By Nicholas Vinocur
PARIS (Reuters) - France's Socialist government may clinch a deal on labor reform by the end of this year but its cautious approach means the outcome may fall short of business leaders' hopes for a "competitiveness shock" to revive the economy.
President Francois Hollande wants a quick agreement that will help companies adjust more nimbly during economic downturns, ease labor costs and simplify layoff procedures, while giving unions guarantees against job losses.
Even without signatures from hardline unions FO and CGT, both of which oppose the measures, talks could produce a deal to be approved in a Socialist-controlled parliament in early 2013.
A reform could soothe France's conflict-prone labor relations, helping firms hamstrung by regulation to claw back some competitiveness in export markets by allowing them to cut costs more efficiently when demand fluctuates.
However, efforts to please all parties may leave some sensitive issues untouched, disappointing critics hoping for an overhaul on a par with Germany's "Agenda 10" reform launched in 2003 by former Social Democratic Chancellor Gerhard Schroder.
In particular, draft plans unveiled on Friday look unlikely to dismantle the highly-protective, long-term "CDI" job contract that makes it expensive for businesses to lay off staff.
"There will be some sort of compromise between unions and management but it will be a deal that leaves in place certain sacred cows like the CDI," said Jean-Louis Dayan, head of the CEE public think-tank on employment.
"There is a risk the final product turns out to be less potent than some might have hoped for, due to a desire to avoid conflict with unions or employers."
Economic worries are setting a dark backdrop for talks, with unions and employers locking horns over planned mass layoffs at firms like carmaker Peugeot PSA, retailer Carrefour and pharmaceutical group Sanofi.
Mindful of the tensions, the government is striving to please both parties at once, notably by excising from a roadmap published last week words like "flexibility" and "competitiveness" which unions despise.
France has so far largely escaped punishment in the euro zone's crisis, but its status as one of the region's strong "core" economies is undermined by a private sector that analysts say may struggle to compete and grow for years to come.
The government is striving to find 30 billion euros in budget cuts to bring next year's deficit down to the EU's 3-percent of GDP ceiling, potentially driving the economy into recession. Against that the labor reform will have little immediate effect, but it remains one of Hollande's main election promises and a symbolic issue for financial markets.
Leaning toward employers, the government has called for making layoff procedures more legally secure.
Firms complain that restructuring is too vulnerable to legal challenges which pile up costs and delays. A reform may limit individual rights to contest layoffs once a collective deal is struck, a senior labor ministry official told Reuters, asking to remain anonymous.
In exchange for ceding some legal power, unions may get more say in companies' strategic decisions, with options including giving works councils rights to inspect long-term plans or putting union members on company boards. That would help soothe suspicions, though experts say secretive French executives are unlikely to accept German-style co-management.
"Companies cannot ask for more flexibility without being truly responsible for their workers' careers," Bernard Thibault, head of the hardline CGT union, told Le Monde.
Firms may also get help to become more competitive on wage costs, which are among the highest in Europe. The source says up to 8 billion euros ($10.3 billion) in social charges may be transferred to other levies, notably the CSG tax, a contribution paid by all employees.
In unions' favor, the roadmap calls for a widening of the use of the long-term CDI, or "contract of undetermined duration", raising the possibility of increasing social charges on various types of temporary contracts to discourage their use.
More generally, critics say that limiting the scope of talks to labor relations and wage costs without curbing benefits to encourage the unemployed to find jobs is problematic.
Much of the bite in Schroder's 2003 reforms was in incentives to work like shortening access to benefits and forcing workers to accept job proposals, which are absent from French plans.
The moderate CFDT, France's largest union, the Christian CFTC and smaller groups are willing to move ahead with reforms, as is the Medef business lobby. Only FO and CGT are opposed.
"The CGT is completely closed to a deal," Philippe Louis, head of the CFTC union, told Reuters.
Yet thanks to a 2008 reform by former president Nicolas Sarkozy, the CGT and FO can no longer block a national deal alone. Approval by unions that together won 30 percent of votes in the latest national round of union elections is sufficient.
Once a deal is struck, however, Hollande has to shepherd it through parliament, at which time CGT and FO could call street protests, a tactic that has scuppered past reform attempts in France, to pressure him into scrapping it or watering it down.
The fallout from Germany's "Agenda 10" reforms offers a warning to Hollande. Protests against the plan drew some 500,000 people, and workers deserted Schroder's SPD in droves.
By the time it started to yield results for the economy, the party had been voted out of power.
(Reporting By Nicholas Vinocur; Additional reporting by Emmanuel Jarry and Jean-Baptiste Vey; Editing by Daniel Flynn and Patrick Graham)