FRANCE: The snail's progress.

FRANCE: The snail's progress. - Militant workers, corruption and a history of chauvinism are all slowing down France's attempts to join the modern world.

by Charles Masters.
Last Updated: 31 Aug 2010

Militant workers, corruption and a history of chauvinism are all slowing down France's attempts to join the modern world.

'I'm in a position where whatever I do is contested,' whined French premier Alain Juppe at the beginning of the year. Well may he complain.

The embattled Gaullist, given the unenviable task of overhauling the bloated state budget by President Jacques Chirac following the elections in May 1995, has encountered popular resistance to his every move.

In the autumn of that year, Juppe announced much-needed cuts in the welfare system in order to halt social security deficits running at some FF54.9 billion (£6 billion) a year as France struggles to get its economy in order for the single European currency. The response was the worst social unrest since the student revolt in 1968, with a massive public-sector strike which paralysed the capital for several weeks in the run-up to Christmas.

More recently, proposals to dissolve the loss-making nationalised bank Credit Foncier led to a three-week occupation of its headquarters by staff, during which the bank's chairman Jerome Meyssonnier was taken hostage by management.

Efforts to curtail spending on healthcare, a sector which cost FF54.9 billion last year, have also blown up a storm: a current plan to peg hospital budget increases to 1% - a drop in real terms - has led to an unprecedented strike taking place in hospitals throughout the country. Thousands of nurses and care workers took to the streets of Paris in March, and several hospital managers found themselves locked into offices by protesting staff.

Transport, healthcare, banking, defence, telecommunications - there is hardly a sector in France that is not facing significant reforms. And wherever you look, the threat of strikes is ever-looming. Rail workers at SNCF have staged local stoppages against a restructuring plan aimed at curbing losses which reached FF12.8 billion last year. Air France pilots - despite being among the best paid in the world - call regular strikes as chairman Christian Blanc struggles to overhaul the national carrier for eventual privatisation. Even at France Telecom, one of the few state-owned companies that is in profit, workers have taken action against the sell-off of 35% of the government's share, scheduled for this summer.

Rolling back the state in France is not proving easy.

It is a country of paradoxes. Polls show that the French are still broadly in favour of EMU and the euro. Yet the austerity measures needed if France is to take its seat at the top table of the post-1999 Europe are met with ferocious opposition at every step. At the root of these protests is a visceral opposition to change, especially if it involves cuts in the generous welfare provision. 'France is a country where the social system is so good no one wants to change anything,' says Baudouin Monnoyeur of the Paris Chamber of Commerce.

Although the union movement is not strong in France - around 12% of the workforce is unionised - it is characterised by its confrontational attitude and its capacity to hit hard. 'The unions are not strong, but they are concentrated in the public sector, especially transport. They have a formidable ability to bring things to a standstill,' says Denis Broissard, deputy editor of Le Nouvel Economiste. 'Most white-collar workers and managers realise what needs to be done: we have to face the reality that there's too much protection today. But in the public sector, the reaction to reforms is simply one of rejection.'

France is only now undergoing these painful transformations because during the 14 years of socialism which came to an end in 1995, public-sector industry and the welfare state were sacrosanct. The current problems are exacerbated by the disproportionate influence of the state on the French economy. The public sector is huge, with nearly 30% of the working population employed in the civil service or in state-run companies.

Privatisation in France was frozen during much of Francois Mitterrand's term of office under his 'ni-ni' policy - neither privatise nor nationalise. The ruling centre-right coalition, which has long believed that the state has no business in industries such as insurance, computing and car manufacturing, has pushed ahead with a privatisation programme since it swept to power in 1993. It has sold off some 24 companies ranging from oil giant Elf through banks like Banque Nationale de Paris to aluminium and packaging group Pechiney.

The pace of privatisation has, however, been hampered by the disastrous financial condition of many state-run companies, where incompetent management by state-appointed functionaries has led to some astronomical losses. In March, the National Assembly's finance commission revised the estimated losses racked up by state-owned bank Credit Lyonnais to a ballpark of FF130-150 billion. And Credit Lyonnais is by no means alone; the finance ministry announced earlier this year that the state will have to make good losses totalling some FF20 billion at insurers GAN, while it looks likely that a further FF11 billion must be pumped into missile and electronics group Thomson before it can be sold.

Finance minister Jean Arthuis has vowed that the state is no longer prepared to finance this kind of debacle, and a string of state companies including France Telecom, GAN, Credit Lyonnais, computer group Bull, Aerospatiale and Air France have been tabled for privatisation. Loss-making Thomson is also on the list, and sparked a diplomatic rift between Paris and Seoul after the government's botched attempt to sell the group's electronics arm to South Korean group Daewoo Electronics. Opposition to bids from East-Asian companies has largely taken over from earlier xenophobic reaction to foreign buyers from the western hemisphere, although the government's recent decision to refuse to allow the UK's GEC to bid alone for Thomson-CSF suggests that some of the sentiment still lingers on.

Razeen Sally, lecturer in international political economy at the LSE, concedes that the pace of privatisation has been steady since 1993. But he is doubtful about the nature of some of the privatisations. 'In general terms, there has been a major shift of assets from the public to the private sector,' he says. 'But a lot of the privatisation has been done in a cartelised atmosphere: shares have been placed, for example, with friends of the Gaullist party, which means that there are major shareholdings in allied companies. Will privatisation in this way really have a net competition enhancing effect?'

Sally is also concerned about the entities that are still to be privatised.

'The most obvious candidates are now in the private sector. That leaves utilities, cash cows with monopoly status, and companies like Thomson and Bull, which with their haemorrhaging balance sheets are difficult to privatise.'

The appalling mismanagement of state companies is a symptom of the nepotistic elite that has run much of France since the war. Trained in the same handful of grandes ecoles, they form an old-boy network that knows no boundaries between industry and the corridors of state power. The omnipotence of this oligarchy is behind a disease which eats into the fabric of French corporate culture: corruption.

'Who are these big bosses who think they can do as they please?' asked an editorial in the newspaper France Soir recently. One is Pierre Suard, former chairman of engineering and telecommunications group Alcatel Alsthom, who was in the dock on charges of misusing corporate funds. He had work done on his three private properties at company expense, despite the fact that he was then earning FF1.2 million a month.

The extent of corporate malpractice has been exposed as a new breed of French magistrate has begun probing company accounts in a Gallic version of Italy's 'clean hands' operation. One quarter of the bosses of France's top 40 companies are currently under investigation for alleged corrupt practices. The latest high-flyers to join the list of accused are Martin Bouygues, head of the eponymous construction giant, and Patrick Le Lay, chairman of France's major private television channel TF1, which is owned by Bouygues. Both are accused of misuse of corporate funds.

The practice of paying kickbacks to officials or into party coffers in exchange for lucrative contracts has become virtually institutionalised, adding to the widespread feeling that many of France's business elite believe themselves above the rules. The lack of accountability to minority shareholders only reinforces the situation. Suard, who is also being investigated over alleged false billing, defended his company against accusations that it had systematically over-charged France Telecom on the grounds that this helped finance research and development and subsidise exports. Everyone does it, he said.

The painful convulsions of the public sector and the persistent corruption scandals across the whole spectrum have caught media attention across the world, and caused some to ask whether France now merits the 'sick man of Europe' label. Yet the invalid does show some signs of good health.

According to Eric Meuller, economist with UBS in Paris, French enterprise can currently be divided into three broad categories: the public sector, in the throes of tortuously slow reform; the recently-privatised companies, implementing strategies to become competitive, but still with a long way to go; and the private sector, which Meuller believes is now as competitive as any in Europe.

His analysis is that the recently-privatised firms have much ground to make up, but there are signs that they are tackling the issues. French car-maker Renault, for example, is simultaneously downsizing and planning future development. Privatised last summer, the group cited the need to drive down fixed costs when it announced the closure of its assembly plant at Vilvoorde in Belgium with the loss of 3,100 jobs - a move endorsed by industry analysts.

Responding to the anger of Renault workers in both Belgium and France who staged a series of demonstrations to protest the closure, the hard economic realities of the decision were recognised by Chirac: 'It's clear that if a business wants to survive, it must adapt. Otherwise it would be considered as a retirement home. If we don't adapt, in five or 10 years' time there will be no French car industry,' he said.

Meanwhile, says Meuller, 'The French private sector has undergone continuous and profound transformation over the past 15 years. Private enterprise has recognised the need for competitivity, and has made great strides in increasing productivity. Since 1990, unit labour costs have improved by 15% compared to those in Germany. French private industry is now totally competitive on a European level,' he argues. 'The message from the government has been: "Don't count on a change in exchange rates, go out and win markets on your own strengths."' The weakness of the domestic market has further pushed French companies to seek overseas markets.

Downsizing has been a major feature as companies seek greater productivity.

Even the traditionally paternalistic Michelin has gone from 46,000 staff in 1982 to some 25,000 today, while Pechiney has cut its global workforce by almost half since 1989. Alcatel Alsthom shed 4,500 staff in 1995, a further 10,000 last year, and is negotiating to cut a similar number of jobs in 1997. The result of this rigorous strategy is that the group succeeded in turning record losses of FF25.6 billion in 1995 into profits of FF2.7 billion last year.

'French companies have realised that reducing labour costs is the fastest way to cut costs,' comments Meuller. 'The unemployment statistics are evidence of this.' Unemployment is around 12.7%, and is expected to get marginally worse before it starts improving.

'Private industry has done what needed to be done, within the fiscal constraints. Today, private enterprises are going to switch from downsizing to strategies of development and conquest,' Meuller predicts.

France's industrial output grew by 0.8% last year and the combination of low inflation and low interest rates suggest 1997 will see stronger growth. Norman Williams, economist at BZW, says there is good reason to expect growth to be higher this year than last: 'The 2.3% government forecast is the minimum the government sees being achieved. We're not talking about boom but improvement.'

Nonetheless, there is still a mass of problems facing the private sector.

Anyone in the business community will lament that they are held back by excessive tax and crippling social charges, the latter adding 40% to the cost of recruitment - and the minimum wage, currently at around FF5,000 a month, further increases this burden. On top of this is an ill-adapted employment law and a jungle of red tape. Monnoyeur, who heads an engineering and distribution company employing 4,500, says there are far too many laws applying to business.

'They are rigid and complex, and have a direct effect on business both in the private and public sector - especially on employment. You can't hire if you can't fire,' he warns.

To illustrate the absurdity of French employment law, Monnoyeur cites the example of the Parisian department store Samaritaine. In 1993, the store made 108 employees in their 40s and 50s redundant. After a protracted legal battle, the supreme court ruled in February this year that the redundancies were illegal because more than 10 staff were involved; under French law this meant the store was obliged to draw up a 'social plan' offering alternative employment or retraining for at least some of those who did not wish to take redundancy. This piece of legislation is dubbed the Aubry law after Jacques Delors's daughter Martine Aubry who pushed it through parliament in the last days of the socialist administration. The court ruling opened the way for the former employees to demand re-employment or request compensation from Samaritaine for loss of earnings. 'The court was obliged to apply the law. It's a typical example of a law made for political reasons with no regard for the economic consequences,' says Monnoyeur.

'France will not get in step with the rest of the world without profound structural reforms,' CNPF president Jean Gandois has said. But the pace of government action is slow, as a Bourse insider explains: 'We'd like the government to be more audacious. I think the government understands what needs to be done, but lacks the guts to do it.'

Despite business lobbying for more reforms more quickly, with the EMU deadline looming, the government appears to feel it can ill afford to accelerate the pace of change for fear of the disputes and consequent economic slowdown this will provoke. It is a difficult line to toe: the country is sailing close to the wind on its budget deficit and if it doesn't reach its growth targets, it will have to make further cuts. However, there are signs that if the government stays on its present tack, the kind of concerted opposition seen in 1995 will not recur. Calls for a repeat of the stoppages last winter went largely unheeded, and a day of action in March by civil servants seeking a pay review saw only around 20% of employees take part.

'The thinking is that we know we must adapt, but we don't want to adopt the Anglo-American model. What we are trying to find is a European model inspired more by Germany, with wages under control but with adequate social protection,' says Monnoyeur. In other words, as Chirac has put it, France is trying to negotiate its way into the future while at the same time remaining true to itself.

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