Could France become the next European state to descend into turmoil? Its labour minister called it “totally bankrupt” on the radio last week. Its debt pile is worth 90% of GDP and has been growing since the 1980s, the last time France balanced its budget.
Last year the deficit was around 5% of GDP, exceeding the government’s target of 4.5%. The economy is set to shrink this year and, because it has become over-regulated and uncompetitive, it will be especially difficult to achieve the growth required to pay down debt.
The fiscal squeeze required to tame the deficit will also be a headwind. And in times of economic trouble, “it’s nearly impossible to impose severe social and economic changes”, says former foreign minister Hubert Védrine. That militates against far-reaching reforms to bolster any growth potential.
Against this inauspicious backdrop, however, France has at least begun to tackle its notoriously inflexible labour market. A deal between employers and three out of five major trade unions will, for the first time, allow employers to trim wages and hours in tough times – having negotiated with in-house unions – in return for guaranteeing jobs.
This is hardly a revolution, however. As the Financial Times notes, the deal fails to address the “excessive protection” of workers on long-term contracts. That’s the main reason employers are loath to hire.
Still, it’s “a step in the right direction”, says Pierre-Olivier Beffy of BNP Paribas, a bank. Deutsche Bank is encouraged by the “clear wedge” that has appeared in the union movement, with the moderate wing “implicitly siding with the socialist administration on the impossibility” of France sticking to the status quo. “This is encouraging for the continuation of the reforms.”
The unemployment benefits system and pensions will be the next areas up for discussion. Only when the president, François Hollande, has tackled the “taboo” of change to France’s excessively generous welfare system, says the Financial Times, will he “be able to say he has modernised France”. France’s bond yields may be low for now, but it’s too early to be sure it won’t succumb to the debt crisis.