Hollande No Schroeder as Businesses Work Through Ambiguous Rules

French President Francois Hollande
French President Francois Hollande. Photographer: Balint Porneczi/Bloomberg

What French President Francois Hollande gives with one hand he takes away with the other.

That’s what some of the country’s business leaders say about the Socialist president’s yearlong effort to try and make France more competitive while also appeasing his labor union supporters. Hollande pushed through a law in April making firings easier and labor rules more flexible. Now, he’s threatening to slap companies closing plants in France with multimillion-euro fines.

Unlike Gerhard Schroeder, Germany’s last Social Democrat leader whose so-called Agenda 2010 package on labor and benefits helped the country crawl out from under its label as “the sick man of Europe,” Hollande’s mishmash of policies has left companies confused and hesitant to invest. That’s making it difficult to end Europe’s second-largest economy’s recession and reverse joblessness that’s at a record high.

“There are somewhat contradictory signals,” Xavier Huillard, chief executive officer of Vinci SA, Europe’s biggest builder, said in a June 18 interview. “We first and foremost need action rather than big new ideas; we need more coherence and more stability.”

Companies in France are not investing. National statistics office Insee said last week that investment by non-financial companies will drop by 2.4 percent this year, more than the 1.9 percent decline in 2012. Corporate margins fell to the lowest since 1985 last year.

‘Last Call’

Businesses are sagging under the third-highest hourly wages among the 17 nations using the euro, after Belgium and Luxembourg, making reforms more pressing, Ernst and Young said this month in a report entitled “France: Last Call.”

As he has on other economic issues, Hollande has so far played both sides on labor rules, corporate taxes and other policies affecting business.

His April labor law allows companies to scale back hours and wages during economic slumps, a move welcomed by businesses. Those steps may be weakened by the proposed bill to prevent closures, a concession Hollande made to those who want to punish profitable companies that shut plants. The draft bill would force companies with more than 1,000 employees that plan to shut a site to “actively” seek buyers for three months.

Workers would be able ask a court to assess the effectiveness of the search, with a fine of as much as 20 times the monthly minimum wage -- about 28,000 euros -- per job lost if “credible” takeover bids are turned down.

‘Not Addressing’

Business leaders say the bill -- called the “Florange law” after an ArcelorMittal steel plant that was shuttered following the government’s inability to find a buyer -- defeats the purpose of closing a plant.

Factories are often folded to address margin erosion from excess capacity, and pushing for a sale would mean that issue isn’t addressed, said Frederic Vincent, CEO of Paris-based cables maker Nexans SA.

“If you’re deciding to shut down, it’s probably to trim overcapacity,” he said in an interview. “If you’re forced to give it away to a Moroccan or a Chinese, you’re not addressing the initial need to reduce capacity.”

Hollande, who has pledged to reverse the trend of rising joblessness by the end of the year, is struggling to meet that goal as companies from carmaker PSA Peugeot Citroen and Alcatel-Lucent to drugs company Sanofi cut thousands of jobs.

‘Blurred Message’

More than 3.26 million people are jobless in France, putting the country’s unemployment rate at 10.8 percent, the highest in 14 years, and double that in neighboring Germany.

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.

Former Chancellor Schroeder’s Agenda 2010 package unveiled in 2003 cut taxes, made it easier to fire staff, forced those out of work for more than a year to accept any reasonable job offer and reduced long-term benefits. The efforts helped German businesses turn around.

“Hollande’s problem is that he’s still trying to spare various left-leaning groups, which is blurring his message,” Guy Groux, a labor expert at Paris-based political research center Cevipof, said in an interview.

Hollande, who was elected in May 2012, has been equally schizophrenic on the tax front.

Tax Happy

He raised 2013 taxes on companies and households by 30 billion euros ($40 billion) to shrink the budget deficit. In October, under pressure from business lobbies, he watered down a tax increase on capital gains made by entrepreneurs, and unveiled 10 billion euros of 2014 tax credits for companies -- to be partly funded by sales levies and environment charges.

He recently slapped the richest households with 1 billion euros in new taxes a few weeks after pledging to keep a lid on the tax wedge, which is already the third-highest among the 27 European Union nations. And he’s not ruling out higher labor charges as part of a plan due later this year to shrink the pension-system deficit.

The president has had to use “little sweeteners” to win support from hardline Socialist lawmakers for legislation such as making flexible labor laws, said Philippe Gudin, an economist at Barclays Plc in Paris. It results in “a communications problem” about the direction of the government, he said.

Hollande’s government defends the efforts, saying it inherited a complicated situation it’s attempting to tackle.

‘Survival Mode’

“When we took over, we found an economy with a certain number of handicaps,” Finance Minister Pierre Moscovici said last week. “We had excessive deficits, deteriorating competitiveness. The government is trying a double repair effort: of public accounts and competitiveness.”

Still, Hollande’s half measures and flip-flops are destabilizing for business, said Pierre Gattaz, the CEO of electronic-components maker Radiall, who takes over next month as the head of Medef, France’s biggest employers’ federation.

“We need to move faster and be much stronger,” Gattaz said. “Companies are already in survival mode.”

Business leaders see efforts to lean on higher levies to cut the budget deficit as avoiding the difficult task of cutting public spending, which at 56.6 percent of gross domestic product is second only to Denmark in the EU.

Hollande says he’ll cap public spending to shrink the budget deficit -- the seventh-highest in the EU last year after Spain, Greece, Ireland, Portugal, the U.K., and Cyprus.

Yet one of his first acts after being elected was to lower the retirement age to 60 from 62 for workers who started their work life early, affecting about 110,000 people a year and funded by a 0.1 percentage-point increase in payroll charges.

No Schroeder

In pension discussions that started June 20, France’s largest union, the CGT, wants higher retirement costs to be financed through charges on companies and the rich. And although Hollande has said there’ll be no new taxes next year, levies already unveiled will mean a heavier burden in 2014 and companies are bracing for more.

The constant zigzags in policies have compounded the unpredictability companies confront in their markets. Many wonder if Hollande knows what needs to be done, like Schroeder did, said Groux, the political analyst.

“Two months ago, Hollande went before Germany’s Social Democrat Party and praised Schroeder,” he said. “Will that Social-Democrat speech really be followed by actions? One can’t tell yet.”

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