Crisis In France

How welfare state economics failed a generation

For years, France was warned that economic and social neglect of its large ethnic-minority population would produce an explosion. The surprise was that it didn't happen sooner. On Oct. 27 two teenagers were accidentally killed during a police sweep in an impoverished Paris suburb. The deaths set off a wave of violence that spread to dozens of cities and even reached briefly into neighboring Belgium and Germany. Night after night a stunned France watched on television as rioters -- mostly teenagers and young adults from Arab and African families -- injured dozens of police officers with rocks and bullets, killed at least one bystander, and torched schools, community centers, and thousands of cars.

Much as Hurricane Katrina did in the U.S. two months ago, the violence has laid bare the ugly underside of a wealthy nation. "Violence, unemployment, discrimination," says Mounir, a 21-year-old of Moroccan origin, summing up his life in the Paris suburb of Clichy-sous-Bois where he took part in the rioting. (He declined to give his last name.) Many French are frightened by the government's seeming powerlessness. "They were out defying us in terrific numbers," says one police officer. "The dialogue has completely broken down."

On Nov. 8, France's center-right government declared a state of emergency. It has clamped curfews on dozens of troubled neighborhoods and ordered the expulsion of foreigners convicted in the rioting. Prime Minister Dominique de Villepin announced a package of measures aimed at fighting discrimination and poverty, including increased spending on housing and social programs in disadvantaged areas as well as expanded job-training opportunities for young people.

But without more sweeping economic change, it won't be long before unrest flares anew. The riots in France underscore just how untenable Europe's economic model has become. For decades government policies across much of the Old World have put a higher value on social protections and job security than on growth and job creation.

"They're Humiliated"

Those policies had the laudable goal of guaranteeing everyone a decent standard of living. But instead, in today's globalized economy, they are helping to create a vast underclass of jobless youths, many from immigrant backgrounds. "These young people have no dreams. They're humiliated and excluded," says Yazid Sabeg, an Algerian-born French businessman who has called for affirmative action programs.

Economic growth won't end racism, of course. But minorities are more likely to encounter discrimination when unemployment is high and applicants are competing for scarce jobs. That's the situation now. For at least five years, economic growth across most of the Continent has been far too feeble to create jobs that could lift have-nots into the mainstream. France's economy has grown an average 1.5% annually for the past four years and is set to grow only 1.2% this year. Unemployment is nearly 10%, and among those under 25 it is nearly 22%, about twice the U.S. rate. Youth joblessness runs over 50% in the suburbs that are home to many of France's more than 5 million first- and second-generation African and Arab immigrants.

Many of the French rioters have been students who figure they probably won't find jobs. Good jobs "are reserved for certain people, and usually it's white French people," says Abdel Karim, a son of North African immigrants who lives in Clichy-sous-Bois, where the rioting began. French-born Karim, 26, finished high school but has never held a steady job. He lives on welfare and rent subsidies totaling about $980 a month.

High unemployment among immigrants and young people isn't limited to France. Joblessness in Germany's Turkish immigrant community is an estimated 25%, and 14% of British Muslims are unemployed. Youth unemployment tops 20% in Italy, Spain, and Belgium. Mix in racial discrimination, crumbling education systems, and scant representation of ethnic minorities among the political and business elite, and it's easy to see why young immigrants are alienated.

More than anything, it's the welfare state that stifles job creation. European governments tax businesses heavily to pay for welfare, unemployment, and health benefits. Such taxes, including contributions by workers, account for 16.4% of France's economy and 14.4% of Germany's, vs. only 6.7% in the U.S. On top of that, governments saddle companies with rigid labor rules that make it difficult to lay off workers or hire them on temporary contracts. "The first priority must be to make the labor market more flexible," says Jean-René Boidron, chief executive of Cosmosbay, a Paris-based consulting group. Boidron says his firm would hire more if it were freed from onerous regulations.

Powerful unions add to the problem by pushing for worker protections at the expense of job creation. France's biggest union, the Confédération Générale du Travail, opposed a recent government initiative that allows employers to hire some workers on a temporary basis -- an arrangement that could encourage employers to hire young, less well-trained workers without fear of being locked into rigid, long-term contracts. Now, the union is even lobbying for higher taxes on companies that take advantage of the provision.

Could the French riots signal the start of broader European social upheaval? France's situation is more explosive than most. It has the Continent's biggest immigrant population. An estimated 9.8 million residents, or 15% of the population, are either immigrants or children of immigrants. Many are isolated in ghettos. In Germany, by contrast, "segregation and ghettoization into separate neighborhoods is not nearly as prevalent [as in France]," says Dirk Halm, an analyst at the Center for Studies on Turkey at the University of Duisburg-Essen.

Moreover, France has long opposed affirmative action on the grounds that -- since the constitution requires everyone to be treated equally, and since everyone is fully French -- no such programs are needed. A beautiful idea, but it ignores the reality of the ghettos, which impede assimilation. One result is that unlike Britain, the Netherlands, and Germany, France has no Muslims in its Parliament.

The government, insisting on a color-blind policy, refuses even to collect data on racial and ethnic backgrounds, which makes it difficult to attack discrimination, even though nearly everyone agrees it is prevalent. In a study last year to test employment discrimination, University of Paris researchers sent out résumés from fictitious job applicants to more than 200 French employers. A résumé with a classic French name received more than five times as many positive responses as one with a North African name, though both listed identical qualifications. "France has been in a state of denial for a long time," says Zaïr Kedadouche, who serves on the government's High Council for Integration. De Villepin and President Jacques Chirac have pledged to crack down on discrimination but haven't spelled out what they'll do.

Although France's problems are unusually severe, other countries are at risk, too. Copycat incidents broke out in Brussels and Berlin on Nov. 7, with youths burning a handful of cars. Ethnic tensions remain high in the Netherlands one year after the murder of filmmaker Theo van Gogh by a Muslim extremist. The more robust British economy provides more jobs for minorities than those of other European countries. But problems can flare. In 2001, there were violent confrontations between Asians and whites, some of them affiliated with the racist National Front, in Bradford and other cities.

Deep Fractures

European governments could make the situation worse if they quell violence with big doses of government spending. That would heighten the tax burden on businesses, making them even less likely to hire workers. And while jobless immigrants hardly live in luxury, benefits are good enough to deter many from working. In Clichy-sous-Bois, Karim says he probably could find a job as a chauffeur or construction worker. But he figures he'd earn less than he gets on public assistance.

Carefully targeted government aid could make a big difference, though. Ghetto schools would be a good place to start. Deep fractures have emerged in the French education system, which long boasted that every child received an equal education. Schools in many poor neighborhoods are dangerous and run-down. Some 36% of high school dropouts are children of immigrants, and those who graduate often lack the skills to find good jobs or enter higher education. "It is becoming more and more evident that there is inequality between the schools in suburbs and those in the [more affluent] city centers," says Saïd Hanchane, a researcher at the Laboratory for the Economics and Sociology of Work in Aix-en-Provence. Wealthier French communities get a disproportionate share of education aid because their elected officials have more clout than those from immigrant neighborhoods, Hanchane says. A study by the Institut Montagine, a Paris think tank, found that per-pupil expenditures in poor neighborhoods were 30% below the national average.

The rising anger of minority groups poses another risk for Europe -- the possibility of xenophobic backlash. Anti-immigrant parties have enjoyed a resurgence. In France, Jean-Marie Le Pen's far-right National Front made a surprisingly strong showing in the 2002 presidential election. Center-right governments from Scandinavia to the Mediterranean now include anti-immigrant parties in their coalitions. The French riots could help extremist groups attract more support.

Shutting the door on immigration could lead to disaster in Europe, which over the coming decades will need a larger workforce to support its aging population. But bringing in more immigrants won't help unless they can find jobs, and that's why deeper reform is so urgent. Some countries are changing. Denmark has largely done away with rigid work rules and now has youth unemployment rate of only 7.5% -- below the U.S. level -- even though it offers relatively generous social protections. Italy provides education, job training, and health programs for immigrants -- even though many work illegally in the underground economy. The result is that many immigrants to Italy find a path to upward mobility. Last year, 67% of business startups in Italy were created by foreigners, notes Luca Visconti, an immigration expert and professor at Bocconi University in Milan.

So far the French government shows little appetite for such measures as deep tax cuts and looser labor rules. It fears angering labor unions in advance of national elections in 2007. That's a risk, all right. But as the past two weeks have shown, the risk of inaction is even greater.

By Carol Matlack, with Esha Bhandari and Rachel Tiplady in Paris, Gail Edmondson in Frankfurt, Stanley Reed in London, and bureau reports

    Before it's here, it's on the Bloomberg Terminal.