Sick-man France’s economic reform failures risk restarting the Eurozone crisis

 
Daniel Mahoney
The French public opposes liberalising employment law (Source: Getty)

Although Britain had its own strike this week, this time by junior doctors, spare a thought for the French public who once again faced widespread industrial action yesterday. A strike was held over proposed reforms to France’s employment rules.

Reform is desperately needed. Employment protection in France is higher than in any other major western economy, according to calculations by HSBC, and the current labour code is complex and imposes a range of bizarre regulations. These include, for example, a provision that larger companies should provide a nursing room with a height of at least three metres and walls covered with paint that “make it easy to clean”.

Read more: Hollande’s solution to France’s economic tragedy is more failed corporatism

The French government has made a series of modest proposals, which would bring France’s labour laws more closely in line with countries such as Germany and Switzerland. Proposed reforms include provisions to allow collective bargaining at the firm level and more flexibility over the 35 hour working week.

The rationale is clear. France’s unemployment rate of 10.2 per cent is stubbornly high, and evidence suggests that punitive labour laws are a primary cause. The IMF finds that restrictions on firm level bargaining along with uncertain dismissal procedures are acting as a major disincentive for employers to offer full time contracts – a view supported by the OECD and many other respected institutions. Data from Acoss shows that the proportion of new short-term contracts in the French economy has risen by 11 percentage points since 2000, leading to growing insecurity for French workers.

France is now lagging behind many of its Eurozone counterparts in labour market reform. Both Spain and Italy have recently embarked on successful changes. An extra 25,000 new permanent contracts a month are attributed to the 2012 Spanish labour market reforms, and Italy’s easing of employment restrictions has led to a fall in the proportion of temporary contracts. In France, it is concerning that the reverse trend is being observed.

A lack of reform has allowed labour costs to consistently outpace productivity gains since the turn of the century. The result has been a growing competitiveness gap with the other major Eurozone economy – Germany. According to the World Economic Forum’s Global Competitiveness Index, Germany now ranks as the fourth most competitive country in the world, while France lags behind at twenty-second. And it’s easy to see why. France’s manufacturing unit-labour costs have risen by 28 per cent since 2000 compared to just 8 per cent in Germany, while French employers pay 13 cents more in payroll taxes for each euro paid in salary than German firms.

This widening competitiveness gap between the Eurozone’s two most important economies is leading to imbalances in the single currency. Major trade imbalances exist within the Eurozone, with Germany managing to accumulate €1.2 trillion from its trade surplus with other Eurozone states. If these imbalances are to be corrected, part of the solution is for France to radically improve its own competitiveness.

Regrettably, these modest labour reforms face significant problems. The French government has already watered down its proposals by dropping plans to cap compensation payments for unfair dismissal. This is a major concession given that unpredictable and high payouts are a major source of legal uncertainty for smaller businesses in France. Yet this hasn’t stopped opposition to the changes. According to an Odoxa poll, around 70 per cent of the French population oppose them.

Read more: France needs serious reform – and fast

And even if these reforms are passed, due to these concessions, their impact is likely to be modest. Further reforms to France’s labour market are also unlikely to materialise in the near future. In the run-up to the French Presidential election in 2017, there has been a notable lack of detail from centre-right candidates about further liberalisation, as economic reform has fallen down the political agenda in the wake of the Paris terror attacks.

The result is that the competitiveness gap between France and Germany may widen further, leading to continuing imbalances within the Eurozone.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles