Project Syndicate - Eight months into his presidency, is Nicolas Sarkozy delivering the “rupture” from 30 years of French immobility that he promised? Dubbed the “hyper-president” by bewildered media, he has launched a vast number of reforms, many of which were once considered political suicide. He has targeted many areas – including universities, the judiciary, foreign policy, immigration, taxation, and the environment – but it is the economy that will prove to be the make-or-break issue.

Sarkozy’s slogan “work more to earn more” has won him considerable support. The crucial test will be his ability to reform the labor market, whose rigidities are widely seen as the main cause of France’s relatively poor economic performance, with an unemployment rate that has never dipped below 8% over the last 25 years.

While the government has begun many projects, with few exceptions, including tax breaks for the wealthy, most are still in the making. The most important concern public employment, pensions, labor legislation, and the length of the workweek, all of which generate fierce resistance.

The main reason for the slow pace – noting that previous presidents had no pace at all – is a 2005 law that requires that all measures affecting the labor market first be negotiated in good faith with the trade unions. Naturally, the unions impede negotiations as much as possible.

As a result, France is likely soon to surpass Sweden as the world’s highest public spender. All French finance ministers lament that they had very little room for cutting costs, given the scope of entitlements, particularly civil servants’ salaries and pensions.

With half of all current civil servants set to retire over the next ten years, Sarkozy has pledged to replace only one of every two. In 2007, the attrition rate was one out of three – short of the pledge, but a sharp reversal from previous decades, in which the ranks of civil servants grew significantly faster than private-sector employment.

Sarkozy believes that he has a popular mandate to push his labor-market reforms through parliament, where he controls a large majority. By contrast, the unions argue that they have “social legitimacy,” a claim that may surprise many outside France, but that holds considerable sway in a country where large-scale demonstrations or drawn-out strikes are interpreted as a valid representation of popular will.

From the outset, both sides expected a defining fight, which occurred last November, after the government decided to align the retirement age in the public sector with that of the private sector. When President Jacques Chirac’s first government attempted such a reform in 1995, railroad workers, who can retire at age 50 or 55, spearheaded the resistance. After nearly three weeks of complete stoppage of trains, the government caved in, and soon thereafter lost a general election.

The 1995 strike became an icon of “social legitimacy,” instilling fear in all succeeding governments. But this time around, the unions caved in after nine days, largely because the reform had been explained and promised to the public during the presidential campaign. Democratic legitimacy won a major battle over social legitimacy.

This opens the way to more and deeper reforms. A law restricting transport strikes took effect on January 1, and Sarkozy intends to break the 35-hour workweek, albeit indirectly. Instead of repealing the law, overtime work is to become easy and relatively cheap. He is also preparing to raise the retirement age to 61, from 60.

Even more provocative are the next steps: a plan to revamp the standard work contract and to require that all workers be invited to vote after eight days of a strike. Indeed, probably the most fundamental measure is to transform radically the way trade unions operate. Their role is currently codified by a post-1945 law that gives them enormous influence, even though their membership has dwindled to a mere 8% of employees. The plan, yet to be fully articulated, is to make them accountable to all workers, not just to their membership – another way of promoting democratic legitimacy, but this time at the heart of the social system.

One reason why Sarkozy could succeed where previous governments have never dreamt to venture, aside from his popular mandate for reform, is a “win-win” strategy, whereby victory for reform implies substantial compensation. For example, Sarkozy has promised that half of the savings from the reduction in public employment will go to higher pay – possibly based on merit, another red line for the trade unions.

But Sarkozy is not quite turning France, long a country hostile to supply-side reform, into what many would consider a normal economy. While he has the right instincts concerning labor markets, he is very French on other issues.

He is a staunch advocate of industrial policies, which will lead him into sharp confrontation with the European Commission and many of his colleagues. He also harbors a deep distrust of financial markets and often advocates more regulation, and sees the strong euro as a threat to French industry and the result of speculation, which has already provoked serious clashes with the European Central Bank.

On all these issues, much of the decision-making power has been transferred to the European Union, which dramatically reduces Sarkozy’s room for maneuver. But France will hold the EU’s rotating presidency in the second half of 2008. Nobody’s perfect, least of all Sarkozy, so we should expect some infuriating initiatives.

Charles Wyplosz is Professor of International Economics and Director of the International Centre for Money and Banking Studies at the Graduate Institute of International Studies, Geneva.

Copyright: Project Syndicate, 2008.
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