It was late October, and President
François Hollande,
faced with an alarming deterioration in the economy, had turned to Mr.
Gallois for advice on how to put corporate France on a more competitive
footing with the rest of Europe.
Mr. Gallois didn’t sugar-coat the message. His report called for a
“competitiveness shock” that would require politicians to curb the “cult
of regulation” he said was choking business in France.
The report said that unless France relaxed its notoriously rigid labor
market, the country would continue on an industrial decline that had
destroyed more than 750,000 jobs in a decade and helped shrink France’s
share of exports to the European Union to 9.3 percent, from 12.7
percent, during that period. The report also called for cuts to a broad
range of business taxes used to pay for big government and France’s
expensive social safety net.
But some wonder whether those measures, even if they can be adopted,
would suffice. For them, there is a larger question: Can France be
fixed?
While the European crisis has made the French acutely aware of the need
to modernize the economy, the country may be running short on time. And
there are mixed signals on whether the Hollande government is willing to
heed the advice.
As details of the report leaked, the French news media went into a
frenzy over whether their country was prepared for such upheaval.
Mr. Hollande quickly provided an answer: a competitiveness “pact”
between business and government would better suit French society.
As Mr. Hollande’s finance minister, Pierre Moscovici, hastened to
explain, “A shock causes trauma, whereas a pact reassures.”
But many observers say reassurance may no longer be an option.
Even the Germans are alarmed: Behind closed doors, Chancellor Angela
Merkel and officials in her entourage are said to be worried that a
failure by Mr. Hollande to improve competitiveness could ricochet back
to the weakening German economy, further stalling what had long been
twin engines of growth for Europe.
“The concern is not just that France could be the next candidate
affected by turbulence” from the euro crisis, said Lars P. Feld, an
economics professor at the University of Freiburg and an adviser to the
German government. “The fear is that it doesn’t manage to cope with the
loss of competitiveness and therefore produces little growth or perhaps
even stagnation for the next few years,” Mr. Feld said. “And that after
that, it could become the new sick man of Europe.”
France still has much working in its favor. Second only to Germany as
Europe’s biggest economy, and the fifth-largest in the world, France is a
wealthy country with a high savings rate, large foreign direct
investment and world-class research and development capabilities.
And the interest rate on French 10-year bonds is only about 2 percent.
That is much closer to Germany’s rate than to those of the euro zone’s
staggering giants, Italy and Spain, which are above 4 percent and 5
percent respectively, as they struggle to clean up their economies.
Yet, last week the French central bank warned that growth would shrink
0.1 percent in the last three months of 2012, after stagnating for most
of the year. Last month Moody’s Investors Service followed Standard
& Poor’s in stripping France of its triple-A credit rating, saying
the government was failing to ignite competitiveness fast enough.
Meanwhile, an ambitious effort Mr. Hollande began shortly after his
election in May to cut the deficit to 3 percent next year from 4.5
percent through tax increases and spending cuts may dampen growth
further and ratchet up unemployment, which recently neared 11 percent,
twice the rate in Germany.
Taxes on businesses are rising, and a 3 percent dividend tax recently
sent money fleeing the country. A plan to lift the capital gains tax to
60 percent from 19 percent sparked a revolt among e-commerce
entrepreneurs.
Amid the turmoil, Mr. Hollande seized on the Gallois report. The day
after its release, the government announced a €20 billion, or $26.6
billion, payroll tax break for business and endorsed a handful of other
recommendations, including trying to compel bosses and union leaders to
agree on more labor market flexibility.
Those moves fanned hopes that France might finally be becoming more
friendly to business. But the message was soon muddied.
Within a few weeks, Mr. Hollande’s administration was in a showdown with
a major employer, the Luxembourg-based steel giant ArcelorMittal, over a
plan to cut about 630 jobs at two mothballed blast furnaces at a
production complex in Florange. The jobs at issue were but a small
fraction of the 20,000 the company employs in France, and the Hollande
government’s threat to nationalize the Florange plant over the matter
sent a shudder through foreign multinationals doing business in France.
The I.M.F. also called for France to tame bureaucracy, cut taxes and
make labor markets more flexible. France’s “significant loss of
competitiveness” is the main hurdle to growth and job creation, the fund
added, indicating that those problems would very likely grow worse if
France “does not adapt.”
Creating the political momentum to achieve that is not easy. Culturally,
France and many of its leaders are wedded to the idea that a social
safety net — despite its expense — is needed to protect society from the
ravages of laissez-faire economics. Economists say a pullback would
have to happen to enhance competitiveness, something Mr. Hollande is
aware of but has so far treaded lightly around.
In other countries, “people roughly understand what modern economics are
about — if you say competitiveness, it’s not a dirty word,” said Pascal
Lamy, the director general of the World Trade Organization, who is also
a rare member of the French Socialist Party who favors open markets.
The hurdle to modernizing the French economy, he added, is that the
state “is still considered a magic wand to cure every illness.”
Meanwhile, Mr. Gallois, a sober but energetic man who was once nicknamed
God by his former employees at the French national railroad company for
imposing hard decisions, has largely maintained a public silence since
releasing his “competitive shock” report — despite being tailed for
weeks by news cameras.
Recently, in his first interview since the report’s release, Mr.
Gallois, sitting in his gilt-trimmed office in central Paris and wearing
the red-cross Légion d’Honneur pin he received for his past business
contributions to France, acknowledged that his choice of language posed a
challenge to the government. “They did not want to use the word
‘shock,”’ he said. “I was only focused on industrial competitiveness,
and they were also focused on employment.”
At least his report, unlike many before it, was not left to gather dust.
“For the first time, I had the feeling that people were not trying to
put their heads in the sand,” he said. Because of the European crisis,
“public opinion was ready to welcome change,” he added; even militant
union leaders were ready to listen.
But change can take years in France. While the €20 billion payroll tax
credit will help, Mr. Gallois said, France still needs to do much more
to make entrepreneurs feel welcome. A thicket of regulation must be
cleared, he said, so that more small and midsize firms can grow and
create jobs.
A hostile climate between workers and management must also be replaced
with dynamic dialogue, he said, as was done in Germany in the mid-2000s,
helping turn that country into an industrial powerhouse.
“In France, there is not actually agreement that companies must be
competitive to create value,” Mr. Gallois said. “We need to create that
consensus first, and after that people can fight over sharing the
benefits of competitiveness.”
He paused and looked at a large photo on his wall of an Airbus A380
soaring above the clouds — a symbol of what French industrial might can
achieve.
Mr. Gallois’s type of straightforward thinking is relatively common in
corporate boardrooms. But getting an entire nation to sign on to a new
way of doing business is a challenge.
“People have to understand that France is a special animal,” Mr. Gallois
said. “We could be more business-oriented, but only if we ensure
justice and fairness for everybody.”
This article has been revised to reflect the following correction:
Correction: December 21, 2012
Because
of an editing error, an article on Thursday about a report by Louis
Gallois, a prominent French industrialist, that urged actions to improve
France’s competitiveness, included outdated information on French
regulatory authority. While the government once fixed the price of a
baguette, it lost that power several decades ago. It is not the case
that it still controls the price of a loaf of bread.
