By Nicholas Vinocur
PARIS (Reuters) - Hardline French unions are demanding President Francois Hollande back them, not employers, at crucial talks on labor reform, forcing a potentially damaging confrontation with little chance of a quick breakthrough.
Hollande has turned to business leaders for advice on how to make French firms more competitive after spending months since his election in May wooing unions with measures including a minimum wage rise and a huge state-funded job creation plan.
But the business world's solutions - painful reforms to lower wage costs and ease restrictions on hiring and firing, which economists say are years overdue and needed to restore market confidence - have soured the unions' view of Hollande.
"In the face of a worsening crisis, the government will have to admit there are contradictory approaches - the employers' and ours - and make a choice," said CGT head Bernard Thibault.
Tension between the rival camps is building ahead of the talks, which may start as soon as October, with two hardline unions threatening to boycott them.
"The government is going to have to spell things out clearly," Jean-Claude Mailly, head of the FO union, said this week. "Are they moving to satisfy the employers' demands, who are forever demanding more, or are they going to take a step in the direction of workers?"
A week before the government distributes a document to frame upcoming talks on the labor market, Mailly has warned that he will sit out if the word "flexibility" features on the agenda.
"Anything is possible," he said. "If conflicts must arise, then they will arise - we will have given enough warnings."
CGT's Thibault said France should not follow Spain and Italy in undertaking painful reforms because worsening joblessness had proved them to be failures. Both countries have sought to water down union privileges and make labor markets more flexible.
France has so far avoided such measures. But with a stalled economy and unemployment at a 13-year high and rising, Hollande is quickly running out of arguments to prove the euro zone's second-largest economy deserves its ultra-low borrowing costs.
His push to fast-track the debate on the labor market, originally scheduled for next year, suggests France may soon follow Italy and Spain, but not without a struggle with unions.
"They are really not good examples," Thibault said. "In fact, they offer an argument for why we should resist any attempt to further deregulate the labor market."
Viewing labor relations as a zero-sum game, hardline French unions including SUD, CGT and FO have a long history of confronting reform-minded governments and winning.
In 1995, strikes forced former conservative Prime Minister Alain Juppe to scrap welfare cutbacks designed to bring France's budget deficit in line with Maastricht Treaty targets.
Ex-prime minister Dominique de Villepin fared no better in 2006 when he dropped plans to create an employer-friendly "first job" contract in the face of massive student protests.
Spooked by such examples, Hollande's predecessor Nicolas Sarkozy largely avoided conflict, except to face down unions over a pension reform that left many of their privileges intact.
Hollande, however, may have no choice. France has already pledged billions of euros for job creation schemes that economists say may only bring a shallow improvement, and budgetary constraints rule out further investment.
If Hollande does not prove he can take painful measures to improve competitiveness, credit rating agencies say they will carry out further downgrades, shaking confidence in French debt.
One sign of looming change is the rapid about-face of the moderate CFDT union, France's largest, which has broken ranks with the CGT and FO and is calling for reforms to happen urgently, even sooner than Hollande's timetable.
A few months ago, CFDT leader Francois Chereque spoke in one voice with Mailly and Thibault to say that high labor costs were not a problem for France. He has now changed his tune.
"I am saying it clearly: the cost of labor is also a factor in the loss of competitiveness," he told weekly le Journal du Dimanche on Sunday. "We must start talks on the labor market as soon as possible and conclude them as soon as possible."
Laurent Berger, next in line to lead the CFDT, said unions risk being sidelined as change is already happening in factories and workplaces, outside the framework of collective bargaining agreements. He called Mailly's recalcitrance "childish".
At Peugeot PSA's Sevelnord plant in northern France, he pointed out, three of four unions have agreed to wage freezes and more flexible working hours, with only the CGT abstaining. A similar deal has been done at Air France.
Bypassing collective bargaining, allowing union leaders to sign agreements with management in one company or worksite, is likely to feature large in the upcoming labor reform talks.
(Editing by Louise Ireland)