Hollande Ducks as French Industry Bleeds Jobs

President Francois Hollande
With his popularity slumping, the challenge for President Francois Hollande is to use Gallois’s recommendations to steer French unions and employers on to a path that will spur growth without generating social unrest that has derailed previous reforms. Photographer: Balint Porneczi/Bloomberg

Renault SA says if President Francois Hollande wants more cars built in France, he needs to tackle the country’s high labor costs and rigid work rules.

France’s second-largest carmaker, which is based near Paris and 15 percent owned by the government, built fewer than a quarter of the 2.83 million cars that rolled off its assembly lines last year in France. With plants around the world, Renault makes its Clio hatchback in Turkey and is ramping up production at a new 1 billion-euro ($1.29 billion) factory in Morocco.

“Making the same Clio IV in France rather than in our Turkish plant is 1,300 euros more expensive and half of the gap is due to labor costs,” Chief Operating Officer Carlos Tavares said. “Within Renault, the French plants are the weakest. It’s not only a matter of cost, it’s a matter of flexibility.”

For Socialist President Hollande, confronting such grievances from French industry by introducing a more flexible workplace environment would put him at odds with his base among unions. At the same time, not addressing the competitiveness concerns of business leaders risks worsening an economic climate that is resulting in thousands of job cuts at companies from carmaker PSA Peugeot Citroen and Air France-KLM to drug-maker Sanofi, driving unemployment to a 13-year high.

On Nov. 5, Louis Gallois, former head of Airbus SAS parent European Aeronautic Defence and Space Co., will deliver a government-commissioned report on making France more competitive. Hollande’s pledge to stem job losses will be tested by how far he is willing to go with the report.

Nothing New

His decisions also will be noted for their contrast with neighboring Spain and Italy, which are dramatically restructuring their economies to cope with Europe’s debt crisis as it enters its fourth year.

The significance of the Gallois report is as much political as it is economic. His diagnosis of why France had a record 73 billion-euro trade deficit last year and has failed to grow for at least three quarters may not vary significantly from previous reports, like the one delivered by Jacques Attali to Nicolas Sarkozy eight months into his presidency in January 2008.

“Everyone agrees that France has a problem of cost competitiveness at a time when Spain and other peripheral countries are cutting wages,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London. “French governments have been looking for ways to cut labor costs for 10 years.”

With his popularity slumping, the challenge for Hollande is to use Gallois’s recommendations to steer French unions and employers on to a path that will spur growth without generating social unrest.

Tempering Expectations

Protests have derailed previous reforms, like when former President Jacques Chirac attempted to trim public sector retirement benefits in 1995.

Companies are concerned that a consensual approach may amount to lack of action. Gallois said as early as July that France needs a “competitiveness shock” with a 50 billion-euro cut in payroll taxes to make French exports more attractive.

Hollande and his government, meanwhile, have sought to temper expectations. He said last week that he prefers the word “pact” and his Prime Minister Jean-Marc Ayrault told businesses they should instead watch the government’s “direction.” Finance Minister Pierre Moscovici said today that a shock risks dividing the nation.

“I was very disappointed to hear about a competitiveness trajectory rather than a competitiveness shock,” Bruno Cercley, chairman of ski-maker Groupe Rossignol, said at a L’Usine Nouvelle magazine conference on Oct. 17. “There’s a really urgent situation. I see a huge concern among business leaders.”

‘Different Planets’

Cercley was speaking barely a week after thousands of French workers demonstrated across the country against Hollande’s plans to trim the deficit and make labor laws more flexible.

“The key question is whether employers and trade unions can reach agreement,” said Antonio Barroso, an analyst at Eurasia Group in London. “Right now they seem to be on different planets.”

The political sensitivity of the labor issues was demonstrated by a report in Le Parisien newspaper last week that said Gallois would recommend that Hollande drop a decade-old law that limits the official work week to 35 hours. Prime Minister Jean-Marc Ayrault’s office issued an immediate denial.

Asked again about the 35-hour law, Ayrault said in yesterday’s Le Parisien newspaper that “nothing is taboo,” a comment that met with immediate opposition from the CFDT union, which has frequently supported the government.

Unions’ ‘Non’

“There is no question of reconsidering the length of the work week, let that be clear,” CFDT General Secretary Francois Chereque said on France Info radio. “If the government wants to see the CFDT angry, this is the subject to raise,” he said.

Less than an hour later, Ayrault was on the radio promising to keep the measure that is in part blamed for France’s declining share of European exports. Scrapping the law was among Attali’s recommendations almost five years ago.

Still, after meeting with officials from the International Monetary Fund and the Organization for Economic Cooperation and Development this week, which are both preparing their own reports on the French economy, Hollande promised not to bury Gallois’s report.

“Nothing will be excluded, everything will be addressed, everything will be on the table,” he told journalists after the meeting in Paris. “Decisions will be taken. We will assume our responsibilities.”

Borrowing Costs

Hollande’s cautious approach may make sense as long as he delivers on pledges over his five-year mandate, economists say.

“I would prefer the government do something gradual and sensible rather than jumping at headline-grabbing measures that get reversed after six months because they’re politically or socially unacceptable,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “It doesn’t need to yield results immediately as long as investors and the corporate sector get the sense things are going in the right direction.”

For now, bond investors show little sign of concern. French borrowing costs have dropped on Hollande’s watch, with the yield on France’s benchmark 10-year debt declining to a record low of 2.002 percent on Aug. 3.

It was at 2.23 percent today. The premium France pays over Germany to borrow for 10 years is less than half of what it was in November last year. France today sold 4.37 billion euros in 10-year debt at lower yields than at its last auction.

Political Courage

For companies, the situation may be more urgent. With French labor costs up about 19 percent in a decade and neighboring Germany’s holding almost constant, France’s share of euro-area exports has dropped by 3.5 percent, more than any other country in the region, according to a study by research group Coe-Rexecode in Paris.

Over the period, operating margins of French companies have shrunk by almost 40 percent, limiting their ability to invest and sustain future growth, figures from the Groupe des Federations Industrielles show. The operating margins of German companies have gained about 40 percent, the GFI report said.

In many ways, the situation in the auto industry is emblematic. About 2 million cars are now produced in France, down from 3.5 million in 2005 and employment by car manufacturers has dropped by 30 percent in a decade, the government estimates. The question is whether Hollande is ready to do what it takes to reverse that drop.

So far “the government’s diagnosis of the roots and consequences of the crisis is on the mark,” Exane’s Beffy said. The problem is “it has lacked the political courage to implement the structural reforms that are needed.”

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