Hollande vows ‘tough action’ to restore competitiveness

French President Francois Hollande pledged “tough decisions” as a new report recommended a “shock” 30-billion-euro ($ 38 billion) reduction in labor costs to improve the country’s industrial competitiveness. The 22-point document was presented by its author Louis Gallois, former head of the French SNCF railways and of the EADS aerospace group which controls Airbus, to Prime Minister Jean-Marc Ayrault. “Tomorrow the government will draw conclusions from the Gallois report and tough decisions will be taken,” Hollande told reporters in the Laotian capital Vientiane, where he is attending an EU-Asia summit. He stressed the need for a “holistic policy” to address France’s flagging industrial competitiveness as the country faces the challenge of dangerously overstretched public finances, anaemic growth and a huge trade deficit. Gallois said the need of the hour was a “sort of social pact between all the partners,” adding that a “shock” reduction in labor costs was needed to kickstart the economy. “The French must back this collective effort,” he said, appealing to “patriotism.” He proposed cutting employer payroll levies by 20 billion euros and those paid by employees by 10 billion euros over two or three years. This would mean shifting part of the tax burden on to workers by increasing the so-called CSG levy which helps fund the social security system, or increasing the VAT sales tax. The review, commissioned by Hollande and the latest in a line of such reports on what is wrong with the French economy, has been described by the right-wing opposition as a last chance to change direction. France’s hourly manufacturing costs are 20 percent higher than the eurozone average, according to the EU’s statistics agency Eurostat. But ministers have already rejected a suggestion Gallois made in July that what the country needs is a big and sudden “shock” to boost efficiency, saying instead that measures will be spread out over five years. The spotlight is on deep structural reforms which run counter to French habits. But similar reports for the government in the past have tended to be quietly locked away where they cannot upset the voters. This time the government — facing having to impose austerity policies as the economy stagnates — says the analysis will not be buried. The share of French industry in global trade has shrunk from 6.3 percent in 1990 to 3.3 percent in 2011 as production costs have risen relative to those in other countries, in particular to euro zone neighbor Germany. The government has set a target of eliminating during its five-year term the country’s 25-billion-euro ($31-billion) trade deficit excluding energy. The competitiveness pact is shaping up to be a key initiative to rejuvenate the economy as the government is being forced to apply 37 billion euros ($ 47 billion) in austerity next year to meet the country’s EU fiscal targets. With the unemployment rate rising back to 10.0 percent, pressure has been building on the government to act. Gallois has already enraged unions by suggesting taking the labor cost issue by the horns and cutting payroll levies paid by employers. Business leaders have piled pressure on the government, with the heads of 98 of the biggest French groups calling for a 30-billion-euro cut in welfare charges paid by employers over two years, along with massive cuts in public spending.