France is in a state of alarm about its slumping ability to pay its way in the world, and a report on industrial competitiveness due on Monday is expected to add fuel to a hot debate about the causes, solutions and effects.
The so-called Gallois report, named after its author Louis Gallois, is the latest in a list of reports commissioned by successive governments on what is wrong with the French economy and the urgent reforms needed.
Typically, they point the way to deep structural reforms which run counter to French habits: they tend to be short-lived time bombs which are then locked away where they cannot upset the voters.
Gallois, the former head of the Airbus parent company EADS, was asked by the new Socialist government overseen by President Francois Hollande to report on what is holding France back, as part of the preparation of a “competitiveness pact”.
Ministers have already rejected talk that what the country needs is a big and sudden “shock” to boost efficiency, saying instead that measures will be spread out over five years.
But this time the government — facing a dilemma of dangerously overstretched public finances, anaemic growth and a huge trade deficit — says the analysis will not be buried.
The document is being launched into a frenzied climate. The government has just presented a budget for next year which raises taxes and curbs spending to correct public finances and to maintain France’s standing abroad as a pillar of the eurozone.
But the standing of the government at home has plunged in the polls just six months after the election which overturned right-winger Nicolas Sarkozy, and scarcely a week goes by without bad news of factories closing, jobs being shed or industries struggling to compete.
Prime Minister Jean-Marc Ayrault and his ministers have had a run of gaffes, the latest being a suggestion by Ayrault himself that the Socialists’ landmark 35-hour-week experiment, attacked by the opposition as a cause of falling competitiveness, might be reviewed.
He soon backtracked, but then Hollande himself acknowledged that the socialist administration is faced with introducing deep and difficult reforms.
Meanwhile, the minister for industrial regeneration, Arnaud Montebourg, who has been outspoken in blaming globalisation for destroying French jobs, has launched a “buy French” campaign, appearing on the cover of a magazine wearing the blue and white striped French fishermen’s jersey.
This provoked Frenchman Pascal Lamy, who heads the World Trade Organization but has socialist credentials, to warn that economic patriotism should not be tinged with protectionism, since growth in the world economy would come from export markets in emerging economies.
The cost of labour, and the cost of welfare
The share of French industry in global trade has shrunk from 6.3 percent in 1990 to 3.3 percent in 2011 as production costs have risen relative to those in other countries, and in particular to eurozone neighbour Germany where there are signs of concern about structural weaknesses in the French economy.
The government has set a target of eliminating during its five-year term the country’s 25-billion-euro ($31-billion) trade deficit, excluding a heavy deficit on trade in energy.
The competitiveness pact is shaping up to be a key initiative for Socialists to rejuvenate the economy as they are being forced to apply 37 billion euros ($47 billion) in austerity next year to meet the country’s EU fiscal targets.
With the unemployment rate rising back to 10.0 percent, pressure has been building on the government to act.
Leaks and speculation about what the report will recommend have sparked heated debate in recent weeks.
Much of the debate is likely to focus whether to target labour costs, which are high owing to taxes levied employers and employees to fund France’s expensive welfare system, or to target innovation.
Gallois has already enraged unions by suggesting taking the labour cost issue by the horns and cutting payroll levies paid by employers. This would mean shifting part of the tax burden on to workers by increasing the so-called CSG levy which helps fund the social security system, or increasing the VAT sales tax.
This is an old debate in France. The former government under President Nicolas Sarkozy failed to gather enough support for a similar measure which would have replaced the lost revenue with an increase in VAT.
Business leaders have piled pressure on the government, with the heads of 98 of the biggest French groups calling for a 30-billion-euro cut in welfare charges paid by employers over two years, along with massive cuts in public spending.
According to the Le Figaro business daily, Gallois will propose reducing cutting employer payroll levies by 20 billion euros and those paid by employees by 10 billion euros over two or three years.
The revenue shortfall would be made up by a small increase in VAT, an increase in the CSG levy and pollution taxes.
The government would find implementing such tax increases difficult next year because they would crimp consumer spending further.
Finance Minister Pierre Moscovici said this week that the government was likely to focus on measures to promote innovation.
“I think that first of all we’ll act on things other than labour costs,” said Moscovici.
Targeting innovation is unlikely to produce such quick results although it is likely to cost less in the short term.
Promoting research, improving worker training, simplifying administration and other similar measures could produce significant long-term benefits, however.
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