France needs a revolution in its economics

Even before the start of the 2016 European football championship on June 10 the host nation France was experiencing violence.

An industrial unrest with protesters clashing with police on the streets of Paris; workers picketing refineries, oil depots and power plants; and train and air transport being disrupted by striking airline workers, rail workers and air traffic controllers.

Such violent industrial action and protests against government policies are not unusual and are as French as the Can Can dance and croissants. However for a socialist president, Francois Hollande, who came to power promising to shift the economic balance in favour of wage earners by increasing taxes on the wealthy and big businesses, to become a source of workers’ hatred is rather unusual in French politics.

The cause of this recent labour unrest is the U-turn in economic policy by the socialist government. When he came to power in 2012, Hollande’s original economic policies — to redistribute wealth and balance the public budget through higher taxation — were abandoned. And new ones to reform the labour market — by making it more flexible to hire and lay-off employees — introduced.

The economic problems in the Eurozone are predominantly framed in terms of bank failures and sovereign debt problems in southern European countries like Greece, Spain, Italy and Portugal.

However, the structural economic problems of big countries like France have been swept under carpet. And these are as serious obstacles to the revival of the Eurozone economy and the global economy as the sovereign debt problems of the smaller southern countries.

The French economy cannot create high-wage jobs for its workforce, especially for its youth, and lacks growth generating private investments. Consequently, the economy cannot generate sufficient tax revenues due to the aggressive tax management strategies of big multinationals. The raid on Google’s headquarters in Paris by the French tax authorities — in the midst of industrial unrest in France — is a good example of the government’s increasing frustration in the face of low tax payments by big multinationals.

Google makes good money out of the French economy but the French government cannot collect taxes from its operations in France. On the other hand French companies pay their taxes to the government but tend to invest and create jobs outside France — in China for example.

The socialist government’s response to this economic malaise is to reform the labour market so that both French and international companies invest in France by making labour costs competitive.

These reforms, if the bill goes through the French Senate, will reduce stability for workers and introduce precarious working conditions. The unpopularity of the proposed law was such that the president used the presidential decree to avoid a parliamentary vote on the bill as a debate would have caused heated discussions and set off a political crisis in France.

The bill aims to give more freedom to individual employers in hiring, firing and setting working hours and paying for overtime. The proposed labour law, for example, will extend the weekly working hours from 48 to 60 and reduce overtime payments, making labour costs more flexible for employers.

This will be such that pay levels will be determined by local economic conditions rather than national negotiations between the unions and employers.

Currently the general unemployment rate is about 10 per cent but youth unemployment is 25 per cent. The youth constitutes only 8 per cent of unionised workforce.

Hence, there is a valid argument that the current labour laws protect the elderly unionised workers at the expense of the youth trying to enter the labour market. The proposed law aims to increase access to employment by the youth by making firing of unionised workers easier and putting a cap on redundancy pay at 15 months for people over 20 years of age.

Although these reforms will not make France the most competitive labour market in Europe, by French standards such reforms are revolutionary.

However in the midst of this sound and fury in French industrial relations, more rational questions regarding the structural problems and the global economic trends remain undiscussed. The UK reformed its labour market a long time ago making it one of the most flexible workforces amongst high-income countries.

But investments in the UK have not increased as a result because the economic problems in high-income countries are primarily due to private sector investment behaviour and the changing role of capital markets.

Most major companies in high-income countries are managed by executives who focus on stock prices rather than market share and growth. Hence they are more likely to use profits to make acquisitions, share buybacks or hoard the cash rather than invest.

And the fund managers in high-income countries tend to invest in capital markets to earn short-term high returns rather than support long-term investments in the real economy.

The politicians in France should aim to reform the governance in private companies and the way capital markets work as much as reforming labour markets. France has the necessary political, economic and intellectual capital to start a new revolution in economics by reforming the way private sector and capital markets work.

But will the French politicians, businesses and unions be creative enough to work collectively towards this goal? France needs new thinking rather than fighting over old-fashioned ineffective labour reforms.

The writer is with Manchester Business School.