France ponders how to halt its slow decline

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PARIS -- For decades, Europeans have agonized over the power and role of Germany -- given its importance to European stability and prosperity.

Today, however, Europe is talking about "the French question": Can the Socialist government of President Francois Hollande pull France out of its slow decline and prevent it from slipping permanently into Europe's second tier?

At stake is whether a social democratic system that for decades prided itself on being the model for providing a stable and high standard of living for its citizens can survive the combination of globalization, an aging population and the acute fiscal shocks of recent years.

Those close to Mr. Hollande say that he is largely aware of what must be done to cut government spending and reduce regulations weighing down the economy, and is carefully gauging the political winds. But what appears to be missing is the will; France's friends, Germany in particular, fear that Mr. Hollande may simply lack the political courage to confront his allies and make the necessary decisions.

Changing any country is difficult. The French are justifiably proud of their social model. Health care and pensions are good, many French retire at 60 or younger, five or six weeks of vacation every summer is the norm, and workers with full-time jobs have a 35-hour week and significant protections against layoffs and firings.

But in a more competitive world economy, the question is not whether the French social model is a good one, but whether the French can continue to afford it. Based on current trends, the answer is clearly no, not without significant structural changes -- in pensions, in taxes, in social benefits, in work rules and in expectations.

But Mr. Hollande's Socialist Party and the harder French left have not seemed to grasp the famous insight of the prince in Giuseppe Tomasi di Lampedusa's renowned novel of social upheaval, "The Leopard," that "everything needs to change, so everything can stay the same."

The Socialists have become a conservative party, desperately trying to preserve the victories of the last century. Many in the party, like the anti-globalization campaigner Arnaud Montebourg, now the minister in charge of industrial renewal -- let alone those further to the left -- seem to believe that France would be fine if only the rest of the world would just disappear, or at least work a little less hard.

There is nonetheless an underlying understanding that there will be little lasting gain without structural changes to the state-heavy French economy.

The warning signs are everywhere: French unemployment and youth unemployment are at record levels; growth is slow compared with Germany, Britain, the United States or Asia; government spending represents nearly 57 percent of gross domestic product, the highest in the eurozone, and is 11 percentage points higher than Germany's. The government employs 90 civil servants per 1,000 residents, compared with 50 in Germany.

Hourly wage costs are high and social spending represents 32 percent of GDP, highest among the industrialized countries; real wage increases outpace productivity growth; national debt is more than 90 percent of GDP.

About 82 percent of the new jobs created last year were temporary contracts, up from 70 percent only five years ago, not the kind of full-time work that opens the door to the French middle class. That keeps nearly an entire generation living precariously, no matter how hard people study or work.

In 2012, France was ranked 28th out of the 60 most competitive economies in the world, according to the International Institute for Management Development in Lausanne, Switzerland. The United States was first. Even China, at 21, and Japan, at 24, outranked France. In the World Bank's ranking of "ease of doing business," France ranks 34th, compared with 7th for Britain and 20th for Germany.

The country retains plenty of strengths. France is the world's fifth-largest economy, with strong traditions in management, science and innovation. The gap between rich and poor is narrower in France than in most Western countries, although it is growing.

When the French work, they work hard; labor productivity, perhaps the single most important indicator of an economy's potential, is still relatively high, if dropping. But with long holidays and the 35-hour week, the French work fewer hours than most competitors, putting an extra strain on corporations and the economy.

Large French companies compete globally; there are more French companies in the Fortune 500 than any other European country. But the bulk of their employees are abroad, and there are few of the midsize companies that are the backbone of Germany.

Ninety percent of French companies have 10 or fewer employees and fear expansion because of extra tax burdens and strict labor regulations.

There is a broad consensus that real social and structural renovation can be carried out only by the left. But that can happen only if Mr. Hollande, who has a legislative majority, is willing to confront his own party in the name of the future, as the former German Chancellor Gerhard Schröder did a decade ago with a series of legal modifications that now get much of the credit for Germany's revival.

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