A response to Tony Barber

 Tony Barber, European comment editor of the Financial Times publishes an in-depth article on a European country  every Saturday. He quotes many references to back up the points he is making and I always find that I have learnt something new when I have finished reading him.

 Last Saturday, his article was on France:Europe Express Weekend: Macron’s troubles go deeper than pension reforms

and was critical of Emmanuel Macron's approach to governing in general and pension reform in particular.  I felt moved to make some comments and they eventually ran to  three pages. I am happy to post them here on my blog:

 "Dear Tony Barber

 

I enjoyed reading your Europe Express Weekend piece, as always, but I don’t think you have been entirely fair to Macron nor put the policies he has been pursuing in their context.

 

First off, I think it’s fair to say that he is the first President for 40 years who is attempting, with method and determination, to  belatedly repair the slow burning damage done to the French economy by Mitterrand’s decision to cut the retirement age from 65 to 60, at a stroke, in 1981 and the introduction of the 35-hour working week by a socialist Prime Minister in 2000. It was already clear in 1981 that demographic trends would put the pension system under pressure within a few years. But once the genie was out of the bottle, it has proved very difficult, as always, to put it back in. In 1995, Chirac made the first attempt to roll back the abnormal pension privileges (les régimes spéciaux i.e retirement on a full and generous pension well before 60) of the workers and employees in the nationalised railway and energy sectors. The unions fought this tooth and nail and brought the country to a standstill for several weeks at the end of 1995. Chirac, who was not a great reformer at heart, capitulated and the reform was withdrawn. He subsequently endured a long period of “cohabitation” with a socialist majority in parliament and Prime Minister Jospin took advantage of the situation to introduce a statutory 35-hour working week - a one-size fits-all reform that was fine for office workers in the lower and middle ranks of the civil service but totally inappropriate to private industry, not to speak of nurses and doctors in public hospitals. The private sector, fed with large dollops of subsidy, adapted over time but many parts of the public sector, particularly public hospitals, have been thoroughly disorganised, which largely explains, in passing, the sorry state of French public hospitals and particularly A & E services today. Chirac served out his first term, was re-elected in a landslide against Jean-Marie le Pen in 2002 and proceeded …..to do practically nothing (except keep France out of the Irak war) during his second term, now reduced to 5 years. Denouncing “immobilisme”, Nicolas Sarkozy was elected in 2007 to get things moving again. He loosened up labour laws to enable private sector companies to work around the 35-hour working week more easily and introduced tax incentives for overtime (i.e anything over 35 hours - “ travailler plus pour gagner plus”) but did not attempt to amend the statutory working week, that the public sector in particular was keen to keep. He also had a go at reforming pensions but took the relatively easy option of  reforming the private sector system, raising the statutory retirement age to 62, amid widespread protests from the same quarters as today, but did not dare tackle the public sector in any serious way and kept very clear of stirring up the unions by trying to reform the “regimes spéciaux”. By this time, both the public sector pension system and the régimes spéciaux were becoming increasingly unbalanced. It is now estimated, (something that has been little mentioned in the current debate) that the pension deficit of the public sector, carefully concealed by some creative accounting, is around €30 billion a year and that of the “régimes speciaux” another €5 billion. After Sarkozy’s stinging defeat by François Hollande in 2012, his 5-year term introduced some tweaks to labour legislation and a very gradual increase in the number of contribution years required to receive a full pension, to the considerable ire of many in his party and the street, that turned out en masse to protest.

 

In the 2017 campaign, Macron appeared to many as a breath of fresh air. Although he started his political career as Hollande’s economic advisor and subsequently Minister of economic affairs, his recipes for change were anything but socialist. He promised to liberalise labour laws, reduce taxes, particularly on businesses, and sketched out a vision for pension reform to the effect that everyone, whether in the public or private sector, would be subject to the same rules and the same contributions would generate the same pension benefits. He also promised to reduce unemployment in general and improve job prospects for young people in particular by promoting apprenticeships and vocational training.

 

It is only too easy at this moment, with pictures of mountains of rubbish in the streets of Paris and the ancient gate of Bordeaux Town Hall going up in flames, to lose sight of the fact that Macron and his government have delivered on many of these pledges. Labour laws were liberalised very early in his first term, punitive taxes on the wealthy were reduced, taxes on business have been cut and investment, from both France and abroad, has been actively courted and landed. Last year the number of new factories outstripped the number of factory closures; new apprenticeships reached a record of over 800 000 and are still rising. France’s previously very generous unemployment benefits have been curtailed to encourage people back into work more quickly. What economists refer to as supply side reforms have never been part of the French “dirigiste” approach in the past and the cultural changes they have brought about in the French economy have passed largely unnoticed. To take just one telling example: for many years, manual work was considered in France as vaguely demeaning, only fit for dimwits and dropouts, not bright enough to complete the broad curriculum that culminates in the “baccalauréat” and a free pass into university. This attitude is still the basic assumption of the left-wing teaching unions who hold inordinate sway in the centralised ministry of education. But at last, skilled manual work is coming to be seen as a reasonable and profitable alternative to general education, as it is in Germany; parents are less reluctant to see their offspring take apprenticeships or vocational courses rather than scrape through their baccalauréat and waste a few years at taxpayers’ expense in university courses that offer doubtful job prospects.

 

As Macron has projected and implemented this very focused vision of the French economy, it has not always been appreciated, to say the least. But he has used the considerable powers of a 5th Republic President to push these reforms forward, with the conviction that they are essential to making the French economy competitive once again and produce more high-value goods and service after so many years of drift and a widespread feeling of complacency and entitlement. And despite the inevitable protests from the unions and political opponents.

 

I think it is only fair to see the current debate on pension reform against this background. Macron was unfortunate in his first, and probably overambitious attempt, which played itself out between the gilets jaunes and the COVID pandemic.  Although it did in principle enjoy the support of the more moderate unions, it had to be abandoned as protests and the COVID emergency took their toll. But Macron made it clear that pension reform would be back on the agenda if he were re-elected in 2022. He was, with a majority of 58%, although he lost his parliamentary majority just a month later. The current reform is less ambitious than the first and has been contested by all the unions. It is simpler, raising the retirement age from 62 to 64, does not change the way in which public sector pensions are calculated (70% of final salary as opposed to 50% of the best 25 years for the private sector) but it does abolish the  régimes spéciaux, albeit only for new entrants and therefore very slowly. My feeling is that this is once again the core of what the unions are protesting about. They are far more powerful in the public sector than elsewhere and many of their members currently retiring on a full pension at the ridiculously early age of 58 to 60 will indeed be required to work two years longer. For employees in the private sector, who, as a result of previous reforms, must work until 64 anyway, if not more, its effect will be marginal.

 

A lot can and has been said about what Is seen as Macron’s high-handed way of pushing the reform through parliament. Personally, I would have preferred to see it put  to a vote and withdrawn if the vote had been lost, with a return to the original plan of 2017-2018. But Macron clearly judged that he had better things to do in the remaining four years of his mandate than spend yet more time and dwindling political capital on a third version of pension reform.  The best thing that can be said about the 49.3 procedure is that it has at least made clear that there is no alternative majority in the Assemblée Nationale.

 

Especially, as you clearly point out, as this version of pension reform will not have a huge impact on overall public spending. But there are two counter arguments here: the first is that it will at least stop the fiscal deficit and public debt from increasing further, and if it obviates the need for a taxpayer subsidy of €35b. a year, this is definitely progress. Unfortunately however, the French still expect the state to continue to massively subsidise businesses and consumers to shield them from economic headwinds. On top of that, the “whatever it takes” of the last three years has given many the sentiment that the pension deficit is indeed peanuts. By comparison, blanket energy subsidies cost the taxpayer €80b. in 2022 and have been extended for the whole of 2023. Meanwhile, the German finance minister is up in arms over an unforeseen €70b. he is being asked to spend in 2023….

But there is a second argument which is more valid over the longer term and which, I suspect, is more important to Macron and explains why he never ceases to explain, in every interview he gives, that France must re-industrialise and produce more high-value goods and services: if the size of the overall GDP pie can be increased, each individual slice will represent less of the whole. Knowing how difficult it is to cut public spending in any country, let alone France with its very generous welfare state, this is surely the logic behind his supply-side reforms referred to earlier.

 

On the relative strength of Macron and Le Pen at the last presidential election, the map you chose shows that Macron not only won in the major cites but also in large swathes of the rural centre of France as well as almost the whole of Brittany. MLP garners her support mainly from the North (area of mine closures and declining  industries, long a bastion of the Communist party) the East (idem in Lorraine, but Alsace has a more Germanic culture and places more store by law and order) and along the Mediterranean coast from Marseille to Nice, where support is primarily driven by, sometimes rabid, anti-immigrant sentiment, a hangover from the Algerian war and the  many pied noirs and their descendants keeping their resentment very much alive. It is no accident that Eric Zemmour, even more extreme than MLP, tried, unsuccessfully, to gain a parliamentary seat in Saint Tropez! How well MLP and her party can weld these disparate strands into an election winning coalition by simply being anti-Macron and highlighting cost of living issues (as she did in 2022) will be one of the factors determining whether she wins the presidency in 2027. Many commentators seem to think that she will, but I beg to differ. I am fairly sure that in a bitterly fought campaign, she will, on the contrary, be shown up for what she is, a Trump style populist with Trump style friends, notably Putin, a large debt to a Russian bank and facing a judicial investigation over possible misappropriation of European Parliament funds, a demagogue, quick to identify scapegoats but with no coherent vision of the future."

France's painful pension reform

 

    Almost five years ago, I wrote a post on this blog entitled “Brexit won’t happen”. I was wrong, it did happen and, after many ups and downs, became effective three years ago on January 31, 2020.

     

    Long enough to have some perspective on its impact on the UK.

      

    There is little doubt that the effect of deliberately putting up trade barriers with the country’s major trading partners has been economically disastrous. Among the many column inches, speeches, research and anecdotal evidence related to Brexit, that I have digested over this time, by far the most complete compendium is a half hour video put together by the Financial Times.  (The Brexit effect: https://www.ft.com/content/58b6f2af-9171-46ed-97bd-4a4a0f7c0500). Its verdict could not be clearer: on every economic and financial criterion, whether its output, exports, investment or productivity, the UK, has done worse than its European neighbours and the country has become poorer. The former Bank of England Governor, the Canadian Mark Carney, said recently that it was not for him to comment on the policy of the current government, but it was clear that whereas the UK economy was worth 90% of the German economy in 2016, it is worth only 70% today.

      

    The point of this post however is not to add one more voice to all those bemoaning the effect of Brexit on the UK, but to try and suggest some pointers, more suited to a blog entitled “Interpreting France”, for the country just across the Channel that is now embroiled in a heated public debate about pension reform.

      

    As most readers of this blog will know, the French pension system is what is called a “pay-as-you-go system” in which those in work and their employers make a compulsory and proportional payment into the pension system which finances the pensions of those in retirement. Such is the deep-seated mistrust of financial markets in French public opinion that pension funds of the kind that are commonplace in comparable countries are inexistent here. The French pension system is entirely state run and based on intergenerational solidarity. It stands to reason therefore that for it to function smoothly and sustainably, the dependency ratio, i.e., the number of those in work compared to the number of pensioners, has to be in long-term equilibrium. But as in many comparable countries, the dependency ratio in France is currently unfavourable, has been for some time and, with increasing life expectancy, can be expected to remain so for the foreseeable future. The statutory retirement age of 62, one of lowest in the EU, is therefore unsustainable. In addition, the effect of previous mini-reforms over the past 20 years has been to surreptitiously erode, mainly for workers and employees in the private sector, through the non-compensation for inflation or by changing the parameters for the calculation of pensions, the percentage of their former earnings that pensioners receive, another trend that is likely to continue.

      

    This is all the more relevant as the state budget is currently subsidising pension payments in a way that is opaque to most and largely taken for granted by those who should know better. The COR, the official pensions observatory, has calculated that the state budget spends €30 billion of taxpayers’ money every year to compensate for the shortfall of pension contributions in the public sector and another €4 or 5 billion a year to subsidise the (very) early retirement of train drivers and conductors of the SNCF, workers in the Paris public transport system (RATP) and employees of the nationalised and previously nationalised energy industries. And this in a country that has not voted, let alone executed, a state budget in balance since 1974 and currently has a debt/GDP ratio of nearly 112%, second only to Italy in the EU.

      

    The overall effect of all this is compounded by the widespread expectation in public opinion that, in return for their compulsory contributions, pensions should be provided primarily, if not exclusively, by the state. Indeed, the state spends 14% of GDP on pensions, one of the highest ratios in the OECD. It is now dawning on an increasing number of future pensioners that, to maintain their standard of living in retirement, they are going to have to work longer and/or contribute a portion of their own savings. This is one of the factors explaining France’s high savings ratio and the number of tax-deductible retirement schemes that are now being sold by banks and insurance companies.

      

    Emmanuel Macron is staking his political legacy on the successful passage into law of the current reform plans which, while maintaining the foundations of the pay-as-you go-system, would increase the retirement age from 62 to 64. EU statistics show that French workers and employees  toil proportionately less during a typical year than their European counterparts, the 35 working week is the norm in the public and many parts of the private sector  and ever since his first election in 2017, Macron has been consistent about the need for the French to work more, become more competitive and create more wealth in order to reduce public debt, spend less of the budget on social transfers and interest payments and have some financial leeway to spend more on public services like health and education. And in many ways, he has kept faith with that pledge, successfully promoting vocational training which now reaches far more young people than it used to, reducing taxes on businesses, giving them incentives to take on trainees and, more controversially, tightening the rules of the very generous, by the standards of comparable countries, unemployment compensation scheme. While these reforms are undoubtedly having, and will continue to have positive economic effects, without a successful pension reform, they will not be seen as complete, neither by the French nor by France’s partners within the EU.

      

    As always however, whenever pension reform is on the agenda, as it has been in some form or another since Macron was first elected to the Presidency in 2017, the Trade Unions have succeeded in focusing the public debate on issues not of intergenerational solidarity, but of social solidarity and the distribution of wealth in society.  Day after day in the mainstream media, workers in all kinds of jobs say how “unfair” if would be for them to work another one of two years before being able to retire because of the particularly trying requirements of their job. While there is no doubt that some jobs are physically demanding, once you start trying to codify how demanding, every corporation will have good reasons for claiming that its own activity is particularly taxing. Many of those demonstrating in the first wave of protest on January 19, were schoolteachers, train drivers in Paris and railway workers. Can any of them find convincing arguments for not working two years more when schoolteachers in most other OECD countries work longer hours and retire later than 64, while train drivers in the public sector are surly no more overworked than those in the private sector and tram drivers in Bordeaux or Lyon have no less taxing jobs than their counterparts in Paris who can often retire ten years earlier?

     

    It is also relevant to recall that the French system of transfer payments, according to official statistics, does more than almost any other country of the EU to reduce primary income inequalities and that the state still takes, in taxes and levies of all kinds, 44% of the country’s wealth that it then redistributes.

      

    The unions of course know full well that their arguments will resonate more strongly with public opinion than issues of sustainability and public debt, especially at a time when inflation is high and many people find it more difficult than before to make ends meets. And in a country which has spent untold amounts on protecting workers, employees and businesses from the ravages of the COVID epidemic, and was still subsiding energy and fuel bills to the tune of €70 to €80 billion in 2022, it is an easy gambit to claim that balancing the pension system would cost peanuts.

      

    Sensitive to the impact of these arguments on public opinion, the government is proposing, as part of the current reform package, a number of compensatory measures, like raising the minimum pension for a full career to € 1200 or allowing those who started working before the age of 20 to retire earlier than 64.

      

    But the unions, that draw most of the strength from the public, nationalised and previously nationalised sectors, are also advancing a more self-serving and largely hidden agenda which, unsurprisingly, is to defend the interests of their members. Strangely, few observers and even fewer journalists are impertinent enough to ask serious question about the justification of a €30 billion yearly subsidy for public sector pensions, let alone the justification for the retirement privileges of railway or Paris transport workers. Strangely too, the government is very coy about denouncing them. During interviews, journalists usually “serve the soup” as the French say, to their chosen interviewees and simply don’t ask such awkward questions. In the last few weeks, I have heard just one question on a mainstream news network about the €30 billion subsidy but the union leader being interviewed quite simply ignored it. The unions have been fighting to maintain the special retirement privileges of public sector workers since the first time a government set out to reform them in 1995 under Jacques Chirac’s presidency. They brought the country to a standstill, the reform plans were withdrawn and no serious attempt was made to revive them until Macron came to power in 2017.

      

    For the moment, the battle for public opinion seems balanced between those who consider the reform fundamentally unfair and those who realise that current arrangements are unsustainable and, in addition, have had enough of what they consider to be union obduracy and their nasty habit of taking the country hostage to their demands.  After the publication of the draft reform that will be debated in parliament, a country-wide series of marches on January 19 were joined by over 1.2 million people, according to official figures, probably underestimated. Further demonstrations are planned for the end of January and February, with some unions threatening to take more radical action to block the country as in 1995, or during the demonstrations against Macron’s initial reform plans in 2019, that were withdrawn during the COVID pandemic.

      

    In his New Year’s message for 2023, Macron made the point over and over again (“par votre travail et votre engagement”) that the French need to work harder if they want their country to remain competitive, attract investment both domestic and foreign and  create well-paying jobs. He knows only too well that a successful pension reform will be one further, probably irreversible, step on the road towards a more economically liberal France.  Casting one eye over the Channel and the other over the Rhine, there is surely no doubt in his mind which example France must follow.