Jan. 16 (Bloomberg) -- Edouard Martin was certain he and about 600 workers would keep their jobs at ArcelorMittal’s steel plant in eastern France after President Francois Hollande floated the idea of nationalization to prevent a planned shutdown in late November.
Two days later, Hollande retreated, agreeing to a deal in which a decades-old blast furnace will close, without saying whether people would be moved to other sites. It was a pullback from a promise he made to protect the site made atop a union truck there during his 2012 election campaign.
“We were sure that nationalization would happen,” said Martin, a representative at the Florange plant for CFDT union, which will lead a protest at the presidential palace on Jan. 23. “We were promised a law to prevent Mittal from shutting the site. Today there’s no law and the blast furnaces are shut. The government’s decision was a slap in the face.”
Hollande’s equivocation illustrates the conflicting pressures in restoring his nation’s competitiveness and closing the gap with Germany. He took a step last week with an agreement between business leaders and labor unions. It would allow companies to reduce working time and salaries when demand slows, though it also extended medical and unemployment benefits and raised employer taxes on short-term contracts.
The incremental approach shows how he’s spurning the model of Germany’s last Social Democrat leader, Gerhard Schroeder, who stood up to his own party and gambled his political career a decade ago by cutting welfare and rolling back protections for workers. His economic bet paid off; the electoral one didn’t.
“Schroeder was bold and a gambler,” Jan Techau, director of the Carnegie Endowment for International Peace’s center in Brussels, said in an interview. “Hollande is notorious for not finding it easy to make decisions and there seems to be little boldness in him.”
Hollande hasn’t yet succeeded in improving what he inherited from predecessor Nicolas Sarkozy: an economy that was barely growing, unemployment on its way to a euro-era record and now 10.3 percent and job cuts by some of France’s biggest companies, including PSA Peugeot Citroen and Alcatel-Lucent SA.
Compared with Germany, its neighbor and biggest trade partner, French competitiveness is sagging. Germany has racked up a 1.1 trillion-euro ($1.5 trillion) trade surplus in goods and services since 2005. France’s last surplus was in 2004.
In 2011, France’s current-account deficit represented 2.2 percent of its economic output, while the German surplus was 5.7 percent, according to European Union data.
The difference is the legacy of Schroeder’s so-called Agenda 2010. Ten years ago, German unemployment stood at 9.5 percent, on its way to 11.4 percent in 2005, according to International Labor Organization standards.
His measures forced those out of work for more than a year to accept any reasonable job offer, reduced long-term benefits and made it easier to fire staff. German joblessness has been less than 7 percent since July 2010 and was 5.3 percent in October, according to the ILO.
“We love your Agenda 2010,” Laurence Parisot, head of France’s Medef business lobby, told Schroeder at the group’s annual meeting near Paris in late August. “We’d like to cut and paste it to our country.”
Cutting and pasting may not be what Hollande, 58, has in mind.
The new president introduced a competitiveness package in November in which he jettisoned an election pledge by raising sales taxes to cut payroll levies. Playing to his Socialist base, though, he also jacked up the top tax rate to 75 percent on incomes above 1 million euros -- which was struck down in court Dec. 29 -- and lowered the retirement age in some cases.
“Decline is not our destiny,” Hollande said Nov. 13 at his first semi-annual press conference as president. What matters is “the state of France in five years.” The first French Socialist president in 17 years asked to be judged “when the time comes, on employment and growth.”
“The assessment of a need for change may be the same but Hollande certainly never took Schroeder for reference,” Hubert Vedrine, a Socialist who was foreign minister from 1997 to 2002, said in an interview. “The equation is much more political today: a strained European economy with a charged atmosphere and an intractable political base.”
A methodical strategy instead of a big bang may be the only way to persuade a country that has had a 35-hour work week since 2000 and whose unions represent a constant threat to shut down key services.
The Jan. 11 accord between business chiefs and three of the country’s five biggest unions “is a step in the right direction, not a revolution,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London. “Companies are gaining a fair amount of flexibility in downturns and that will be welcomed.”
Parisot of the business association said she had received congratulations on the deal “from Washington, London, and of course Berlin as well as Brussels.”
France has escaped the market pressure that drove policy makers across southern Europe, notably in Spain and Italy, to rein in their deficits and loosen labor restrictions. French borrowing costs have reached record lows. The premium France pays to borrow over Germany is now about 61 basis points, compared with a euro-era high of 190 basis points Nov. 15, 2011.
One obstacle Schroeder didn’t have to face was the distress in the neighborhood. Between 2002 and 2006, growth in the 27 European Union countries was between 1.3 percent and 3.3 percent. The euro region is in its second recession in three years thanks to fallout from Greece’s fiscal emergency.
“In the current economic circumstances, it’s nearly impossible to impose severe social and economic changes,” said Vedrine, now a Paris-based author and consultant.
While Hollande has a majority in Parliament that allows him to pass any necessary laws and faces only municipal and European Parliament elections before the end of his mandate in 2017, he may not be ready to break up with his political base.
Schroeder’s SPD party still bears scars from his forced march. It was defeated in national elections in 2005 and 2009 by Angela Merkel’s Christian democratic-led alliance. The SPD is still far behind Merkel’s party in polls. An EMNID survey from Dec. 9 gave Merkel’s bloc 40 percent and the SPD 28 percent for the upcoming September 2013 national elections. No margin of error was given.
Hollande’s political juggling act was illustrated in his clash with steel mogul Lakshmi Mittal. After his industry minister threatened nationalization, Hollande brokered a deal with Mittal to maintain jobs at the plant and commit 180 million euros to improve job access and training.
“We now have two enemies, Mittal and the government,” said Martin, the union representative, in a December interview with BFM TV. The jobs are vulnerable despite the pledges to keep them, he said.
His concerns echoed the opposition Schroeder confronted. “We will continue this process in spite of any protests,” the then 60-year-old leader said after eggs were thrown at him in Wittenberg in 2004.
At a Leipzig rally in the same week, dozens of booing and yelling protesters attempted to drown out his speech. Schroeder continued talking and said the measures were necessary and that “reasonable” people supported his choices.
“We know what we have to do,” said Gregory Goba-Blé, managing director of United Parcel Service Inc.’s France unit. “Now we have to have the courage to do it. Whether we will is the whole question.”
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