Commentary: France Is Shooting Itself In The Pied

Its rigid labor policies are driving off desperately needed foreign investment

Clara Gaymard, the French government's special representative for international investment, makes an impressive sales pitch. On a recent swing through Washington, Detroit, and Atlanta to woo U.S. corporations, Gaymard wielded a fistful of statistics showing that France has lower real estate prices, cheaper utility costs, and lower average wages than most of Europe's major economies. Not to mention an enviable standard of living, with excellent health care, education, and public transportation.

So why aren't corporate decision-makers buying? France, although Europe's second-largest economy after Germany, has lagged Britain, Germany, Belgium, and Luxembourg in foreign direct investment over the past six years -- not only in absolute numbers but also in average annual growth rates. French leaders ought to be disturbed, given that the unemployment rate, at 9.6%, is among Europe's highest. They should be even more upset when they consider what's driving potential investors away. The big problem isn't transatlantic political tension, or the strong euro, or the siren song of outsourcing to emerging markets. More than anything, it's government policies.

Even in a region known for labor rigidity, France stands apart. Its 35-hour workweek forces employers to cut working hours without reducing pay. While the smallest businesses are now exempt, the short week is among the biggest impediments to foreign investment, says Ernest-Antoine Sellière, head of MEDEF, the leading employers' group. It also undercuts France's efforts to attract high-paying jobs in research and technology -- positions that often entail long, irregular hours. "The government said it wanted employment," Sellière says, "but it has devalued work."

Among other big deterrents are laws requiring lengthy consultations with workers over the restructuring or downsizing of business operations. Consider the plight of Nestlé (NSRGY ), the producer of Perrier mineral water. The 1,600 workers at Perrier's source in southern France turn out about 600,000 bottles of water apiece each year -- less than half the production rate at Nestlé's San Pellegrino plant in Italy. Nestlé wants to offer early retirement packages to trim about a quarter of the Perrier payroll, but the proposal has been bogged down for months in talks with unions. Frustrated Nestlé execs now say they may sell off Perrier. "We can't risk weakening our other brands for a product that accounts for only 5% of our sales," fumes Frits van Dijk, head of the Nestlé Waters unit.

Aren't such hassles outweighed by France's relatively modest wage scales? Gaymard cites a study of major industries by accounting and consulting group KPMG that shows an average annual salary of $40,742, compared with $48,019 in the U.S. But when payroll taxes and other benefits are added in, the average cost per employee surges to $64,154 -- above the U.S. total of $63,379. As to higher-paid workers, a government study found that a company employing a $147,000-a-year worker pays $70,000 in payroll taxes, while the employee pays more than $61,000 in social security and income taxes. The combined burden is far higher than in any other European country.

Some multinationals are simply moving higher-paid employees to other countries. Colgate-Palmolive Co. (CL ) recently relocated its European headquarters to Zurich from the town of Compiègne, near Paris; British retailer Kingfisher moved the offices of Castorama, a chain of do-it-yourself stores it owns, from Lille to London.

France is starting to respond. Paris has streamlined work-permit procedures for expatriates and increased tax credits for research & development. Prime Minister Jean-Pierre Raffarin promises action this year on overhauling the health-care system, which accounts for a big share of the payroll tax. "We know that France has some handicaps, but reform is on the way," promises Sébastien Huyghe, a center-right parliamentarian.

Reformers need to hurry. Look at Switzerland, which passed a sweeping package of corporate tax reforms in 1997. Since then, a crowd of foreign companies, including Procter & Gamble (PG ), Starbucks (SBUX ), and Google, have set up European headquarters there. Now that's a successful sales pitch.

By Carol Matlack

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