21 Jun.

Europe‘s Secret Economic Problem: France

By Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.

Before the start of the 2016 European football championship on June 10th the host nation France has experienced a violent industrial unrest- protesters clashing with police on the streets of Paris; workers picketing refineries, oil depots and power plants; train and air transport being disrupted by striking airline workers, rail workers and air traffic controllers etc. Such violent industrial action and protests against government policies are not unusual and are as French as the Cancan dance and croissant. However for a socialist president, Francois Hollande, who came to power promising to shift the economic balance in France in favour of wage earners by increasing taxes on the wealthy and big businesses, to become a source of workers’ hatred is rather unusual in French politics. The cause of this recent labour unrest in France is the U-turn in economic policy by the French socialist government. Fran?ois Hollande‘s original economic policies, when he came to power in 2012, to redistribute wealth and balance the public budget through higher taxation were abandoned and new economic policies to reform the labour market instead by making labour market more flexible at a lower cost to the employees have been introduced.

The economic problems in the Eurozone are predominantly framed in terms of bank failures and sovereign debt problems in southern European countries like Greece, Spain, Italy and Portugal. However the structural economic problems of big countries like France have been swept under carpet. And these structural problems of the leading economies in the Eurozone are as serious obstacles to the revival of the Eurozone economy and the global economy as the sovereign debt problems of smaller southern countries. French economy cannot create high-wage jobs for its workforce, especially for the youth, and lacks growth generating private investments. Consequently the French economy cannot generate sufficient tax revenues due to growth and also due to aggressive tax management strategies of big multinationals. The raiding of Google’s headquarters in Paris by the French tax authorities, in the midst of industrial unrest in France, is a good example of the governments‘ increasing frustration in the face of low tax payments by big multinationals. Google makes good money out of the French economy but the French government cannot collect taxes from Google’s operations in France. On the other hand French companies pay their due taxes to the French government but tend to invest and create jobs outside France- in China for example. The socialist government‘s response to this economic malaise in France is to reform the labour market so that both French and international companies invest in France because the labour cost is competitive.

These reforms, if the bill goes through the French Senate, will reduce stability for the workers and introduce precarious working conditions. The unpopularity of the proposed new labour law was such that the President used the presidential decree to avoid parliamentary vote on the bill as the parliamentary debate on the bill was expected to cause heated discussions and possible political crisis in France. The bill aims more freedom to individual employers in hiring, firing and setting working hours and paying for extra time. The proposed labour law, for example, will extend the weekly working hours from 48 to 60 hours and reduce overtime payment, making labour cost more flexible for the employers. The flexibility of labour market will be such that pay levels and conditions will be determined by local economic conditions rather than national negotiations between the unions and the employers. 

Currently the unemployment rate in France is about 10% but the youth unemployment is 25%. The youth in France constitutes only 8% of unionised workforce. Hence there is a valid argument that the current labour laws in France protect the elderly unionised workers at the expense of the youth trying to enter the labour market. The proposed new labour law aims to increase access to employment by the youth by making firing of unionised workers easier and putting a cap on redundancy pay at 15 months for people over 20 years age. Although these reforms will not make France the most competitive labour market in Europe by French standards such reforms are revolutionary. 

However in the midst of this sound and fury in French industrial relations more rational questions regarding the structural problems of France and the global economic trends remain undiscussed. The U.K. in Europe reformed its labour market long time ago making it one of the most flexible work force in high income countries. But investments in the U.K. have not increased as a result because the economic problems in high income countries are primarily due to private sector investment behaviour and the changing role of capital markets. Most major companies in high income countries, including France, are managed by executives who compete in share price rather than market share and growth. Hence they are more likely to use profits and cash to do acquisitions, share buybacks or hoard the cash rather than invest. And the fund managers in wealthy high income countries tend to invest in capital markets to earn short term high returns rather than support long term investments in real economy.

The politicians in France should aim to reform the governance in private companies and the way capital markets work as much as reforming labour markets. France has the necessary political, economic and intellectual capital to start a new revolution in global economics by reforming the way private sector and capital markets work. But will the French politicians, businesses and unions be creative enough to work collectively towards this goal? France needs revolutionary thinking in economics rather than fighting itself over old fashioned ineffective labour reforms.


Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.

Ismail is a regular commentator in the broadcast and print media. He has taught corporate finance, bank financial management and international finance on both the School’s MBA and Executive Centre programmes. His research interests are in financialisation and financial innovation.


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