Wolf Richter: Competitiveness Cacophony – Attack On France’s Sacred Cow

Yves here. Wolf reports on the row in France over “competitiveness,” which some readers have correctly noted is of the excuses used for reducing worker wages while those of the managerial and executive classes somehow always wind up being exempted. The part I find curious is the proposal to get rid of the 35 hour workweek. Wasn’t it in France that proposals were floated to cut the workweek even further, the idea being that it was better to share the pain of a weaker economy via underemployment, rather than have more people unemployed? Remember that unemployment imposes costs beyond the loss of wages (which are bad enough): loss of skills, social isolation and often depression. But one has to assume this 35 hour workweek proposal is really about a big pay reduction, by getting employees to stay at work for 38 or 40 hours a week for the same level of pay. French nationals are very much encouraged to pipe up in comments.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from http://www.testosteronepit.com/home/2012/10/8/punishment-of-the-spanish-political-class-by-the-people.html“>Testosterone Pit.

References to the financial crisis are piling up in France’s economic data. Earlier this week, the manufacturing and service indices hit levels last visited in early to mid-2009. Then the business climate index dropped to a level of pessimism not seen since mid-2009. On Wednesday, the unemployment office announced the largest month-to-month jump in people registered on its rolls since April 2009. Over 3 million people were on those rolls for the second month in a row, the worst since 1999. The long-term unemployed rose to 38.7% of the total. Unemployment, which started ticking up in May 2011, will likely end the year well above 10%.

On Thursday, it was housing. The total amount that banks granted for mortgages plummeted by 30.5% so far this year from the same period in 2011—despite the low rates. For all of 2012, an estimated €115 billion in mortgages will be granted, versus €162 billion in 2011. “We have never before seen a drop of this magnitude at this speed,” said Michel Mouillart, author of the study. What took two years during the crisis of 2008-2009, he said, is now happening in one year.

The government has been flailing about to counter economic trends that started while Nicolas Sarkozy was still president. And one of the most bandied-about catchwords these days is “competitiveness”—entailing among others the cherished and untouchable 35-hour workweek, equally untouchable wages, and sky-high employer-paid payroll taxes and social security charges. An explosive mix.

To keep the government out of the danger zone in case this mix blows up, Prime Minister Jean-Marc Ayrault had entrusted this task in June to Louis Gallois, former CEO of aircraft maker EADS and of state-owned railroad SNCF. Gallois would head the Investment Commission, and one of his jobs would be to put together recommendations on how to raise the competiveness of French businesses. The report would be submitted to President François Hollande by November 5.

Alas, last Friday, elements of the report seeped to the surface. Written mostly by CEO associations, apparently, it calls for a “competitiveness shock” by slashing €30 billion from employer-paid payroll and social security taxes. To fund it, the report calls for “massive reduction in public spending” (which would trigger total war from all concerned), moderate increases in General Social Contributions and Value Added Taxes (screaming from workers and households out of whose pockets this would come), and a new eco-tax on diesel (about 74% of all automobiles in France are diesel-powered… expect taxis to paralyze Paris for a few days).

Instant cacophony. In the spring, President Sarkozy had tried to implement a similar program of payroll tax cuts—and cost transfers from companies to households, which might have contributed to his defeat.

Hollande distanced himself from the fallout immediately. It “only commits the author,” he said coolly. Labor Minister Michel Sapin shrugged it off: “The Gallois report isn’t the only one,” he said. Finance Minister Pierre Moscovici tried to step out the brushfire. “I’m here with Louis Gallois who is assuring me that these aren’t even leaks but distortions,” he told reporters in Berlin where he attended an economics forum. But on Wednesday, Prime Minister Jean-Marc Ayrault defended the report: “I don’t want to bury it,” he said. “There will be lots of things that will be taken up, and there will be others that won’t be.”

CEOs weren’t so sanguine. “The problem must be dealt with, we don’t need another report,” said Carlos Ghosn, CEO of Renault and Nissan on Saturday. “If we want to create jobs in France, and if we want that the industry doesn’t emigrate from France in a massive manner, we need to reduce the charges that weigh on labor.” He was supported by the CGPME, an employer union of small and medium companies with about half a million members.

But on Thursday, le Parisien provided another glimpse at Gallois’ “Competitiveness shock,” and a shock it was. “Based on our information,” it wrote, the report proposed to “bury” the 35-hour workweek.

Shrapnel flew in every direction. It’s the Socialist sacred cow, instituted in 1998 under Prime Minister Lionel Jospin, cherished and loved and ridiculed too—though many managers, sales people, entrepreneurs, and others work often ungodly hours (same as elsewhere). How could a Socialist government even come up with such a thing! It was the conservative agenda! It was Gallois’ “bomb,” le Parisien wrote. It was THE shock proposition. It would eliminate any reference to a legal limit of the workweek and shift to an “à la carte system, as in Germany,” with the length of the workweek being negotiated company by company.

Oh là là! The electronic ink wasn’t even dry when the denials started hailing down on France—including categorically from Gallois’ Commission.

The leaks and the resulting cacophony had ground down what little credibility the yet unpublished report on competitiveness still had. Perhaps, given the uproar, it will be hastily rewritten and watered down to be put on a shelf and forgotten.

This report to raise France’s competitiveness wasn’t the first one: since 2005, members of parliament, prestigious institutions, economists, expert commissions, and think tanks have presented a total of 25 such reports to the various French presidents. All of these reports warned about the increasingly uncompetitive French economy—and all of them were soon left to gather dust on some shelf. A fate that awaits Gallois’ report as well.

And if “competitiveness” is just too painful, there’s another option. In its desperation, the government deployed its man with a vision: Industry Minister Arnaud Montebourg. Read…. Shooting From The Hip And Hitting Consumers: Protectionism In France.

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  1. Hilary Barnes

    All about a big pay reduction? Not really. Once upon a time it was possible, by exchange rate devaluation. That option is not avilable, so the French are discussing shifting taxes from labour to taxes paid by everyone,like the value added tax or income tax. Many of France’s welfare programmes are largely financed by ‘charges sociales’ (which are in effect wage sum taxes). But while reducing the ‘charges sociales’ would lower wage costs, financing it by taxing a broader base would reduce the purchasing power more especially of low income people. The government does not seem inclined to take this path. As for the 35 hour week, it now appears that the competitivity report does not call it in question. On the other hand there are discussioins taking place which might result in some easing up in France’s voluminous and complex labour laws that seem to be based on the implicit assumption that firms should never be able to reduce the payroll, except by natural attrition, and any attempot to do so is made very difficult and very expensive. So firms are reluctant to hire when times are good because they are at the mercy of these same labour laws if they caught with too large a work force when times turn bad.
    As for Wolf Richter, he is always entertaining, but when you strip away the fun you find he knows what he is talking about. The cacophony in the ranks of the government is apparent to everyone, originatig pehaps from the fact that few of its members have previous ministerial experience. Francois Hollande also wants to obtain a degree of social consensus over the measures which need to be taken to straighten out the economic problems, which means discussing everything with the social partners. Whether he will get the consensus he would like we do not know yet, but in the meatime it gives rise to an impression that the government does not know what it wants to do. And what it has done or is in the process of dloing is to try to cut the general government budget deficit from 4.5% this year to 3% in 2013 in compliance with EU agreements. Whether austerity French style will make the budget problems, as well as the labour market problems, even worse, as in Spain, Portugal and Greece, we don’t know, but it is obviously possible. France’s budget tightening is being done largely by increasing taxes, especially on business and the rich. The argument seems to be that cutting public expenditure would be more damaging to domestic demand than raising taxes, but the tax policy has alienated business. If the mood prevailing right now is anything to go by, this policy will have a devastating impact on business investment.
    P.S. I am not French but resident in France

    1. Systemic Disorder

      “Once upon a time it was possible, by exchange rate devaluation. That option is not avilable.”

      Will the adaption of the euro come to haunt France in the way it has haunted countries like Greece? When the all the devaluation has to come internally, the results are not pretty …

  2. The Dork of Cork.

    The recent countrywide Q2 declines in public transport numbers (even in the Paris metro) puts into question the massive investment in this sector since 2009 and the future.

    The Euro disease of falls in domestic demand to subsidise the very wasteful activties of the elite has arrived on French shores.
    Its now the Franc or Baltic like austerity where Human and physical capital gets the market state treatment which uses false fiscal metrics to justify its entropy.

  3. The Dork of Cork.

    Even the Paris Metro is now not a closed loop French system…..
    “google translate”

    “End of 2010 and after a competition between different suppliers, the RATP decided not to renew his contract at EDF and supply, electricity from 1 st January 2011, with the Austrian Verbund and the German E.ON to cover 90% of its electricity needs.”

    It seems the French have caught the British “switch” disease via their not so bright German partners.
    But where does these dubious efficiency gains finally end up ?
    Does it merely increase west indian domestic demand via off shore equity holders ?

  4. The Dork of Cork.

    Euro car plant supply chains have increased to absurd distances so as to benefit from lower labour costs in the east.


    (There is now a push beyond Poland to Russia for no net gain, indeed this increases non labour costs such as transport)

    However this tactic depends on the existance of increased amounts of credit to take the place of lower wages……i.e. its a Ponzi.

    If they want a domestic market of any size they will need to go back to national units of account and pay people the wages to build the stuff needed at home.

    France still has some elec. energy it exports abroad……why not add value to its products at home ?

    This means a return to cheap 1 Litre petrols and the use of diesels only for people who drive long distances.

    They also need a modern 2CV built in France with a cheap 600cc engine as before.


    Labour costs should not enter any Industrial equation which requires so much capital.
    The Euro system especially post 1986 is at the heart of this waste via pointless arbitrage.

  5. steve from virginia

    The Dork of Cork is like Poe’s Raven:

    `Prophet!’ said I, `thing of evil! – prophet still, if bird or devil! –
    Whether tempter sent, or whether tempest tossed thee here ashore,
    Desolate yet all undaunted, on this desert land enchanted –
    On this home by horror haunted – tell me truly, I implore –
    Is there – is there balm in Gilead? – tell me – tell me, I implore!’
    Quoth the raven, `Nevermore.’

    Wolf Richter is now what he was before, a used car salesman:

    ““The problem (labor expenses) must be dealt with, we don’t need another (stinkin’) report,” said Carlos Ghosn, CEO of Renault and Nissan on Saturday.”

    It is easy to see to what lengths the French — both in and out of the establishment — will do to preserve their precious automobiles. They will will literally stop at nothing, including attack other countries (Libya) and abuse their own citizens: France is Greece with a slightly differing place on the time line.

    Germany is on the same time line.

    Keep in mind, France has no oil wells or domestic fuel production, it relies on cleverly disguised thievery to remove the 1+ million barrels of crude oil from other countries! This is the crude oil it burns up for zero-returns every single day …

    France, its workers, intelligencia, bosses and ‘better classes’ are entitled to this into the far distant future, doncha think?

    Quoth the raven, `Nevermore.’

  6. Ishmael

    I remember one time I was doing some consulting work in Malta involving Libya. It was against the law to work past 5 oclock, so we would just pull the blinds down and keep working. How ridiculous. I remember when I arrived with some big trunks full of supplies and customs started sniffing around. I thought they were going to ask me if we had drugs or something. Nope he asked me if we had color TV’s. It was against the law to bring color TV’s in because it would create such a negative flow of cash out of the country. This is socialism for you.

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