Competitiveness Cacophony: Attack On France’s Sacred Cow

References to the financial crisis are piling up in France’s economic data. Earlier this week, the manufacturing and service indices hit levels last visited in early to mid-2009. Then the business climate index dropped to a level of pessimism not seen since mid-2009. On Wednesday, the unemployment office announced the largest month-to-month jump in people registered on its rolls since April 2009. Over 3 million people were on those rolls for the second month in a row, the worst since 1999. The long-term unemployed rose to 38.7% of the total. Unemployment, which started ticking up in May 2011, will likely end the year well above 10%.

On Thursday, it was housing. The total amount that banks granted for mortgages plummeted by 30.5% so far this year from the same period in 2011—despite the low rates. For all of 2012, an estimated €115 billion in mortgages will be granted, versus €162 billion in 2011. “We have never before seen a drop of this magnitude at this speed,” said Michel Mouillart, author of the study. What took two years during the crisis of 2008-2009, he said, is now happening in one year.

The government has been flailing about to counter economic trends that started while Nicolas Sarkozy was still president. And one of the most bandied-about catchwords these days is “competitiveness”—entailing among others the cherished and untouchable 35-hour workweek, equally untouchable wages, and sky-high employer-paid payroll taxes and social security charges. An explosive mix.

To keep the government out of the danger zone in case this mix blows up, Prime Minister Jean-Marc Ayrault had entrusted this task in June to Louis Gallois, former CEO of aircraft maker EADS and of state-owned railroad SNCF. Gallois would head the Investment Commission, and one of his jobs would be to put together recommendations on how to raise the competitiveness of French businesses. The report would be submitted to President François Hollande by November 5.

Alas, last Friday, elements of the report seeped to the surface. Written mostly by CEO associations, apparently, it calls for a “competitiveness shock” by slashing €30 billion from employer-paid payroll and social security taxes. To fund it, the report calls for “massive reduction in public spending” (which would trigger total war from all concerned), moderate increases in General Social Contributions and Value Added Taxes (screaming from workers and households out of whose pockets this would come), and a new eco-tax on diesel (about 74% of all automobiles in France are diesel-powered… expect taxis to paralyze Paris for a few days).

Instant cacophony. In the spring, President Sarkozy had tried to implement a similar program of payroll tax cuts—and cost transfers from companies to households, which might have contributed to his defeat.

Hollande distanced himself from the fallout immediately. It “only commits the author,” he said coolly. Labor Minister Michel Sapin shrugged it off: “The Gallois report isn’t the only one,” he said. Finance Minister Pierre Moscovici tried to step out the brushfire. “I’m here with Louis Gallois who is assuring me that these aren’t even leaks but distortions,” he told reporters in Berlin where he attended an economics forum. But on Wednesday, Prime Minister Jean-Marc Ayrault defended the report: “I don’t want to bury it,” he said. “There will be lots of things that will be taken up, and there will be others that won’t be.”

CEOs weren’t so sanguine. “The problem must be dealt with, we don’t need another report,” said Carlos Ghosn, CEO of Renault and Nissan on Saturday. “If we want to create jobs in France, and if we want that the industry doesn’t emigrate from France in a massive manner, we need to reduce the charges that weigh on labor.” He was supported by the CGPME, an employer union of small and medium companies with about half a million members.

But on Thursday, le Parisien provided another glimpse at Gallois’ “Competitiveness shock,” and a shock it was. “Based on our information,” it wrote, the report proposed to “bury” the 35-hour workweek.

Shrapnel flew in every direction. It’s the Socialist sacred cow, instituted in 1998 under Prime Minister Lionel Jospin, cherished and loved and ridiculed too—though many managers, sales people, entrepreneurs, and others work often ungodly hours (same as elsewhere). How could a Socialist government even come up with such a thing! It was the conservative agenda! It was Gallois’ “bomb,” le Parisien wrote. It was THE shock proposition. It would eliminate any reference to a legal limit of the workweek and shift to an “à la carte system, as in Germany,” with the length of the workweek being negotiated company by company.

Oh là là! The electronic ink wasn’t even dry when the denials started hailing down on France—including categorically from Gallois’ Commission.

The leaks and the resulting cacophony had ground down what little credibility the yet unpublished report on competitiveness still had. Perhaps, given the uproar, it will be hastily rewritten and watered down to be put on a shelf and forgotten.

This report to raise France’s competitiveness wasn’t the first one: since 2005, members of parliament, prestigious institutions, economists, expert commissions, and think tanks have presented a total of 25 such reports to the various French presidents. All of these reports warned about the increasingly uncompetitive French economy—and all of them were soon left to gather dust on some shelf. A fate that awaits Gallois’ report as well.

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