Hollande likely to shrug off "shock therapy" review

Reuters News
Posted: Nov 05, 2012 7:25 AM
Hollande likely to shrug off "shock therapy" review

By Catherine Bremer and Emmanuel Jarry

PARIS (Reuters) - French industrialist Louis Gallois called for a patriotic effort to support shock therapy to reverse declining competitiveness on Monday as he handed in a review the Socialist government commissioned but is unlikely to heed.

Gallois said his report prescribes slashing 30 billion euros ($38.54 billion) off payroll taxes and loosening labor laws to reverse a long decline in industrial competitiveness that has eaten away at exports and bled factory jobs.

The widely leaked recommendations have set frustrated industry heads against a government reluctant to shift part of the tax burden from employers to households which are already struggling with rampant unemployment and an austerity budget.

Gallois said the 22 recommendations set out in a review to be detailed to media later in the day were tough but necessary.

"The French people need to support this collective effort which could be a magnificent project for our country -- winning back our industry," he told reporters as he left the prime minister's office. "This will require real patriotism."

Industry leaders, who say shouldering some of the highest labor charges in the world puts them at a disadvantage against foreign rivals and is the cause of a ballooning trade deficit, have joined forces to demand a radical shake-up.

Gallois suggests slicing 20 billion euros off employers' social contributions and 10 billion off those paid by workers, and compensating with spending cuts and higher consumption taxes.

As the proposals leaked out in recent days, President Francois Hollande snuffed out any expectations of radical reforms by ruling out any "shock" measures.

His aides say raising taxes on households is out of the question when the country is grappling with its toughest austerity budget in years to meet deficit-cutting goals.

"This report is a contribution. It's the government that governs," cautioned Social Economy Minister Benoit Hamon.

Hemmed in by his pledge to cut the 2013 deficit to 3 percent of economic output from 4.5 percent this year, Hollande has limited his language to promising a "competitiveness pact".

"A shock causes trauma whereas a pact reassures," Finance Minister Pierre Moscovici explained last week.

The government may propose trimming labor charges for small firms in certain sectors, Fleur Pellerin, minister for small and medium-sized business, said on Sunday.

But the government's response to the report, due on Tuesday, is set to focus mainly on measures that would not affect labor costs, like investment in innovation and training.

"We cannot simultaneously restore public finances and impose a competitiveness shock - a massive and immediate transfer of employer payroll taxes onto taxes," said a government source.


Finding a solution to the lag in competitiveness that has left France trailing Germany in industrial exports, putting a strain on the economic balance between the euro zone's central economies, is Hollande's biggest challenge.

With French growth stalled for three quarters and unemployment at a 13-year high, Gallois will recommend recouping revenues from lower payroll taxes by raising value-added tax and increasing a separate social levy that affects pensions, investments and rental income as well as workers' pay.

He may also suggest a green tax on diesel fuel.

Hollande, however, has already scrapped a VAT hike his predecessor Nicolas Sarkozy proposed for the same reason.

Michel Didier, head of the Coe-Rexecode economic think-tank, warned on Monday that French industry was on a "slippery slope" that could only be remedied by reducing the cost of labor.

But Moscovici has argued that shifting more of the tax burden onto households too fast risks choking off domestic consumption, a key motor of French growth.

He last week rebuffed a call by the AFEP business association to raise VAT to 21 percent from 19.6 percent to enable lower labor charges, saying the focus for now would be on areas like innovation over labor costs.

Where booming Germany clocked a 2011 trade surplus of 158 billion euros, France saw a record 70 billion euro deficit as its share of euro zone exports has slid to 13 percent from 17 percent a decade ago and its global market share also shrank.

German unemployment is at 6.9 percent versus 10.2 percent in France, which has lost 750,000 industrial jobs in a decade.

French manufacturing margins have slid as Germany's have soared, and the drop in profits has impacted spending on new technologies and innovation.

Meanwhile, impatience at what voters see as a plodding approach to fixing the economy has knocked Hollande's approval ratings to as low as 36 percent from over 60 percent when he took over from the conservative Sarkozy in May.

Grappling with new layoffs in the steel and auto industry, Hollande is working with unions to find ways to increase flexibility in a labor system that makes it hard for firms to hire and fire quickly to adjust to changing business cycles.

He is not expected to offer any real action on labor costs before a review on welfare financing in January, however.

His resistance to the kind of measures advocated by Gallois, ex-chief of aerospace group EADS, means Monday's report risks ending up stuck on a shelf alongside a similar review ordered by Sarkozy when he took office in 2008.

That report, by economist Jacques Attali, also called for an overhaul of labor laws and cuts to employers' social charges.

"The worst would be for this to end up in our cemetery of buried reports," Le Figaro daily said of the Gallois review. ($1 = 0.7785 euros)

(Additional reporting by Alexandria Sage; Writing by Catherine Bremer; Editing by Peter Graff and Philippa Fletcher)