist background and calls for a "competitiveness pact" rather than a "shock" last week suggest that his feelings on the topic may be markedly different to Gallois'.

The most unpredictable factor around Monday's announcement is how much notice France's government will take of it. France has been dubbed "the big laggard" of Europe by Credit Suisse analysts, who argue that its potential is being stifled by the need for structural reforms. Reforms could add around 0.75 percentage points to annual GDP growth, according to International Monetary Fund (IMF) estimates. In an economy which is expected to grow by just 0.6 percent this year, this could make a material difference.

The IMF added its voice to Gallois' on Monday afternoon in calling for greater competitiveness in France, heaping more pressure on the government to act.

Hollande's first budget, which increased the tax burden on businesses at the same time as reducing public sector spending by less than hoped for, failed to alleviate market concerns.

Werner Perdrizet, economist at Credit Agricole, singled out the "rigidities" of the French labor market, particularly its notoriously high job protection and tightly regulated bargaining agreements with unions, in recent research into the labor market in the euro zone.

Reforms suggested for France include: less employment protection; more focus on getting young workers into work; making working hours more flexible and cutting the labor tax for companies.

France's continued growth despite a lack of reforms indicates that it "has room to grow fast" if reforms are introduced, according to Credit Suisse. Yet without some concerted action from Hollande's government soon, that time seems far away.

Contact Europe: Economy

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