The French president tries belatedly to catch up with other more competitive countries. But his efforts may amount to too little, too late

IN NOVEMBER 2003, France and Germany teamed up to bust the euro’s stability-pact rules for budget deficits that they had agreed to six years earlier. For three years neither Jacques Chirac of France nor Gerhard Schröder of Germany respected the deficit cap of 3% of GDP. Neither suffered sanctions. But Germany used its fiscal space to become more competitive and loosen its labour market. France, which had just introduced the 35-hour working week, mainly made matters worse.

Now, under François Hollande, France is once more breaching the deficit rules and has, yet again, been given more time to bring its deficit below 3%. The unwritten deal is that this time it will make a proper stab at reform, especially of its labour market. France’s labour code, a fat red doorstop of a book, runs to 3,809 pages, 45% longer than ten years ago. The collective-bargaining agreement for hairdressers alone covers 196 pages. “The key challenge”, concludes a recent survey of France by the OECD, a Paris-based think-tank, “is to reform the labour market to promote job growth.” Yet is this likely?

The contrasting record on jobs across the Rhine is compelling. In 2001 unemployment in France and Germany was comparable, at just under 8%. Today it is below 5% in Germany, but over 10% in France. Although France and Germany have similarly high productivity per hour worked, the French start work later and stop earlier. Too many French youngsters leave school with no qualifications and drift for years on the fringes. The share of young people not in education, employment or training is 19% in France, almost twice that in Germany. In 2003 the overall employment rate in the two countries was similar; today it is 74% in Germany but only 64% in France. Among 55- to 64-year-olds only 47% of the French toil away, next to 66% of Germans (see charts 1 and 2).

Put simply, Mr Schröder, a Social Democrat, made the political choice to get people into jobs, even if only part-time and low-paid, rather than leave them on the dole. His controversial Agenda 2010 measures, including the Hartz labour reforms, may even have cost him the chancellorship in 2005. They shortened the maximum period for receiving unemployment benefit, made it harder to refuse job offers and let small firms shed staff more easily. Combined with wage-moderation deals between unions and employers, the outcome was an injection of flexibility that eased low-wage service-sector job creation, lifted employment and limited job losses during the 2008-09 financial crisis. On both the French left and right, by contrast, political leaders implicitly accepted high unemployment as a price for giving those in work more security and higher wages. This has created a dual labour market of insiders and outsiders (see article). Employers are deterred from creating permanent jobs by the uncertainty and costs of shedding them if they have to. So they hire only on short-term contracts, reinforcing precisely the insecurity that the system of job protection was meant to avoid. Over 80% of new hires in France are on contracts of three months or less. Under Manuel Valls, the reformist prime minister, and Emmanuel Macron, his economy minister, Mr Hollande’s government has shifted its stance. There is less talk of subsidised job-creation or raising the already high minimum wage, and more of market incentives. Three years of near-zero growth and worries that unemployment may not drop before the 2017 election have concentrated minds. French employers, Mr Valls has said, are “frightened of hiring” because of labour-market rigidities. On April 19th Mr Hollande said he would make labour courts judge contested redundancies within six months; today’s average is 25 months. How far is the government ready to go on labour reform? Unlike Mr Schröder with Agenda 2010, it is doing lots of small things that make it hard to judge the whole. Mindful of hostility from unions and its own party rebels, the government has decided not to go for one big eye-catching labour-market reform. “We’re doing the opposite to Renzi,” says one adviser, referring to Italy’s prime minister, Matteo Renzi, who has made a splash with a single, more flexible short-term contract. French reforms are parcelled out between Mr Macron, who is already pushing through a law to liberalise product markets, and François Rebsamen, the labour minister. Some planned reforms are being left to talks between employers and unions, even though only 8% of private-sector workers belong to one.

The French ragbag includes a bill, unveiled by Mr Rebsamen on April 22nd, to simplify works councils. This will not abolish “threshold effects”, which deter firms from employing more than 49 staff, when rules obliging them to set up separate works councils and health-and-safety councils kick in. But it should reduce the burden, in some cases by blending the two councils into one. The bill will also merge two back-to-work benefits to encourage (if not force) the unemployed to work.

The government plans to loosen rules passed in 2013 that allow firms in “serious economic difficulty” to renegotiate working hours and pay in return for protecting jobs. Only nine firms (including Renault) have used this. Unions and employers will also discuss ways to make it easier for small firms to hire; they may loosen rules on short-term contracts or strengthen firm-level bargaining. And they must trim the €4 billion ($4.3 billion) deficit in the unemployment-insurance fund. This could mean reducing the maximum period for which benefit is paid (now three years for over-55s), or reducing payouts (now capped at €6,000 a month). These measures come on top of a cut in social charges of as much as 8%, taking a slice off France’s notoriously high tax wedge on employment (see chart 3).

Mr Macron claims that all this adds up to “60% of what Schröder did on the labour market, and [referring to his product law] more than the Germans did on liberalising goods-and-services markets.” He does not seem cowed by the bruising experience in February of having to force his law through parliament by decree, for want of a guaranteed majority. Indeed, if need be, the government could do the same again in July. It claims that its reforms could create 800,000-900,000 extra jobs and add a cumulative four points to GDP over five years. It all sounds good. But the twin difficulties ahead are muddle and politics. In a recent report comparing France and Germany, Jean Pisani-Ferry, head of the government’s economic-planning unit, and Henrik Enderlein, a German economist, pointed to the shortcomings of French piecemeal reform. “Partial reforms often fail to provide enough clarity to economic agents,” they wrote, adding that “external perception of French priorities and directions remains blurred at best”. The best guess is that these reforms are useful steps, but nowhere near as much as France needs to prompt a lot more private-sector permanent jobs. “France could perhaps level the playing-field with Spain, or even Italy, but certainly not with Germany, where liberalisation has gone through the roof,” says Ludovic Subran, the chief economist at Euler Hermes, a credit insurer. The high level of the minimum wage is seen as a taboo, even for the young. Jean Tirole, a Nobel prize-winning economist at the Toulouse School of Economics, says that “at some point, you have to confront the duality of the labour market and the excessive role of judges in severance procedures.” But this may be the best that can be hoped for, given the political constraints. Mr Hollande campaigned on a promise to squeeze the rich and the banks, not to curb unemployment benefits or reduce job protection. Mr Valls, who has in the past called for such things, took under 6% of the vote when he ran in the Socialists’ presidential primary in 2011. France is never far from another election. Regional polls now beckon in December, and after that the pre-presidential season will begin. So the space for taking political risks is dauntingly narrow.

Yet, if many Socialists are sceptical, the public seems less so. Less than 5% of voters support the Communist Party, the main backer of France’s biggest union. After resorting to his decree, Mr Macron rose in popularity. Mr Hollande may not win friends on the left by letting his government push labour-market reform. But he has little chance of seeing a revived jobs market before 2017 if it fails.