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.
