Hollande Faces a Dilemma

5 MINS READJun 21, 2013 | 00:28 GMT

The French government is trying to reconcile its need for economic reforms and its desire to maintain social stability. On June 20, France held the first day of the "great social conference," a summit of businesses, unions and government representatives, to address the country's main social and economic reforms. Central to the summit was France's highly controversial pension reform.

France spends roughly 12.5 percent of its gross domestic product on pensions, more than most almost any other Organization for Economic Co-operation and Development member. (For reference, Germany spends about 11.4 percent of its GDP on pensions, and Japan spends roughly 8.7 percent.)

The fact that an increasingly larger proportion of France's population qualifies for pensions factors into the debate. In 1975, there were 31 workers paying contributions for every 10 retirees; today, there are 14 workers paying contributions for every 10 retirees. As the baby boomers from the 1950s and 1960s begin to retire in the next decade, the pressure on France's coffers will grow substantially. The deficit of the French pension system is projected to double between 2010 and 2020, when it will exceed 20 billion euros.

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Most French citizens admit that reforms are necessary, but they disagree on how to apply them. On June 14, a group of economists and lawyers submitted several proposals to the French government in a document known as the Moreau report. Headed by Yannick Moreau, the commission that authored the report was tasked by the government to formulate reform proposals, which are nonbinding but nonetheless may guide Paris' decisions.

The proposals include a reform that would increase the number of contributions necessary to qualify for a full pension, which would extend contributions from 41.5 years to 44 years. Proposals also call for a reduction of tax benefits for retirees and a modification to the methodology for calculating pensions in the public sector. (In general, pensions in the public sector tend to be higher than those of the private sector).

Notably, this is not the first "great social conference" undertaken by French President Francois Hollande; he held one in July 2012, just two months into his presidency. But unlike the first conference, the current summit is taking place during a much less optimistic social climate. The unemployment rate is higher than it has been since the mid-1990s, and the economy is in recession. Hollande's popularity is below 30 percent, and most French citizens doubt the president's ability to implement the necessary reforms. Moreover, these reforms are particularly controversial within the Socialist Party, which is forced to enact policies that run counter to its convictions.

The president's strategy is to look for consensus on the reforms to prevent mass protests like those that accompanied reforms adopted by former French President Nicolas Sarkozy in 2010. Hollande thus faces a dilemma: He could try to push for comprehensive reforms unilaterally, but that would be incredibly unpopular, at least in the short term. Otherwise, he could try to enact diluted reforms, which would be more palatable for French citizens but ultimately would be ineffective at reducing the costs of the French pension system.

Hollande's problem is shared by many Western European leaders, who have responded to the ongoing economic crisis by implementing painful reforms in their welfare states. The problem is that countries consider the welfare state one of the defining economic, political and social features of postwar Europe and a symbol of economic prosperity. The French have a long and rich tradition of fighting for their civil and social rights, and the notion of a social contract between rulers and the constituents is a key feature of French politics. For the French — not to mention the Italians, Spanish or Germans — a generous welfare state is an acquired right, a part of the social contract in Europe.

Denying citizens these rights comes at a high political cost. For example, former German Chancellor Gerhard Schroder was forced to call for early elections in 2005 because of the unpopularity of the reforms he applied in the labor sector. In the long run, those reforms helped the German economy regain its competitiveness.

During his first year in office, Hollande favored tax increases over structural reforms. But as the economic crisis worsens, Paris is acknowledging the need to implement reforms to improve France's competitiveness and reduce spending. With the parliament in recess, Hollande has time in July and August to discuss reforms with unions and employers. The big challenge will come in September, when the National Assembly will begin analyzing the reforms discussed during the summer. Two major French unions, Worker's Force and the General Confederation of Labour, already have announced strikes against the pension reform.

The European crisis forced most eurozone governments to implement painful economic reforms aimed at cutting state spending and making their economies more competitive. Over the past two years, governments that have implemented unpopular economic reforms — Greece, Spain, Portugal, Ireland, Slovenia and Italy, for example — have been forced to resign early. Today protests continue in most of these countries. And in the coming months, Hollande faces the challenge of finding the right balance between structural reforms and social stability.

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