The French in Denial

By Robert J. Samuelson
Tuesday, March 28, 2006

To anyone who cares about Europe's future, the French demonstrations and street riots protesting the government's new labor law must be profoundly disturbing. It's the French against France -- a familiar ritual that mirrors Europe's larger predicament. Hardly anyone wants to surrender the benefits and protections of today's generous welfare state, but the fierce attachment to these costly and self-defeating programs prevents Europe from preparing for a future that, though it may be deplored, is inevitable. Actually, it's not the future; it's the present.

The dilemma of advanced democracies, including the United States, is that they've made more promises than they can keep. Their political commitments outstrip the economy's capacity to deliver. Sometimes the commitments were made dishonestly. Sometimes they were made sincerely based on foolish assumptions. Sometimes they've been overtaken by new circumstances. No matter. The dilemma is the same. To disavow past promises incites public furor; not to disavow them worsens the country's future problems.

Look at France. Its needs are plain: to assimilate a large and restless Muslim population of immigrants and their children, to pay for the rising health and pension costs of an aging society and to compete in the world economy. But its economy is lackluster. From 2001 to 2005, annual growth averaged only 1.6 percent. By accident and design, the French have discouraged work. In a recent study, the Organization for Economic Cooperation and Development (OECD) in Paris reported:

· From 1994 to 2003 unemployment among prime-age adults, from 25 to 54, averaged 9.9 percent; for those 15 to 25, the average was 24 percent.

· In 2003 French workers spent an average of 1,431 hours on the job, the third-lowest among 26 advanced countries. Italy (1,591 hours) was 11 percent higher; the United States (1,822 hours), 27 percent; and South Korea (2,390 hours, the highest), 67 percent.

· Among those 60 to 64, only about one in six have jobs. In the United States, the comparable figure is about one in two.

This cannot continue. In 2005 France's labor force was 2.7 times as large as its 65-and-over population; by 2020 it's projected to be only twice as large. A shrinking share of France's population -- already working short hours -- would pay an increasing share of the country's rising pension and health costs. In 2004 the average retirement age was 59. Average taxes are already about 50 percent of national income; effective marginal rates (the rates on additional income) can hit 60 percent. How much higher could these go without crushing work incentives? Sooner or later France will have to adopt policies that lower unemployment, lengthen work hours, raise retirement ages and cut promised benefits.

Probably later. Efforts to face these issues provoke protests. The present flash point is a new law that allows employers to fire young workers (those hired younger than 26) for the first two years. Of course, U.S. firms can fire workers of all ages within the bounds of union contracts and the anti-discrimination laws. But in France the Labor Code gives most full-time workers an employment contract that makes layoffs costly. Legal standards must be met. Workers can appeal to labor courts. By one study, companies lost 74 percent of those cases. All these protections perversely -- but predictably -- stifle job creation. Companies don't hire, because it's hard to fire. They don't want to be saddled with unwanted workers. That's one cause of high unemployment.

Prime Minister Dominique de Villepin's new law tries to disarm that logic. The two-year probationary period gives employers flexibility. They don't have to keep workers they don't want. The change stemmed from last fall's rioting among young Muslims and complaints about their high jobless rate. Whether the law might work as intended -- or inspire temporary two-year jobs -- is unclear. Protesters said it would make them "the Kleenex generation," to be discarded at will. Either way, the change is minor. The outsized political reaction is telling and has happened before. In the 1990s prime ministers Edouard Balladur and Alain Juppe withdrew controversial proposals in the face of mass protests.

All this bodes ill for Europe, because other countries share France's situation. Governments seem incapable of reconciling political commitments and economic realities. The street protesters are given to much make-believe -- the illusion that if they march long enough and burn enough cars, they can prevent unwanted change. The concessions that governments make to the future are usually small and slow. France is raising full eligibility for retirement benefits from 40 to 42 years of contributions; the change occurs between now and 2020. This suggests a messy process of grudging accommodations that neither placate public opinion nor improve economic vitality. Europe, which is insecure and unconfident now, will probably become more so.

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