The French Endgame about Labor Reforms: Europe’s Summer of Discontent

The French Endgame about Labor Reforms: Europe’s Summer of Discontent

photo: Tim Lam

French government wants structural reforms, but unions and most people don’t. As political friction is escalating, Paris is preparing for the Euro 2016 football tournament, which is attracting terror efforts by radical right, ultra-left and the jihadists. At the same time, the country has been pummeled by ‘once-in-a-century’ flooding.

As long as the European sovereign debt crisis caused depressions in small economies, such as Greece, bailouts were still possible. As the crisis spread to larger Euro economies, such as Italy and Spain, stability is no longer viable without structural reforms. Now the turmoil is spreading into Europe’s core economies, starting with France.

While everyday life suggests no chaos, France, behind its carefully cultivated façade, is boiling over.

Protests begin

At the end of May 2016, half-a-dozen French cities turned into battlefields. From Paris and Le Havre to Saint-Nazaire and Marseille, workers protested the government’s plan to change France’s labor law The new legislation would allow individual companies greater flexibility to make decisions about hiring, firing, pay and working hours, according to economic conditions as they are perceived by the employers.

In contrast, the unions see these measures as an effort to undermine collective-bargaining procedures that they once established with blood and tears. What makes the battle bitter is the simple fact that the Socialist government is willing to fight its own constituencies to bring the French labor model closer to those of the UK and Germany, which are led by conservative governments.

In late May, every third gas station was said to have no fuel for drivers, and the country’s electricity supply was decreasing. After days of union strikes at oil refineries, effectively blockading oil imports, workers from more than a dozen nuclear power plants walked off the job. Even nature seemed to join the demonstrations, as deadly storms caused the worst flooding France had seen in 35 years, leading to a “national emergency.”

The showdown began on June 10, when the Euro 2016 football tournament kicked off with matches in 10 French cities. Ahead of the tournament, a number of railway unions called for a rolling strike, as well as an open-ended strike on the Paris underground and suburban commuter train network. Meanwhile, air traffic controllers’ planned a three-day strike – their 47th since 2009.

And yet, economic uncertainty and market volatility are just beginning.

The quasi-socialist reformers

When socialist politician François Hollande replaced the conservative Nicolas Sarkozy as the French president in May 2012, the latter’s ratings plunged. In contrast, Hollande’s ratings hovered at around 58 percent. Today, Hollande’s ratings are at a new low of 15 percent. The government is hammering the message that “things will get better,” but the French aren’t convinced. According to the polls, some 60 percent of the population sides with the General Confederation of Labor (GCT), one of the country’s largest unions and staunch opponent of the proposed labor law changes.

In France, efforts to change the labor code often result in conflict between the government and the unions. In 1995, huge strikes forced President Jacques Chirac to back down from proposed changes to the pension system. Strikes also erupted in fierce opposition to President Sarkozy’s attempt to raise the retirement age. Now, as a Socialist government is pitted against unions and the radical left, the net effect is bitter disappointment and fragmentation.

As French Prime Minister Manuel Valls pushes the labor bill forward, Hollande’s government looks increasingly centrist rather than socialist. Both Hollande and Valls lean toward the right of the Socialist Party (PS). Born into a comfortable position in the middle class, Hollande is a longtime party operative. Amid internal friction, he opts for unity and reconciliation – but is often opposed by left-wing factions.

Valls began his political career as part of the “Second left” (La Deuxième gauche). Over time, he rejected the “new left” and defined himself as “Blairiste” or “Clintonien.” While both terms suggest a “Third Way” reconciliation of traditional right- and left-wing politics, Valls may have seen the success of Tony Blair in the UK and Bill Clinton in the US as an opportune rationale for “centrist” leftism in France. The problem remains that PS’s traditional constituencies are not quite as eager to embrace conservative doctrines, even if union power has declined.

Today, his popularity has fallen to 24 percent, the lowest it has ever been. Economy Minister Emmanuel Macron’s approval remains around 45 percent, which makes him the most popular member of the government and may result in him launching his own “great march” for presidency in 2017. Macron was a member of the Socialist Party only briefly, from 2006-2009.

Reflective of “labor aristocracy,” rather than labor, Hollande, Valls, and Macron may no longer understand the constituencies they represent. Most tragically, they offer little in terms of new, radical Keynesian or socially minded fiscal and monetary policies that could serve as a viable alternative. This is particularly true within the framework of what PS die-hards regard as a neoliberal class war seeking to undermine union power, eliminate workers’ rights, and reinforce income polarization.

Critics call Hollande “Flanby,” a cheap, sugary, bland pudding sold at French supermarkets – an apt metaphor for the government’s not-right-not-left-not-even-in-the-center economic policies.

Cyclical rebound, structural rigidities

After half a decade of stagnation, the French economy is finally benefiting from a cyclical rebound, thanks to a more accommodative external environment – including lower oil prices, a depreciated euro, record low interest rates, and the European Central Bank’s (ECB) quantitative easing.

Nevertheless, the shifts in the external environment cannot compensate for France’s longstanding internal rigidities, which continue to overshadow the economy’s medium-term potential.

In the 1980s and 90s, it still exceeded 2.2 percent; in the 2000s, it hovered around 1.8 percent; now it has plunged to 1.1 percent. In April 2015, French unemployment soared to 10.5 percent, remaining above 10 percent since. Meanwhile, growth sputtered to barely 0.2 percent and efforts to bring the fiscal deficit in line with the targets of the Stability and Growth Pact deteriorated. As short-term disinflation (decrease in the rate of inflation) spread, it began to morph into more structural deflation (decrease in the general price level of goods and services). France’s competitiveness, as reflected by its share in world export markets, has declined significantly in the past decade.

The November 2015 Paris terror attacks adversely impacted the country’s growth as its tourist industry suffered. As almost half of the French now view the country’s large Muslim minority as “mainly a threat,” Marine Le Pen, the leader of the anti-immigrant National Front, is seeing 20-30 percent support in polls and could beat both socialist and conservative contenders in the 2017 elections.

France is amid a protracted period, during which real wage growth is solid, despite declining productivity growth. However, this equation is unsustainable.

The French economy is penalizing future generations for its current complacency. Any advanced economy can sustain high living standards only through productivity, real GDP growth and innovation. Today, French productivity is lingering, growth is stagnating and R&D – one measure of innovation – is barely 2.3% of GDP – behind not just Germany and the US, but Slovenia and certain Chinese megacities, such as Shenzhen. If structural challenges cannot be overcome, living standards will erode and debt burden will increase – and it is the future generations that will pay the bill.

The worst turmoil is ahead

Ironically, President Hollande, who won the election with promises to take down the wealthy and reinforce social safety nets, now seems determined to reverse both objectives.

As Hollande’s government continues to struggle amid escalating opposition, growth will deteriorate, debt will climb, and fiscal flexibility will decline further. As a result, a sovereign downgrade is no longer excluded in 2016-17. In that case, yields would rise, which would reinforce negative feedback scenarios. Even if Hollande’s government can realize labor reforms, growth will only amount to 1.5 percent in 2017, at best.

Afterwards, France may face a period of deepening stagnation, meaning that growth could decline to below 1.0 percent by the early 2020s. At this point, cutting general government debt from 100 percent to the low 90th percentile by the mid-2020s is illusionary.

Politically, President Hollande cannot afford to give in to the opposition or acquiesce to the demands of the strikers. However, neither can the unions remain complacent. In the absence of strong political support, French Prime Minister Manuel Valls forced the new labor legislation through the lower chamber of Parliament, relying on rarely invoked executive power. The French Senate will begin talks about the legislation after mid-June.

The El Khomri law, named for the labor minister, proposes reduced pay or longer working hours, but no changes to the 35-hour workweek. After backlash from the unions in response to the proposed labor reforms, President Hollande diluted the proposed reforms, which will not be adequate to revive the economy, according to the International Monetary Fund (IMF).

Thanks to their substantial role in the Eurozone economy, French banks, given their size and interconnectedness, could generate concerning effects, not just domestically, but also through spillovers in Italy and emerging European markets.

If the government fails to boost investment and business confidence, consumer confidence will suffer from protracted stagnation. Ultimately, if the external environment grows less accommodative and the reform progress remains slow, the world’s sixth largest economy will begin to shake – leading to a prolonged period of financial volatility and causing a devastating ripple effect that will impact other ailing European economies.

This commentary was originally published by the Georgetown Journal of International Affairs. It is the first of a series of travel reports on “Europe’s Summer of Discontent.”