France Sacks Youth Labor Law

At last, France can return to normal. On Apr. 10, President Jacques Chirac's center-right government withdrew a youth-employment law that had ignited two months of tumultuous protest. Now that the protesters are declaring victory, the labor strikes will abate, students will go back to school, and everyone can enjoy the balmy spring weather.

But beneath the outward calm, France's political landscape has changed dramatically. And in the aftermath of the protests, the chances for major reform to revive a faltering economy seem more remote than ever.


  First, the politics. The big loser is Prime Minister Dominique de Villepin, who as recently as January was considered a leading presidential contender in the 2007 elections. The suave, silver-maned Villepin has effectively self-destructed. His approval rating has plummeted to 25%, half the figure in December.

Even supporters of the labor law, which was intended to boost youth employment by making it easier to hire and fire workers ages 26 and under, say Villepin botched the situation. He pushed the legislation through Parliament without first trying to sell it to a skeptical public. As protests intensified, his refusal to negotiate came across to many voters as arrogant, rather than principled.

The big winner is Nicolas Sarkozy, the ambitious Interior Minister. Villepin's meltdown gives him a near-lock on the conservative UMP party's presidential nomination. It also makes Sarkozy the front-runner in the race, since the fragmented Socialists haven't found a candidate to rally around.

Sarkozy has long presented himself as a market-friendly reformer. During the labor-law protests, he criticized the government for failing to consult with unions and student groups before putting the legislation to a vote. But he never said what he would do about the 22% youth unemployment rate that the legislation was intended to address.


  Indeed, the biggest loser of all may be France's economy. After seeing what happened to Villepin, no French politician will dare propose major reforms before the elections -- which will probably be held next spring -- and perhaps not even after that. "I am very sad today, as are many executives across the country," says Marc Touati, chief economist at Paris-based Natexis Banques Populaires. "We have a confirmation that France will not, can not reform."

No question, the French economy is in trouble. Growth has averaged below 1.5% for the past four years, national unemployment hovers around 10%, and the government is piling on debt to pay for generous social programs. Employers, burdened with some of the world's highest payroll taxes and stringent anti-layoff laws, have sharply curtailed hiring and are shifting work to less-expensive labor markets whenever they can (see BW Online, 3/21/06, "Job Security Ignites Debate in France").

That helps explain the seemingly incongruous fact that France Inc. is still perking along nicely. Corporate profits are strong. The CAC 40 index of leading stocks is up more than 10% this year. These big companies are expanding globally, while trimming their French payrolls. Alcatel (ALA), the telecom equipment maker that recently announced a deal to acquire Lucent Technologies (LU) of the U.S., is just one example. The chief victims of France's heavy taxes and labor restrictions are smaller companies. In healthy economies, these companies are the engines of job growth. In France, they are hanging on for dear life.


  For all the fury it unleashed, the youth labor law would have done little to address this dilemma. True, it would have allowed employers to fire or lay off younger workers without going through the usual cumbersome procedures. But existing protections would have remained in place for older workers who make up the vast majority of the labor force.

"The fundamental issue is France's capacity to create employment," says Amaury Eloy, who owns a chain of photocopy shops and is a leader of Croissance Plus, an organization of French entrepreneurs. But, he laments, "instead of reforming once and for all, the focus is on small technical reforms" such as the youth labor measure (see BW Online, 3/29/06, "France: Will Youth Strike Out?").

The French stalemate is all the more alarming when compared with Germany and other European countries that have begun reforming their labor laws. And now France will lose another year, since reform looks politically impossible until after the 2007 elections.

Would Sarkozy tackle the problem if he became President? He has warned repeatedly that France can no longer cling to its old ways and must embrace globalization and free markets. Yet recent public-opinion surveys suggest that a majority of French voters don't agree. Sarkozy has not yet laid out a detailed economic program. Now, the debacle of the youth labor law is likely to make him even more cautious.


  Despite its problems, France is still wealthy enough to keep cushioning most of its citizens from severe economic pain. Indeed, economist Touati says, "We can easily continue without reforms for another 5 to 10 years. The consequences will be a reduction of 0.1% to 0.2% in economic expansion per quarter. It's in 10 [or] 20 years that we'll feel it fully."

After weeks of tumult, a return to la vie normale is surely a relief. But in many ways, it's the last thing France needs.

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