France Moves Gently To Loosen Job Rules

Investor's Business Daily

France's recent reform attempts are insufficient to reverse a downward economic spiral that could marginalize a eurozone pillar and prevent further integration among member states, analysts warn.

Without comprehensive action, France's increasingly dim prospects could scare Germany into blocking eurozone burden-sharing policies needed to guard against another debt crisis.

Gross domestic product data released Wednesday underscored France's weakness, confirming it is in its third recession in four years as Q1 output fell a worse-than-expected 0.2% from Q4.

Eurozone GDP shrank for a sixth straight quarter, though the 0.2% fall was less steep than Q4's 0.6% retreat. Germany expanded by just 0.1%. Italy and Spain remain stuck in deep slumps.

The data came a day after France's parliament passed reforms meant to allow more staff and pay cuts in recessions. The changes also are aimed at discouraging short-term labor contracts .

France Is No Germany

But the reforms are seen as too little and too late, especially compared to Germany's labor liberalization a decade ago as well as efforts Spain and Italy made when the debt crisis worsened.

Failure to reform the labor market has eroded France's competitiveness, depressed economic growth and contributed to a record number of unemployed.

France's jobless rate is 11%, more than double Germany's 5.4%, according to the European Commission's calculations. At the start of 2007, Germany's rate was 9.3% to France's 8.8%.

"France is drifting closer to the periphery," said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

One of the most glaring omissions from the labor measures is any change in the 35-hour workweek. Also unaddressed is France's relatively generous minimum wage and jobless benefits.

Overall, firms still face rigid rules on how to operate, and Kirkegaard doubts more reforms are on the way.

"It's not a country that's politically capable of reforming itself without an economic crisis," he said.

A crisis may not come. France doesn't have towering debt imbalances like Greece and Spain, nor does it have Italy's history of chronic stagnation. The European Central Bank is also unlikely to allow Europe's No. 2 economy to reach a crisis state.

That may leave Germany without a strong opponent/partner that would provide Berlin with enough confidence to share some of its neighbors' fiscal and banking risks, he said.

Other analysts are less pessimistic in the long term but also don't expect much in the short term.

Additional reforms may not come under Socialist President Francois Hollande, but they are still possible, said Virendra Singh, an economist at Moody's Analytics.

France eventually will come under sufficient domestic and international pressure to liberalize its labor market and regain some of the competitiveness it lost.

"Reform will come," he predicted. "It may be stretched out over a longer period than necessary.

If or when it does happen, policies like the 35-hour workweek probably won't completely disappear but will instead get watered down enough to represent a de facto repeal, he added.

Better Than Nothing

Given the fears that France would do nothing about its com petitiveness, the labor laws could be seen as a good first step, said Bill Adams, senior international economist at PNC Financial.

He believes France's leaders understand the economy has fundamental problems, though more serious changes likely will take years rather than months.

Another area to address would be loosening the licensing regulations in the service industry. He acknowledges that's a tall order. A smaller, reassuring step could be undoing some job protections.

Such safeguards and social welfare policies are central to how the French see their economy, and changing them will take time, he noted.

"We can't expect it to be quick. That they've started is a positive signal," he said.

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