French will resist reform till things get worse

PARIS Mon Apr 30, 2012 10:49am BST

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PARIS (Reuters) - "How can you govern a country which has 246 varieties of cheese?" General Charles de Gaulle famously asked.

His distant successor as president of France, who will be elected on Sunday for five years, faces the same puzzle of how to reform a perennially rebellious nation to meet the economic challenges of the 21st century.

Conservative President Nicolas Sarkozy set out with great energy in 2007 to shake things up but ran out of steam after loosening the 35-hour work week and raising the minimum retirement age to 62 from 60 in the face of massive resistance.

His most recent move has been to reduce labour costs by cutting social insurance charges on payrolls and raising value-added tax on goods and services instead.

Socialist challenger, Francois Hollande, hot favourite to sweep Sarkozy from office in Sunday's decisive runoff, says he will reverse that switch and sounds disinclined to even try the structural economic reforms advocated by many economists and the European Union.

"Does anyone really believe that liberalism, privatisation, deregulation which led us to where we are today in the financial crisis will help us get out of this crisis?" Hollande said last week when asked whether he would emulate measures being taken in Spain and Italy.

"I believe that today the way we can create growth is through new technologies, through higher education and new energy sources," he said.

Questioned about proposals by a 2008 panel led by economist Jacques Attali to unleash growth in France, such as opening up regulated professions like taxis and pharmacies to competition or allowing stores to open on Sundays, Hollande was dismissive.

TOO COMFORTABLE?

The inconvenient truth is that most of the French are too comfortably off, despite 10 percent unemployment, a flat-lining economy and a national debt approaching 90 percent of economic output, to countenance radical changes to their way of life.

While there has been plenty of hand-wringing about de-industrialisation and relative economic decline during the election campaign, particularly in comparison to key neighbour Germany, there is little, if any, sense of urgency.

This is partly because France has been anaesthetised from the searing bond market pressure that drove Greece, Ireland and Portugal to seek bailouts and Italy and Spain to undertake draconian austerity measures and structural reforms.

A brief moment of drama when ratings agency Standard & Poor's stripped Paris of its triple-A credit rating for the first time in January evaporated when borrowing costs held steady and other credit watchdogs did not follow suit.

Paris still borrows at historically low rates around 3.1 percent for 10-year bonds, partly because investors assume its fate is tied to Germany's, but also because it has a rock solid track record of being able to raise revenue.

Public services work, the country has an ideal geographical location and a large consumer market, with a well educated workforce and high hourly productivity - just as well, given how few hours the French work on average.

Another reason for reform-wariness is that successive French governments have burned their fingers trying to overhaul protective labour laws, the minimum wage, healthcare benefits and an underfunded pay-as-you-go pension system.

Strikes and mass street demonstrations, with broad public support, defeated attempts to reform special early retirement regimes for some public employees in 1995 and efforts to create a lower-wage first employment contract for young people in 2006.

The French, it seems, would rather live with nearly 25 percent youth unemployment than see the minimum wage or rigid job protection for incumbent workers eroded. And many are unwilling to see any connection between the two.

CLOSET REFORMER?

Some of Hollande's economic advisers, speaking under cover of anonymity to avoid embarrassing the candidate in the final days of a tense campaign, say he would be more of a reformer as president than he dares say to get elected.

The Socialist would offer trade unions a grand bargain of seats in corporate boardrooms and more consultation in government in exchange for cooperation in reforming the pension system and accepting necessary public spending curbs, they say.

Whether France's weak and divided unions, steeped in a tradition of confrontational labour relations, are ready to share such responsibility remains to be seen.

Hollande's main hope is the CFDT, the second-largest union confederation, which has long favoured negotiated reform over strikes, but is overshadowed by the larger, Communist-led CGT and sometimes outflanked by smaller but more radical unions.

Sarkozy made a brief effort to negotiate on pension reform with the unions but ended up imposing it top-down against mass protests. He has spent much of the campaign denouncing the unions, especially the CGT, as "intermediate bodies" that distort the will of the French people.

If he were re-elected, France could well see a "third round" of the presidential election in the streets later this year, as frustrated unions protest against his plan to force retrained unemployed people take the first vacancy they are offered.

The tens of thousands of activists who flocked to rallies of Communist-backed hard left candidate Jean-Luc Melenchon are a warning of the resistance any president may face if he tries to roll back what most French people consider their social rights.

The "Nixon to China" theory of politics suggests Hollande might have a better chance of achieving incremental reform of the welfare state and labour markets than Sarkozy, because he may face less militant opposition from the unions.

After all, some of his economic advisers say, between 1997 and 2002 Socialist Lionel Jospin opened more state enterprises to private capital than any conservative prime minister.

Hollande has said he will immediately launch a European negotiation on measures to revive economic growth if elected next Sunday. He has also said he will call an immediate audit of public finances.

That could give him political cover to make public spending cuts due to a worse-than-expected inherited fiscal and economic position, and agree to pursue some structural reforms in a compromise with Germany on a European growth pact. (Editing by Catherine Evans)

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