Breathing new life into France's economy

PRAGUE — Nicolas Sarkozy’s presidential election triumph in May, and now the victory of his party, the UMP, in the parliamentary election, has created the most favorable opportunity in decades for deep structural reform in France. Not only did Sarkozy win the presidency with 53 percent of the vote, but his approval rating has since soared, to 62 percent, after he formed an inclusive government with high-ranking recruits from the opposition.

In the first round of the parliamentary election, the UMP won a record-high 40 percent of the vote. While voters denied the UMP a landslide victory in the second round, its overall win meant that the governing party retained its legislative majority for the first time in 29 years.

In the days following his election, Sarkozy brought France “back to Europe,” reinvigorating the Franco-German partnership and giving decisive support to German Chancellor Angela Merkel’s campaign to revive the European Union’s draft constitutional treaty. He demonstrated pragmatism by not vetoing ongoing EU accession negotiations with Turkey, thus avoiding unnecessary confrontation with Britain and Spain, despite maintaining his long-term opposition to full membership for Turkey. Likewise, his government’s discreet silence in the wake of the European Central Bank’s latest interest rate increase constitutes eloquent recognition of the ECB’s independence.

But how will Sarkozy and his government respond to France’s internal challenges? With anemic growth, unemployment stuck between 9 percent and 10 percent for more than 20 years, and immigrant ghettos that vacillate between lawlessness and despair, France is indeed one of the sick men of Europe. Where adaptation to ruthless international competition and rapid technological change calls for flexibility and individual responsibility, the dominant culture in France continues to be one of assistance and entitlement.

It is now clear that the French government will follow Sarkozy’s presidential program to the letter. The program’s flagship measure is the wholesale exemption of overtime hours from social security and income taxes. Many economists and some foreign observers are puzzled by the emphasis Sarkozy has placed on this expensive provision. Indeed, it might appear disproportionate to give higher priority to encouraging overtime than to stimulating employment.

But France is not a normal country. For 10 years, it has struggled with the costs of a mandatory 35-hour week — a ceiling that is now so embedded in the legislation regulating working hours that simple abrogation would lead to chaos. The alternative, a targeted tax holiday, constitutes a welcome break with the culture of “time off” and an encouragement to those who, as Sarkozy’s campaign slogan put it, want to “work more in order to earn more.”

The program’s other measures are a series of tax cuts for the middle class, entrepreneurs and the wealthy, which, though expensive, constitute a similarly welcome break with France’s tradition of punitive taxation.

However, none of these measures goes to the heart of France’s structural problems. The Gordian knot paralyzing initiative and blocking employment consists in the maze of regulations that stifle the labor market. French companies live under the constant threat of a surprise visit from the labor inspector to determine compliance with a thick book of arcane measures. Worse yet, the knowledge that some law or regulation covers every aspect of employment poisons the workplace and discourages attempts to resolve problems pragmatically. When both parties to a dispute know that they are likely to end in a labor court, neither has an incentive to compromise.

The law’s most onerous provisions are those regulating the terms of employment contracts, for they condemn employers who decide to close a plant to a marathon of legal proceedings of uncertain duration and unpredictable outcome. This not only hampers restructuring, but also makes firms hesitant to hire and inhibits innovation.

A stopgap measure that permits firms to hire workers for temporary assignments, on condition that they not be renewed, condemns the least skilled to a demoralizing cycle of short-term jobs and repeated spells of unemployment. These marginal workers are predominantly immigrants and the children and grandchildren of former immigrants, whose social and economic integration is thus blocked, trapping them in increasingly violent suburban ghettoes.

There is a simple, if radical, solution: abrogate the legal provisions that regulate the duration of employment contracts, and return the treatment of tenure and seniority to collective bargaining, as is the case elsewhere. The logical complement of such freedom would be to make employers pay for the social costs of plant closings, by levying a tax on layoffs, which would increase with seniority. The proceeds of the tax could be used in part to fund the much needed expansion of France’s underdeveloped public job placement services.

Unfortunately, Sarkozy’s program in this critical area is vague. Job protection benefits the employed at the expense of the unemployed, and some unions, notably the most militant, are strongly opposed to greater flexibility, and have already threatened to block liberalizing measures in the streets. The pragmatic course, therefore, was to set general objectives during the campaign and, after the elections, to encourage the unions to make the first proposals.

Prime Minister Francois Fillon has called for tripartite negotiations on tenure and seniority this summer and fall. Will the government settle for marginal changes to the existing labor code, or will it seize its unique opportunity to break with a generation of stifling regulations? The future of the French economy, the stability of French society, and the influence of France in the world hangs on the outcome.