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updated: 10/29/2012 7:28 AM

Layoffs, perks, labor costs trap French govt

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Associated Press

PARIS -- 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 the country, and Europe, more competitive in the global marketplace? Slowly and carefully, President Francois Hollande says.

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"It's not going to be a question of shocking or brutalizing the French economy," Economics Minister Pierre Moscovici said Friday, as the government held meetings on lowering France's labor costs, which are among the world's highest. "It's going to be continuous action, spread over our entire mandate."

Many economists say France could be running out of time, and ratings agencies appear to be getting worried. 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 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.

After Hollande was elected in May, the Socialists' first response to France's lagging economy was to add a layer of government: the Ministry of Industrial Recovery. That failed to keep unemployment from rising, or some of France's biggest corporations -- including carmaker Peugeot Citroen, Air France and retail giant Carrefour -- from announcing thousands more layoffs.

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 an effective tax rate of more than 60 percent on corporate profits, once all the expenses are tallied.

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 people may be ahead of their government in realizing that something has to give.

Despite the official length of the French work week -- the shortest in the world, according to World Bank figures -- French employees actually clock an average of about 40 hours, according to several polls. Other surveys have found that even on vacation, a sizable number check in to the office.

"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 pay stub 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.

Economists are doubtful about real labor reform under a Socialist government, saying they expect the competitiveness report from Gallois, due Nov. 5, to fall into the same dust-gathering category as 40 other studies compiled over the past decade.

"The rest of the world continues to finance the French economy," said Jean-Christophe Caffet, an economist for Natixis.

Markets are starting to take notice.

Standard and Poor's downgraded France's largest bank BNP Paribas on Thursday and lowered expectations for 10 others, citing high unemployment, lower domestic growth and the European recession.

"We've been in this kind of infernal machine for a long time," said Dussillol. "Certain economic systems are stable for years and then suddenly it falls apart."

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