Budget Deficit France Under Pressure to Reform

The French government has promised to overhaul its labor market to appease the European Commission and meet its budget deficit targets.
Dark times for the City of Light.

France’s Socialist government is not having a great time.

A week ago, prime minister Manuel Valls had to face a vote of no-confidence, after he forced through a controversial set of labor-market reforms without parliamentary approvals.

He survived that vote, but he may face a much more humiliating no-confidence motion from Brussels. In a nutshell, the European Commission, the E.U.'s executive arm, does not believe in the economic success of the government’s policies. It is calling for quicker reforms.

“France’s economy has lost its competitiveness,” Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, told his countrymen on Wednesday.

The debt burden of unemployment insurance can be unbearable. Manual Valls, French prime minister

France has missed two deadlines imposed by the European Commission to get its budget deficit under control. On Wednesday, the Commission agreed to give France another two years to deal with its budget deficit but said that the country must do more to remedy its high budget deficit.

If that does not happen before May, then the Commission would declare an “excessive macroeconomic imbalance” and demand an economic “corrective plan of action” of the government in Paris.

France talks a lot about growth, but has been among those bringing up the rear in the euro zone in recent years. For three years the country has had almost zero growth, and only this year is it expected to rise to one percent.

The government has been talking to Brussels for weeks about France’s shortcomings and Mr. Valls made it clear, ahead of the Commission’s verdict, that he was willing to push through unpopular changes.

The most important and also most delicate issue is unemployment insurance. Management and labor unions have been united in their desire to maintain generous payments, at the expense of those who pay into the pot.

An unemployed person is entitiled to benefits of aournd 60 percent of their previous salary for a maximum of two years and payouts can hit €6,000 a month. And unlike in Germany, the claimant is not obliged to take any job.

 

French prime minister Manuel Valls promises more change.

 

Mr. Valls wants to change the system. “The debt burden of unemployment insurance can be unbearable,” he told employers and unions on Wednesday.

The rules applying to management and labor are actually due to be revised next year, but Mr. Valls does not want to wait that long. “For me, it is clear that the negotiations must be done very quickly,” he said.

The government faces not just opposition from the left-wing of its own party, but also labor union CFDT.

Mr. Valls benefits from the fact that unemployment in France, which has been at a a record high, dropped in January for the first time in two years by 19,000, down to 3.48 million people. If unemployment continues to fall the unions are more likely to be willing to discuss reforms – they were, unsurprisingly, not keen on cutting unemployment insurance at a time of rising joblessness.

Mr. Valls announced another change that will please Brussels: he wants to cut back on support given to the long-term unemployed. “There must be greater incentives to take a job,” he said.

The prime minister also wants to give companies more room to deviate from labor laws, and grant more exceptions to the 35-hour working week.

Ultimately, Mr. Valls wants to improve the dialogue between management and labor, but at the same time to reduce the costs incurred by companies. Today, businesses with more than 200 employees are immediately legally obliged to set up formal work councils and a host of other labor committees.

The prime minister wants to increase the threshold to 300 and allow companies to reduce the number of committees by blending different internal committees.

The economics minister Emmanuel Macron said on Thursday that “the government is determined to implement an agenda of reforms.”

The E.U. Commission made it clear that it believed France to be a weakened, but not sclerotic economy. It commended France for lowering taxes and social security payments, but said the changes did not give enough of a boost to exporting companies and will only first take effect in 2016.

The current government began its reform program too late: a mistake its center right predecessors made. In the past five years, France has lost 13 percent of its export markets. There are too few companies exporting, and their profitability is sinking. High wages are a big factor, but are not the only issue. The unit labor costs have risen but the rate of growth is slower than in Germany, and last year the hourly wages in industry fell below German levels.

The road to recovery is long and rocky, but there are signs that France is becoming attractive to international investors again. Business France, the foreign investment lobby group, said around 30,000 new jobs have been created in France since 2014 by outside investors and most of these have been related to the export economy.

Losing Competitiveness-01

 

 

But the uptick is too small to effectively counteract the trade deficit. In 2014, France posted a €53.8 billion trade deficit. The figure was lower than the €60.8 billion in 2013, but the difference was mainly due to falling energy prices, which made the fuel France imports cheaper.

That explains why Brussels is losing patience.

E.U. Commission, Jean-Claude Juncker has made it clear that while France has two more years, to get its budget deficit down to 3 percent, it will face a set of interim deadlines in the process.

By May, the government must ensure that the structural – that is, the cyclically adjusted deficit –must drop by 0.5 percentage points this year. If Paris does not succeed, then the situation in France will be up for discussion again in the Commission.

 

 

Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. Thomas Hanke is Handelsblatt's Paris correspondent. To contact the author: [email protected] and [email protected]