The performance gap

The French government realizes that the country’s competitiveness must be restored

By  AULNAY-SOUS-BOIS

THE end of the early shift, and workers at the Peugeot car factory at Aulnay-sous-Bois, near Paris, are streaming out through the turnstiles. The anger is raw; the disappointment crushing. In July, when the company announced that the plant, which employs 3,000 workers, was to close, President François Hollande loudly branded the decision “unacceptable”. Two months and an official report later, his government has now accepted its fate. “Hollande said that he would look after us,” says Samir Lasri, who has worked on the production line for 12 years: “Now we regret voting for him.”

The decision by Peugeot-PSA, a loss-making carmaker, to shut its factory at Aulnay, the first closure of a French car plant for 20 years, and to shed 8,000 jobs across the country has rocked France. It has become an emblem both of the country’s competitiveness problem and of the new Socialist government’s relative powerlessness, despite its promises, to stop private-sector restructuring. Tough as it is for the workers concerned, the planned closure may have had at least one beneficial effect: to jolt the country into recognising that France is losing competitiveness and that the government needs to do something about it.

Over the past 12 years, a competitiveness gap has opened up between France and Germany, its biggest trading partner. This shows both in manufacturing unit-labour costs, which have risen by 28% in France since 2000, but only 8% in Germany, and in France’s declining share of extra-EU exports. A cross-border study of two chemicals firms by Henri Lagarde, a French businessman, points to part of the problem: the German company pays only 17% of its employees’ gross salaries in social charges, next to 38% for its French counterpart. A recent study of competitiveness ranked Germany in sixth place; France came 21st.

During the presidential election campaign earlier this year, competitiveness scarcely featured—either on the right or the left. Once elected, Mr Hollande gave Arnaud Montebourg, who wrote a best-seller calling for “deglobalisation”, a ministerial job designed to stop industrial closures. Mr Montebourg has duly toured the country promising the impossible.

This autumn, however, as factory closures mount, a creeping sense of reality seems to be setting in. Mr Hollande may still be bent on his new 75% top tax rate, yet on other matters the tone has changed. Not only has the Aulnay closure been accepted, but Mr Hollande has talked of “painful” efforts ahead. He warned about €10 billion ($13 billion) of spending cuts, as well as €20 billion of tax increases, in the 2013 budget. Above all, he called for a “reform of the labour market”—traditionally a taboo for the left.

Mr Montebourg may still denounce the “greed of the financial system”, but other ministers, notably Pierre Moscovici, the finance minister, and Michel Sapin, the labour minister, sound more reasonable. “We want to be sensibly pro-business,” says Mr Moscovici. “We are very conscious that our economy won’t perform without our companies.” Advisers recognise that labour costs too much and that the level of public spending—at 56% of GDP the second-highest in the European Union—is a problem for France.

If there is a new mood, it is partly because of the stagnating economy, and partly because business chiefs have been pressing ministers to stop bashing them. France still has plenty of competitive industrial firms. This summer, Mr Hollande spent three hours visiting a research facility near Paris belonging to Valéo, a successful high-tech car-components supplier with €10.9 billion in annual sales.

How far the new realism will translate into bold decisions, however, is another matter. One immediate test will be the 2013 budget, due on September 28th. The French now face the shock of cuts. Mr Moscovici insists that, however difficult, France’s promise to reduce its budget deficit to 3% by 2013 will be respected.

Equally hard will be a test of the new team’s resolve to improve competitiveness. Louis Gallois, a former businessman, is due to produce a report next month. He is likely to argue for a “competitiveness shock”, including the transfer of a chunk of payroll charges to other forms of taxation, such as green taxes or the contribution sociale généralisée (CSG), which is levied on not only the payroll but financial returns, pensions and unemployment benefit.

Most critical of all, Mr Hollande has given union leaders and bosses until December to negotiate labour-market changes. On the table are various options, including making it possible for firms to reduce hours and salaries in a downturn against a guarantee of job security, along the lines introduced by Gerhard Schröder in Germany in 2003. The CFDT union’s incoming leader, Laurent Berger, also accepts the case for more suppleness in the labour market.

All of which is at least encouraging. Yet it is one thing to recognise a problem, and quite another to do something about it. Much will depend on the attitude of union leaders, who do not enjoy a reputation for co-operation and compromise. But in the end, it will come down to Mr Hollande’s resolve. He promises to pass a labour-reform law anyway, even if no deal is reached. His Socialist Party controls power at all levels across France; he is at the start of a five-year term; and his popularity is already dropping fast. If he cannot do what is needed this autumn, it is unlikely that he ever will.