Commentary: The High Cost of France's Aversion to Layoffs

By Carol Matlack

It was a sad ending for appliance maker Moulinex, once considered an icon of French industry. On Oct. 22, a bankruptcy court approved the sale of most Moulinex assets and brands to French rival SEB. Nearly two-thirds of Moulinex' 8,800 employees will lose their jobs as a result.

France's Socialist government reacted with predictable dismay, promising to help workers find new jobs. But government officials--not just the Socialists but their conservative predecessors--bear blame for the company's demise. As Moulinex slid deeper into the red over the past decade, authorities repeatedly blocked management's efforts to cut costs. In August, the government rejected a plan to shutter a refrigerator factory and lay off 670 workers. Instead, the company was ordered to resume talks with unions. By then it was too late. Moulinex had racked up $120 million in losses last year on sales of $1.1 billion. Bankruptcy beckoned.

The Moulinex saga underscores a growing worry in corporate France. To stay competitive, companies need flexibility to trim their payrolls, especially now that Europe faces its steepest downturn in nearly a decade. But laying off workers in France is nightmarishly difficult. Labor laws require lengthy negotiations with unions over planned job reductions, and expensive severance packages for laid-off workers. On Oct. 23, 56 leading French chief executives sent a letter to Prime Minister Lionel Jospin's government, warning that layoff policies were hurting French competitiveness. "This trap must be loosened," they wrote.

French executives have reason to worry. Germany, where governments traditionally have been as layoff-averse as in France, is looking a lot more open-minded these days. Companies ranging from electronics giant Siemens (SI ) to chipmaker Infineon Technologies (IFX ) to Commerzbank (CRZBY ) have announced thousands of job cuts, with only muted government response. Such flexibility could help German companies recover more quickly when the economy improves, says Antonella Mei-Pochtler, a senior vice-president at Boston Consulting Group in Munich.

In France, it's another story. When consulting firm Bain & Co. recently polled chief executives of 125 leading French and German companies on their plans to weather the downturn, the German CEOs listed trimming payrolls as a top priority. But French bosses put layoffs well down their list, saying they would first cut back on purchasing, investment, and marketing. Apart from bankruptcy cases like Moulinex, virtually no companies have announced big layoffs in France this year. "We are still a civilized company," said a France Télécom (FTE ) spokesman recently, denying rumors that the phone operator was planning to eliminate jobs.

HANDCUFFED. An analysis by the Organization for Economic Cooperation and Development shows that Germany's anti-layoff laws are just as tough as France's. But French executives know even modest job cuts will ignite a political firestorm. Consider what happened to Groupe Danone (DA ) CEO Franck Riboud last spring when he moved to close two factories employing 570 people. Riboud offered every worker a job at another factory or an attractive severance package. No matter. Protesters marched through Paris calling for a boycott of the foodmaker, and the government introduced legislation, now pending, to fatten mandatory severance pay.

With unemployment creeping back up to 9%, and national elections due next year, the pressure to protect jobs will only intensify. Already the government is pushing state-controlled Air France, which is reeling from a steep drop in traffic, to hire workers laid off by a bankrupt regional carrier, AOM-Air Liberté. "We must use every tool at our disposal," says Communist Transport Minister Jean-Claude Gayssot.

France Inc. may be ready to fight back. The Oct. 23 letter was signed by top bosses like Thierry Desmarest of TotalFinaElf and Jean-Martin Folz of Peugeot (PEUGY ). Ultimately, they warn, workers will suffer if companies cannot restructure quickly enough to save themselves. But don't take the CEOs' word on that. Just ask the ex-employees of Moulinex.

Matlack covers labor issues from Paris.

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