Insight: Schroeder a la francaise won't work for Hollande

Reuters News
Posted: Oct 21, 2012 6:58 AM
Insight: Schroeder a la francaise won't work for Hollande

By Mark John

PARIS (Reuters) - A left-wing leader takes office in a troubled European nation. Company bankruptcies are piling up and unemployment is on the rise. His pledge to pull off long-overdue economic reforms is greeted with weary skepticism.

The scene that played out in Germany a decade ago is being repeated in France today.

But whereas Gerhard Schroeder in 2003 launched deep labor reforms that helped revive a moribund German economy, Francois Hollande will find his room for maneuver hemmed in by the global slowdown and France's prickly industrial relations.

"This is not about copying someone else's model - just improving our own," said Lionel Fontagne, an economics professor at Paris's Sorbonne university who has tracked France's gradual decline as a global economic force.

"But it is very difficult to discuss the real issues."

Hollande came to power five months ago on promises to revamp France's economy and halt a spate of industry closures that have pushed joblessness to a 13-year high of over three million.

In a nod to the "Agenda 2010" label that Schroeder gave to his reform drive, he has christened his own push "Agenda 2014" - the ambitious deadline he has set to restore jobs and growth.

He has tasked trade unions and employers with negotiating a "historic" overhaul of the French labor market and charged Louis Gallois, ex-head of European aerospace concern EADS, to propose by November 5 measures to boost French competitiveness.

It is a bold timetable that, in coming months, will show whether the euro zone's second biggest economy can follow the largest in grasping the nettle of reform.


Back in 2003, Germany was struggling to digest the cost of the 1990 reunification of west and east. Over 4.4 million had no job and the head of the revered Ifo economics institute said Germany was "the sick man of Europe", its citizens lagging behind the rising income per head elsewhere in Europe.

But World Bank data put German income at $39,211 a head last year against $34,993 in France, with Germany outdoing its southern neighbor on just about every economic benchmark.

Schroeder's reforms such as the creation of a new low-wage sector and wage moderation pacts with unions have meant German labor costs have risen less than 10 percent in the past decade, compared to 30 percent in France.

Critics say the "Hartz reforms" - named after Peter Hartz, the personnel director of auto giant Volkswagen whom Schroeder named to draft the plans - led to a generation of "working poor" in Germany, sometimes paid less than one euro an hour.

While that carries a social cost, few dispute the German economy as a whole is currently in a better shape than France's.

Where German exports are at record levels, France's share of total euro zone exports has crumbled from around 17 percent at the turn of the century to 12.9 percent. Unemployment is at 6.8 percent in Germany against over 10 percent in France.


Schroeder's left-leaning credentials helped persuade unions to moderate wage claims in return for future job security.

Socialist diehard Hollande enjoys similar confidence with France's main unions. But the way French industrial relations work will make it harder for him to get the same result.

Whereas German unions such as the auto sector's IG Metall can strike wage deals across an entire industry, French accords are made at company or individual level and so cannot be used as a policy tool for nationwide wage restraint.

Schroeder also had the benefit of a more predictable trade union scene: workable contacts with the main umbrella group, the German Trade Union Federation (DGB), and unionists who were less inclined to call for strikes because their statute gave them "co-determination" rights to influence company policy.

In contrast, Hollande must deal with at least a handful of main trade unions ranging from moderate to militant and which compensate for lacking the statutory powers of their German counterparts by having earlier recourse to the street.

"French trade unions are structurally weak but time and time again they show their ability to mobilize," Jacques Freyssinet of France's Centre of Labour Studies (CEE) said of protests and strikes that sporadically bring the country grinding to a halt.

With the economy near recession, Hollande cannot risk protests such as a 1995 strike over welfare cuts that brought France to a halt for weeks, or fierce 2010 protests against pension reforms by his predecessor Nicolas Sarkozy.

Yet even if he can find some common ground with the unions, things are less promising on the employers' side.

Whereas Schroeder cultivated a pro-business image - and even enjoyed the nickname "Comrade of the Bosses" - Hollande campaigned on a solidly leftist platform of reining in the excesses of big business and the world of finance.

His first annual budget targeted the wealthy and corporate world, with a symbolic 75 percent tax on the super-rich among a raft of tax hikes aimed at bolstering public finances.

The government has poured cold water on demands for at least 30 billion euros ($39 billion) of social charges businesses pay to be transferred to other levies such as value added tax (VAT).

Employers insist such cuts are vital, pointing to the fact that French labour charges are among the highest in the European Union alongside those in Belgium and Sweden.

But the government fears a shift of those charges onto VAT or other taxes would hurt consumer spending, for years one of the main props of the French economy.

"We are looking at all the options," said a source close to Prime Minister Jean-Marc Ayrault. "But we won't be looking at any transfers that would bring on a recession."


Prospects for France to follow Germany in establishing a low-wage sector of "mini-jobs" also appear dim.

Not even employers dare suggest scrapping the current minimum wage of 9.40 euros an hour, and unions are furious that more companies are turning to temporary contracts to avoid permanent contracts that are hugely expensive to terminate.

"Each time we give them a bit of flexibility they want more," said Francois Chereque, head of the moderate CFDT union.

With anything more than a small chipping away at labour costs unlikely, the government argues France can maintain a competitive edge by moving upmarket to offer high-value goods for which the world is ready to pay a premium.

That tactic has worked for German companies such as Mercedes-maker Daimler AG and specific sectors in France such as aeronautics or the luxury goods industries.

But engineering a more widespread shift would take years. Firms such as Franco-Italian microchip-maker STMicroelectronics say the race to keep one step ahead of low-cost rivals is getting tougher by the year.

"The real differentiator is labour cost and flexibility," STMicroelectronics director Gerard Matheron said, citing the example of Taiwanese workers who worked longer than the 32 hours a week of their French counterparts for a fifth of the salary.

"To keep producing in Europe we have to continually find the right mix between research and production to keep up with the most up-to-date technologies."

Yet high labour costs are trapping many French firms in a vicious circle of lower profit that prevents investment in new technologies, argues Axa chief economist Eric Chaney.

Using official EU data, Chaney calculates French research and development spending has remained flat at 1.4 percent of national output over the past decade while Germany's has risen from the same level to over 1.9 percent of output.

French research group Coe-Rexecode estimates gross operating margins in the French manufacturing sector have fallen from 37 percent in 2000 to 29.9 percent last year, while German margins are up from 27 percent to 34.4 percent.

"French companies are not profitable enough to spend as much on R&D as German ones. Why? Labour costs," concluded Chaney, who in 2007 investment note entitled "France - the new sick man of Europe", was among the first to sound the alarm on its economy.

Hollande is creating a state agency to foster innovation with a budget of around 40 billion euros but the challenge is whether the civil servants spend the money on industry's needs.

It may be the middle of 2013 before any progress in talks between unions and employers and Gallois' proposals start to be translated into reforms and longer before the economy benefits.

Worryingly for Hollande, Schroeder did not survive in office to see his reforms take effect. As unemployment continued to rise into 2005, he lost support with core left-wing voters and was ousted in a September poll by conservative Angela Merkel.

He told adoring French business leaders in August: "Courage means putting reform of your country before staying power." ($1 = 0.7679 euros)

(Additional reporting by Marc Joanny, Nick Vinocur, Emmanuel Jarry and Jean-Baptiste Vey; editing by Anna Willard)