Hollande Tiptoes Toward Raid on Pensions With EU Pressure

President Francois Hollande is preparing to take on a French sacred cow: pensions.

Facing European Union pressure to reach budget targets, the Socialist president is risking the wrath of his core supporters to shrink the pension system, which had a deficit of 14 billion euros ($19 billion) in 2011.

While leaving the issue of fixing the retirement age to talks between representatives of employees and employers, Hollande may propose separating pension increases from inflation, government officials said. He’s venturing upon a pension overhaul -- which few of his predecessors have managed without drawing millions into the streets -- as his government says it’s unlikely to meet this year’s budget-deficit target.

Hollande is preparing “public opinion, rating agencies and markets for a drift in the deficit while at the same time conveying a sense that the country is taking steps to address its structural shortcomings,” Gilles Moec, co-chief European economist at Deutsche Bank in London. “France is walking a tightrope.”

Nine months into his presidency, Hollande is grappling with an economy on the brink of its third recession in four years and the highest joblessness since 1998. Prime Minister Jean-Marc Ayrault said Feb. 13 that France wouldn’t make its budget-deficit target of 3 percent of gross domestic product this year as the economy fails to generate growth and tax receipts.

Budget Rules

The European Commission is preparing to release its latest round of growth and deficit forecasts on Feb. 22 and is indicating it will take a tough line with countries that are behind schedule.

In a letter to European finance ministers this week, Economic Affairs Commissioner Olli Rehn rejected suggestions that the EU’s budget rules represent excessive austerity, saying deficit-cutting is reassuring bond markets that governments count on for financing.

France has been able to borrow at record-low yields, with the 10-year rate falling to its lowest of 1.916 percent on Dec. 10. The yield stood at 2.24 percent at 10:21 a.m. in Paris

An Hollande effort to shake up the pension system may help reassure officials in Brussels that France is making progress on cutting the deficit, said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London.

Sarkozy Measure

“If the French government wants a loosening of its fiscal target, it will have to stick with its plan of structural savings and lay out its program of spending cuts,” he said. “A general pension reform, which could be launched in July, would be seen as a positive step.”

In particular, a plan to delink state pensions from inflation would offer up-front savings, unlike an increase in the retirement age, which takes longer to feed through to the budget. On the table for discussions are also issues including pensions of civil servants, exemptions and the level of pension payouts, said one of the government officials.

For Hollande, the possibility of an overhaul was eclipsed by his campaign pledge to lower the retirement age to 60 for workers who had started working early. He made good on the promise last year, partially reversing a policy implemented by predecessor Nicolas Sarkozy to increase the retirement age.

Sarkozy raised the minimum retirement age to 62 and the age at which French residents can receive a full state pension to 67, bringing it closer to Germany’s.

Paralyzing Protests

The measures will still boost France’s pension-system deficit to 21.3 billion euros by 2017 and 24.9 billion by 2020, according to COR, the country’s council for retirement policy. Hollande will aim to close these gaps and to cover pensions for up to 2040, the government official said.

Sarkozy’s retirement-reform efforts brought millions of people into the streets across France during intermittent protests over a two-month period in 2010. Before the measures were pushed through, oil-refineries stoppages, fuel shortages and train- and public-transport disruptions had cost the French economy 400 million euros.

Protests in 1995 against then-Prime Minister Alain Juppe’s effort to reform pensions and social security brought France to a standstill for a month, forcing Juppe to abandon the plan.

Hollande, whose election in May came with support from labor unions, may have a battle on his hands with changes to pensions. Still, his record so far has been good, said Karine Berger, a Socialist lawmaker and former chief economist of Euler Hermes.

Reform Record

Hollande won an unprecedented union accord on labor flexibility last month, allowing companies to reduce hours and wages during economic slumps and also making it easier to fire people. He also cut 20 billion euros in payroll taxes for businesses to bolster competitiveness.

He has pledged to cut government spending by 60 billion euros over his five-year mandate.

“The credibility of this government in terms of structural reform is widely recognized,” Berger said. “A retirement-system reform will be done. We knew from the start that the last reform wouldn’t be sufficient.”

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