Winds of change in France?

Much has been said and written about the Gallois report on competitiveness, made public earlier this week. The 31^st report on competiviness produced in the last 10 years, this one had been commissioned by the French prime minister. Louis Gallois, a prominent figure in French industrial life, is seen as able to bridge the divide between French business and the French state. Relations have soured recently between the two, in particular between small and medium sized businesses and the recently elected Socialist government. Gallois’ own career has involved heading large companies that are competitive internationally but are also very closed tied to the French state. He is an emblematic figure of French state capitalism.

The report itself rightly highlighted what is a pressing problem for France: a looming deindustrialisation. France is in the difficult position of straddling an increasingly empty middle ground. On the one side, there are the high-quality goods produced by an export power like Germany, goods that remain expensive but whose quality guarantees that they dominate the high-end markets for cars and many other industrial products. On the other side are lower quality goods from Asia that win-out on price. They are cheap and good enough to crowd out slightly better quality but signficantly more expensive French-made products. Stuck in between this polarisation, France has in the last 10 years lost a great deal of export market shares. Hundreds of billions of Euros of exports have been lost and around 750,000 manufacturing jobs have gone in the last decade. This was not always so: until the early 2000s France enjoyed a strong showing on the balance of payments, not least relative to Germany. But it has now gone deeply into deficit, as the graph below shows. France has not seen the kind of reversal of fortunes that Spain, Greece or Portugal have but its current acccount deficit has been steadily growing.

The report itself recommended that the burden of social security payments should be shifted – to the tune of a 30 billion Euro transfer – away from business and salary contributions and towards generalized taxation, in the form of the CSG tax (generalized social contribution) and VAT. French economist Jean-Claude Casanova put it thus: when employees decide to have babies, companies face a rise in labour costs that in some cases can push them into the red. Bizarrely, as soon as the main recommendation of the Gallois became known – what the author referred to as a “confidence shock” for French business – the government declared that it would not be implementing this particular recommendation. It preferred a different system for lowing labour costs that involved a complex credit transfer system. Companies will have to work out for themselves what they can win back from the state through these transfers, something that favours large companies with bulging accounting departments. Smaller firms, the ones suffering most from declining competiveness, will find the system opaque and difficult to implement. Regardless of where you stand on the rights and wrongs of the labour cost/competitiveness debate in France, the government’s handling of the report was poor.

It would be wrong, though, to dismiss all this with a gallic shrug and a muttering of plus ça change. The business newspaper, Les Echos, points to one recommendation in the report likely to be taken on by the government and one which could have a very considerable impact on France in the medium to long term. Gallois proposed that French firms systematically include in their governing bodies worker representatives. In companies with more than 5,000 employees, between a quarter and a third of the members of these governing bodies should be worker representatives. Les Echos celebrates this as a signal that France will move in the direction taken up by Germany, Austria and other countries with much more successful industrial policies than France. In the German case, this rule is applied to companies with more than 500 employees. For companies with over 2,000 employees, the proportion of worker representatives in these governing bodies rises to 50%. Les Echos argues that therein lies the key to Germany’s success in turning itself round and boosting its competitiveness.

What Les Echos is getting at is labour discipline. German companies were able to boost competitiviness in the absence of currency devaluations largely because German workers accepted the cost-cutting measures being proposed, many of which were harsh and involved temporary unemployment. As well as the German government having a strong hold over unions, company directors themselves have a better hold over their own workforce. The consensual way labour and business interests within German firms implemented the competitiveness drive of the mid to late 2000s in Germany goes a long way to explaining Germany’s present export success. France has famously been an example of a very different kind of industrial relations: more conflictual, dominated by the role played by unions, resistant to change. What the Gallois report proposes is a way in which French labour could be better controlled. If implemented, this could have a far greater impact on French industry than the more public spat over VAT, CSG and how to finance social security. At least, that is what Les Echos hopes. Perhaps, in focusing on its rejection of Gallois’ proposal to raise CSG and VAT, the government is deflecting attention from other measures, that could be more far-reaching in the long term. French business-labour relations will not be transformed over night but this could be the beginning of a greater disciplining of labour through co-option into the decision-making process.