France: The Paralyzed Country

Claire Demesmay on Franco-German tensions and the economic crisis next door

13/05/2013 five questions to Claire Demesmay

Five Questions, May 6, 2012

Category: Economy and Finance, Bilateral Relations, France, Germany

The mountain of French debt continues to grow. So does unemployment. Competitiveness remains a weak point. Germany’s most important partner in the EU is in deep economic crisis. President François Hollande has now been in office for a full year, but French approval ratings for him have fallen sharply. Germans are concerned not only about the French government’s reform efforts, which are far from successful, but also by the anti-German comments coming from within Hollande’s Socialist Party.

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The EU Commission’s latest economic forecasts paint a gloomy picture for France. What is the mood like in the country?

After the stagnation of French gross domestic product in the past year, the economic situation has become even worse in the past months. The growth forecasts for 2013 and 2014 give real cause for concern. Unemployment is approaching the 11 percent mark, double the German rate. Above all, the rate of youth unemployment has been increasing dramatically; a fourth of young French people are jobless. Growing social problems are threatening social cohesion.

The closures of the Peugeot manufacturing plant in Aulnay and the Mittal steel works in Florange show just how bad things are right now for French business and the country’s industrial base – even though François Hollande’s campaign emphasized the need to revive France’s importance as a industrial location. In order to keep the left wing of his Socialist Party (PS) happy, he even created a “Ministry for the Revival of Production,” which is headed by the anti-globalist Arnaud Montebourg. But there is a huge gap between speech and deeds in French industrial policy. In a country that relies much more heavily on state intervention than Germany does, it is a particularly painful experience.

The mood in France thus fluctuates between resignation and anger. The people doubt the country’s ability to overcome the crisis. Trust in politics has been shaken – and, above all, in the government. Never has a president become so unpopular in such a short span of time. Hollande is criticized as weak and hesitant.

The clearest sign of the population’s discontent comes from the surveys, where support is at record highs for both the Front National party on the extreme right and the Front de Gauche on the extreme left. At a time of increased taxes and deep cuts to social programs, moreover, the tax scandal surrounding former finance minister Jérôme Cahuzac has had a disastrous impact on the way the public views politics. Prime Minister Jean-Marc Ayrault is now trying to push through a “Law for the Moralization of Political Life,” which would make the financial affairs of French legislators transparent, among other things, but this step will not be enough to win back citizens’ trust.

France is facing immense economic and social-political challenges, but Hollande’s policies of reform seem to be hesitant at best. Why is this?

The president and his administration do not want to scare the public off with a reform tempo that is too fast-paced. If discontent is too high, matters could easily lead to a general strike of the sort that occurred over pension reform under Nicolas Sarkozy. This is how reforms have regularly been thwarted in the past. Social conflicts in France often play out in a far more confrontational way than they do in Germany. In contrast to the German culture of employee participation in companies, French employees have an individual right to strike that is anchored in the constitution. In order to keep citizen irritation from once again becoming a blocking factor, President Hollande and Prime Minister Ayrault are trying to draw employers’ associations and unions into participating in government efforts by means of “social dialogue” – a new and unusual route for France.

In fact, the strategy seems for the time being to be working. So far, the administration has been spared strikes – which, even at the announcement of a reform measure, can completely paralyze public life. Above all, however, the employers’ associations and three of the five unions have managed after month-long negotiations to reach an agreement on ways of making the labor market more flexible. Corresponding legislation is expected to pass this May. With it, businesses in economic difficulty would be entitled to implement longer working hours and wage reductions, and layoffs would become easier.

Because of the split within the PS, moreover, President Hollande must compromise both with the left wing and the social-democratic wing of his party. The socialists on the left have thus pushed him to create more governmentally subsidized jobs and to introduce a capital tax. At the same time, the government has adopted some of the goals of its conservative predecessors, continuing efforts to balance the budget as well as to lighten tax burdens and labor restrictions for businesses.

But Hollande’s method of “having it both ways” is time consuming, and it hardly allows for taking any big leaps. Above all, instead of winning the population over, the government is making itself more vulnerable to criticism. Rather than interpreting their president’s policies as a “middle course,” the citizens see only zigzags. Hollande is between a rock and a hard place – between many rocks and many hard places, in fact. While the conservative opposition calls for greater austerity, many on the left insist on promoting greater social equality.

The major exception to this general policy of balancing was the initiative in support of same-sex marriage, which is being implemented despite mass protests. In times of straightened sociopolitical circumstances, the project is supposed to solidify the left’s sense of itself and show that the president and prime minister have political will as a leading duo. Hollande and Ayrault were able to score points with it – at least within their own party.

How much room for negotiation does President Hollande enjoy?

Very little, unfortunately – particularly with regard to the country’s disastrous finances and its European obligation to restructure its budget. In addition to this, Hollande has to face extremely varied challenges from within his governing coalition.

President Hollande, Prime Minister Aryault as well as Minister of Economics and Finance Pierre Moscovici can be classified as reform-ready social democrats. The fact that they refrained from nationalizing the steelworks in Florange attests to the temporary triumph of realpolitik within the PS. Even most socialists have meanwhile come to realize that, for French business, the lack of competitiveness is a central problem.

In response to this the government agreed at the end of 2012 to a “Pact for Growth, Competiveness, and Jobs,” which indirectly reduces labor costs through tax breaks of twenty billion euros. In addition to this, a relief fund of five hundred million euros is earmarked for research and innovation in smaller and mid-sized enterprises.

On the other hand, a great many socialists and green party members are having a hard time turning their backs on traditional leftist attitudes. A portion of the socialist party fraction in the Senat thus recently supported draft legislation proposed by the left-radical Front de Gauche that would offer amnesty for offences committed in connection with social conflicts. Had it passed, trade unionists and employees who damaged production goods or threatened employers during labor disputes could have counted on immunity from prosecution. Admittedly, the law was criticized by numerous cabinet members and ultimately rejected, but the conflict left its mark.

Like the Socialist Party, the trade unions are also split into two camps right now. The fact that the reform-friendly CFDT (French Democratic Confederation of Labor) and the confrontational CGT–FO (General Confederation of Labor – Workers’ Force) held separate May Day demonstrations this year for the first time in five years says a great deal. Ever since the camps took up opposing positions on the agreement to introduce more flexibility into the labor market, the gulf has become even harder to breach. The division between the unions could lead to radicalization – and further diminish President Hollande’s scope for negotiating. For if resistance becomes to strong, structural reforms will no longer be possible.

How can France get its national debt under control?

Public debt has reached worrisome heights. At the end of 2012 it was 90.2 percent of the gross domestic product, and it is expected to climb to 94.3 in 2014. The high level of public debt is having a negative effect on economic dynamics. Lack of growth in turn makes debt reduction all the more difficult. The French economy risks ending up in a vicious circle.

Already during the campaign Hollande made a priority of balancing the budget. At first the administration focused on a massive income increase by raising taxes. The emphasis seems meanwhile to have shifted to reducing expenditures. The goal for the next year is to reduce public expenditures by 14 billion, while increasing revenue by six billion.

However, Paris has been recently advocating a slower pace for debt reduction. The ambitious 3-percent goal set for the 2013 budget has been dropped. The fact that the EU Commission has now granted France two more years to consolidate its budget appears to affirm this approach.

An austerity program of this sort necessarily means that cuts to social benefits cannot be avoided. Paris wants to save a billion euros on its family programs. It has been predicted that about 15 percent of households will be affected. An expert commission is also currently scrutinizing the financing of the pension system and will present its reform recommendations this summer. Social partners are expected to agree to increasing contributions as well as to limiting pension appreciations so that the rate of increase is slower than inflation. While raising the retirement age will be unavoidable in the intermediate term, it is unlikely to happen in the near future. From the German point of view, this policy of taking baby steps in times of crisis may seem unreasonable; in the French context, however, it is a tour de force.

In the meantime, Paris and Berlin are arguing about the best way to respond to the crisis. What are the implications of this for Franco-German relations and for European policy?

Behind the insulting attacks on the German chancellor and the harsh criticism of Germany by a segment of the PS lies a broader lack of understanding for the German position on the debt crisis – there are calls not only among the socialists but also within political and business circles for loosening the austerity policy, slowing down debt reduction, introducing EU growth programs, and a rapid implementation of the European Banking Union – all demands that Germany continues to reject.

The current situation elicits a double sense of frustration across the Rhine. For one thing in almost all areas France is faring economically worse than Germany, whose economic power is constantly evoked in public discourse as a benchmark. Whether fighting unemployment, setting safeguards for budgetary discipline, or achieving trade balance surpluses, Berlin does it better. For another thing, France’s influence in the EU has been eroding in the last years – to Germany’s advantage. Because of its economic problems it is increasingly difficult for Paris to make its voice heard in Germany and in the EU as a whole, to say nothing of taking on a leadership role.

Paris has for some time been trying to intensify its cooperation with Italy and Spain in order to gain more political weight. If this reorientation turns out to be permanent, it could have a negative effect on the Franco-German partnership – and damage its traditional role of forging compromise within the EU. With it, antagonism between the EU’s southern and northern countries could grow.

If the Franco-German partnership is to regain its former efficiency, France needs to get its economic problems under control. But it would also be helpful to see a greater readiness for discussion and compromise on the German side. This would help forestall the sense of hopelessness in the country next door. Up until now, the German government has refrained from publicly criticizing French policies – for its partner’s weaknesses and the resulting standstill in European public policy are neither in Germany’s nor in Europe’s interest. On the contrary: Berlin needs a strong partner to stabilize the euro zone.

France and Germany must, moreover, strengthen their bilateral cooperation in areas that extend beyond economic policy, areas in which France can take a leading role. Even though solving the euro crisis has top priority, this does not rule out the importance of security and defense policy. In times when resources are scarce, this, too, makes sense.