Hollande Urged to Deliver Competitive Shock By Executives

French President Francois Hollande was urged by business leaders to give Europe’s second-largest economy a ``competitiveness shock'' to pull it out of the morass.

As Hollande brings labor representatives and company executives together today for a “social summit,” reducing the cost of doing business in France has become the new corporate mantra. Hollande is trying to rekindle an economy that had zero growth in the first quarter and saw joblessness rise to a more than 12-year high.

“We need to create a competitiveness shock,” Louis Gallois, former chief executive officer of European Aeronautic, Defence & Space Co., said on July 7 at a conference in Aix-en- Provence, France, calling for cuts in taxes and social charges of as much as 50 billion euros ($61 billion). “It has to be quite massive.”

Hollande, who won office this year on campaign promises of social justice and countering Europe’s sovereign debt crisis with growth, is being forced to address corporate complaints that labor laws are too restrictive, wage costs and social charges too high and corporate taxes too steep. Alleviating those concerns will mean striking a balance between keeping deficit-reduction pledges and cutting business costs.

“It’s extremely complicated to do at a time when the government is raising taxes to plug the deficit,” Gallois said. “The room for maneuver is limited.”

Labor Costs

France has the euro area’s second-highest unit cost of labor after Belgium, according to an April 2012 Eurostat report. The French figure of 34.20 euros an hour compares with Germany’s 30.10 euros, Italy’s 26.80 euros and 20.60 euros for Spain.

Unit labor costs in France have increased by about 20 percent relative to Germany since the year 2000 as French companies implemented the nation’s 35-hour work-week law imposed by the government of Socialist Prime Minister Lionel Jospin, according to economic think-tank Coe-Rexecode, a Paris-based research firm. While Nicolas Sarkozy, who held the presidency for five years through this May, watered down the law in three steps, the damage was already done, economists said.

Hollande’s pledge to cut the French budget deficit to 4.5 percent of gross domestic product this year and 3 percent next year from 5.2 percent in 2011 is likely to limit how much he can do to cut corporate taxes and charges.

At a three-day conference in Aix-en-Provence, ended yesterday, executives and economists urged the government to act quickly to make the labor market more flexible, improve training and lower the cost of work relative to other countries.

Jobs Lost

Hollande’s challenge is to win support from unions for such an agenda.

“There is room for a win-win agreement among social partners,” Jean-Pierre Clamadieu, CEO of chemicals maker Solvay SA, said in an interview. “The employment question and the necessary flexibility so that companies can adapt should be discussed. An important issue is to simplify proceedings to reduce staff.”

Still, given the country’s unemployment rate of 10 percent and “the backdrop of layoffs, it may not be on the government’s agenda,” Clamadieu said.

Carmaker PSA Peugeot Citroen (UG) is considering cutting between 8,000 and 10,000 jobs and drugmaker Sanofi is looking at reducing staff by as many as 2,000, union officials say. Air France-KLM Group (AF) has said it wants to reduce its payroll by more than 5,000 in coming years.

Labor Code

France has lost more industrial jobs than any other European nation in the past decade. Its employment rate, which measures the proportion with jobs, is lower than Germany, Austria, the Netherlands and Portugal, Coe-Rexecode Says.

Companies say one of the biggest obstacles to hiring is the “Code du Travail,” a 3,200-page labor rulebook that decrees everything from job classifications to leave for training to the ability to fire.

In France people “still think that to preserve jobs, we must make it hard to fire people, which is exactly the opposite,” said Clara Gaymard, head of General Electric Co.’s French unit.

France needs to help companies become more nimble, she said.

“The two pillars that definitively need to be reformed are the ability to react quickly to adjust to the world and demand, whether up or down, and the ability to train employees so that they can change” jobs or companies, Gaymard said.

Unlike Germany

Job losses are linked to a competitive decline over the past decade that has shrunk corporate profit margins, caused French companies to lose market share and ultimately led to a ballooning of the trade deficit to a record 70 billion euros last year.

France’s share of exports among the 17 euro nations has fallen to 13 percent from about 16 percent in 2000, according to Coe Rexecode. Germany and Spain’s portions have gained.

At the same time, the gross operating profit of non- financial French companies has fallen by about 6.2 percent, limiting their ability to fund investment without taking on debt.

As a result France is struggling to grow in the face of Europe’s sovereign debt crisis, while in Germany exports have climbed and unemployment has dropped. French growth stalled in the first quarter and the Bank of France estimates the economy probably shrank in the second for the first time since 2009.

More Taxes

“The time has come to set France into motion,” Hollande said today, opening the social summit in Paris. “There is no time to lose. Competitiveness has a social significance. It’s a factor in growth and employment.”

Meanwhile, the national auditor said this month that Hollande needs to find more than 30 billion euros to meet his deficit target next year. To the dismay of business leaders, Hollande is narrowing the gap mostly through higher taxes.

“The most important issue today is to reduce taxes on labor,” Cie de Saint-Gobain CEO Pierre-Andre de Chalendar said in an interview. “I think there is a consensus on that, including among a lot of people in the government. The first measures that have been taken before the full plan aren’t going in the right direction.”

Hollande has also pledged to drop Sarkozy’s so-called Social value-added tax, which would have lowered employers’ labor charges while raising an equivalent amount through a general sales tax.

‘Something Big’

Responding to the calls for action in Aix-en-Provence, Finance Minister Pierre Moscovici indicated that Hollande’s government hasn’t ruled out tax changes to ease the burden on companies and that the meeting in Paris today will be a first step in improving competitiveness.

“There is a massive competitiveness deficit and it has to be addressed,” Moscovici said.

A key element is determining who bears the lion’s share of the burden of social security, said Philippe Aghion, a Harvard University professor who advised Hollande during the election campaign and has since offered counsel to Prime Minister Jean- Marc Ayrault.

“Companies shouldn’t have to pay for social security and by reducing this burden it would create a psychological effect for business,” he said.

The government needs to address that issue of confidence among business leaders, said Gallois.

“What we need are not little steps, but something big that’s visible to companies,” he said.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Francois de Beaupuy at fdebeaupuy@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net;

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