France: A Quiet Revolution

Shaking up the Gallic economic model

The deal was a mold-breaker. In May, French Defense Minister Alain Richard for the first time awarded a naval ship-repair contract to a private company rather than the state-owned shipyard in Toulon. The $2 million winning bid was half that of the state shipyard, and the company promised to do the job in a third of the time. Toulon workers struck for eight weeks in protest, to no avail.

A quiet revolution is sweeping tradition-bound France, whose government-dominated economy looks increasingly outmoded. Until now, efforts to modernize its distinctive welfare state amounted mainly to privatizing the biggest companies. Now, the forces of globalization, technology, and deregulated markets are encouraging reform-minded French people to change the system itself.

A small but growing army of citizens want to shrink the state's role, reverse a pervasive hostility toward entrepreneurs, and erase the handout mentality that is ingrained in French society. The fighting forces come from every walk of life, from entrepreneurs and shareholder activists to government officials and labor leaders. They have little in common except the belief that France must rethink the centuries-old economic model it has held so dear. "France is the only country that still has its head in the 1970s," says Christian Saint-Etienne, a Paris-based economist.

Even Prime Minister Lionel Jospin, scheduled to arrive in Washington on June 18 for a state visit with President Bill Clinton, has begun injecting the concept of "modernizing France" into his speeches. His Socialist government has sold off more state companies, begun reversing laws that hobble new businesses, called for education reforms, made the Internet a national priority, and slashed the number of jobs public officials can hold at one time.

SLOWLY BUT SURELY. The country is far from embracing U.S.-style capitalism. But advocates of reform are turning up the heat on Jospin's government. A top priority, they believe, should be shrinking government outlays from 54% of gross domestic product today to somewhere around 47%. That would still exceed public spending in the U.S. and Britain but would represent a major shift for France. Advocates of change also want a more flexible labor market, in which companies can negotiate individually or by sector rather than being bound by rigid national laws.

A new generation of executives wants to replace the worker-vs.-capitalist enmity in France with a more democratic, motivating relationship that spreads wealth through employee shareholding. During a recent public offering of shares in industrial giant Saint-Gobain, a surprising 40% of the company's blue-collar workers bought stock. "The model that makes Microsoft's employees so happy could be transplanted to France," says CEO Jean-Louis Beffa.

The reformers face daunting resistance. Nearly 25% of French workers are employed by the state, receiving generous pay, benefits, and early-retirement packages. Politicians push taxes ever higher to fund the country's bankrupt social security system, rather than reform it. Unionized civil servants in the transportation sector regularly shut France down with nationwide strikes, demanding pay hikes and resisting any benefit cuts. Unemployment compensation is so high that taking a minimum-wage job is uneconomical. Overall, only 38% of the French population works, vs. a weighted average of 48% in the U.S., Japan, and Germany.

But the forces of globalization promise to erode the state's stubborn monolith, slowly but surely. The European Union's evolution into a single market, in which each member must compete with the others for capital and jobs, is exposing France's sclerosis. Already, in preparing for European monetary union on Jan. 1, 1999, member governments have had to benchmark their fiscal health against not only the EU's qualifying criteria but also against each other. That Europewide competition will increasingly galvanize French reform.

Union leaders, too, quietly admit that monetary union will change work rules by making countries compete for investment with attractive labor markets. A watershed of sorts was reached on June 9 when Air France's striking pilots accepted a deal that gives them a choice between a seven-year wage freeze and a 15% pay cut offset by share ownership. The pact, which will save Air France $6 billion in personnel costs over seven years, was proof that France's labor traditions are giving way to economic reality.

Even some government enterprises are bucking the system--behind closed doors. In the early 1990s, state-owned Company X needed massive restructuring and layoffs to survive. At a meeting at its Paris headquarters, union leaders said they would negotiate, on the condition that management keep their agreement secret. Not a word was leaked to the press. Over the next several years, Company X shed nearly half its 40,000 workers without a strike. It has expanded internationally and gets 70% of sales from exports. To this day, few outsiders know about the layoffs.

TECH LOOPHOLE. At private French companies, management is brainstorming to find ways around barriers to growth. Take the example of a new law that shortens the French workweek to 35 hours starting in 2000, from 39 now. Global software companies, whose programmers often log 60 to 70 hours a week, would have to flee France to remain competitive. So some CEOs will bypass the law with technology, giving employees personal computers, E-mail software, and remote access to the company's network. "Our people will be able to work 35 hours in the building and around the clock from home," says the CEO of one technology company.

Indeed, the need to nurture French technology startups to create jobs could become one of the most powerful tools for dismantling the old state-dominant French model. Faced with a chronic unemployment rate hovering around 12%, government officials have little choice but to pay closer attention to entrepreneurs' needs. That's encouraging young companies to fight for change.

Croissance Plus (Growth Plus), a one-year-old lobbying group made up of growth companies and venture capitalists, was founded to foster a business climate more favorable to Silicon Valley-type startups. The group already has persuaded the government to eradicate for young companies the social-welfare charges that were slapped on top of capital gains taxes on stock options. Altogether, such taxes and charges had amounted to 120%.

The message is getting through to some top officials. Finance Minister Dominique Strauss-Kahn and Technology & Education Minister Claude Allegre are working to make France friendlier to entrepreneurs. Besides the elimination of payroll taxes on stock-option gains at companies less than 15 years old, they have promised to change laws prohibiting scientists from holding shares in companies they collaborate with. That should help boost technology transfer from public institutes to startup companies and improve commercialization of breakthroughs that traditionally have failed to leave French labs.

HIGH TAXES. French entrepreneurs are relieved that the government has finally begun to address their concerns, but they insist Jospin has not yet tackled their biggest problems: high taxes and the rigid labor market. Total labor costs in France, including social-welfare charges, amount to $16.91 an hour, vs. $11.64 in Spain. As the single currency makes such discrepancies more obvious, pressure on the government will mount.

Jospin has a rare opportunity to tackle tough structural reforms while economic growth can ease the pain of cutbacks in benefits. The French economy is expected to grow 2.8% in 1998 and 3% in 1999. "It's a window of opportunity that won't last," warns Pascal Brandys, founder and CEO of Genset, a $16 million French biotech company that is listed on NASDAQ.

The wrenching restructuring the private sector has already gone through in the name of global competitiveness is likely to put the public sector through an equally jolting shakeup. "We are at the end of the first wave of transformation and the beginning of the second wave," says Bruno Roger, a partner at Lazard Freres in Paris. For the troops toiling for change in France, that's the battle cry of the future.

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