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France, Germany

France’s competitiveness ‘shock’ : a campaign of disinformation

By Laurent Mauduit

François Hollande committed a major error announcing on July 9 at the opening of the ‘Social Summit’ , that the first of his five priorities was the issue of competitiveness. It was a political mistake, because it saw the head of state mount the battle horse of the Right and the employers. And since then, he has continued to pay the price of this swerve into an area where the Left had everything to lose – including its values. It is also an economic and social error because in truth the most serious studies, starting with the one published this week by the High Council of Social Protection Financing, highlights the employers’ bad faith in this campaign for business competitiveness.

There was no justification for François Hollande to begin his five-year term with a cascade of anti-popular measures – as if to punish those who got him into the Elysee. There was the announcement of an ridiculously low increase to the minimum wage – with a ‘boost’ of only 20 cents per day. Then, almost at the same time, there was the announcement of the first fiscal austerity measures. And to top it all, there was the competitiveness ‘lurch’: while François Hollande had rightly mocked campaigns conducted earlier this year on this topic by Nicolas Sarkozy, he suddenly made them his own. Let’s all turn Right! He even caught the employers by surprise with his sudden alarm over labour costs in France.

This is a trap that the socialists laid themselves. If, the so-called “pigeons” [young entrepreneurs] , and the big bosses of the French association of private companies (AFEP), campaigned against the socialist government, and together sought to trigger a ‘competitiveness shock’ with the key demand being the transfer of 30 or 40 billion euros to their advantage and to the detriment of employees, it is because they saw the opening first provided by François Hollande. Why would all these bosses deprive themselves of making the demand, when the head of state himself had in his own way vindicated them in advance by asking one of them, namely Louis Gallois, former CEO of EADS and outspoken supporter of the ‘competitiveness shock’ to inform the government’s thoughts on the matter by preparing a report on the question?

In short, the facts of recent months are unfortunately unequivocal: it is François Hollande himself who lit the fuse of the bomb, which for nearly four months has had devastating effects.

Was there really someone in the leadership of the socialist administration who for a moment was naive enough to think that entrusting such an important report to a personality such as Louis Gallois would deliver a open and impartial reflection on the subject? Impossible, since the former boss of EADS had already unmasked himself, advocating on July 7 to the liberal / conservative Circle of Economists think tank a ‘shock’ amounting to a ’30 to 50 billion euros’  transfer in charges from employers to employees through increases in value added (sales) tax  or general social contribution (CSG) tax.

Nothing justified the Socialist residents of the Elysée Palace and the Hôtel Matignon invading a space  reserved for ​​employers and the [right-wing] UMP party.  For proof, just dive into the high quality report produced by the High Council of Social Protection Financing.  Launching the High Council on September 26, prime minister Jean-Marc Ayrault expressed a wish that the first work of this new body would be ‘dedicated (s) to the financial state of the social protection system, analyzing its characteristics and developments.’

Neoliberal dictat

Packed full with new statistical data, this paper provides a cold and meticulous picture of the state of play,  and acts as an antidote for a country intoxicated by the bad faith that the issue of competitiveness has raised. It is of great interest because it can accurately answer many questions and tackle the many commonplaces that are often conveyed by this debate about competitiveness and labour costs.

Does France lives beyond its means?

This is a subtext that recurs constantly in the debate on competitiveness. We know the argument, repeated ad nauseam by neoliberals: the French economy is not flexible enough, not competitive enough, because it is constrained by a social model that is too much of a burden and too inflexible.

What do the numbers say? They show that of all major developed countries, France is indeed one of those who has the most protective social system, since the financing of the welfare system is very large. It was €538.8 billion in 2010, which represents 32% of the national wealth, compared with €414.3 billion euros for state spending.

For half a century, the share of social protection expenditure in national wealth has continued to grow in France. For demographic reasons – the aging of the population – or the sophistication of medical technology has weighed heavily on the increased costs of pension insurance system or health insurance. But also for economic reasons: during periods of crisis, like now, social protection plays its protective role in full, and social spending increases.

Overall,  France does have a welfare system that is more protective than many other countries. In Europe, it is one of the most generous, just behind Denmark.

However, the debate on the generosity of the French social system is marked by great hypocrisy. For those who point to the burden of social spending in France fail to mention that international comparisons are often biased because they do only take into account public expenditures and do not include private spending, financed mostly by insurance systems.

This is what the report underlines: ‘If the size of public social protection systems is different depending on the country, the differences between states seems less important when one takes into account the analysis of private spending and fiscal nature: in all major OECD countries then, the total social protection expenditure (public and private) represents between 26% and 31% of the national wealth. With a ratio of 28%, Germany is less than two percentage points above the US and the UK and is three points below France and Belgium, which dedicate the highest share of spending on social protection among all OECD countries.’

The French system of social protection is actually one of the most generous, but mostly it is much more supportive. And this point is of great importance, because those who advocate a social model that is less protective often seek to hide the logical outcome of their recommendation: a growing reliance on private insurance. They are challenging the system of solidarity on which the French social model rests.

And in any case, should we succumb to the intellectual terrorism that seeks to tell us that a competitive economy is governed by the law of the jungle, without social protection?

The report takes the exact opposite position to the neoliberal dictat, and despite the jargon,  its observation is welcome: ‘On the other hand, among the non-price competitiveness factors, social protection can also be an element of the attractiveness of the country.’

The unequal division of capital-labour

• Are social contributions paid by employers too high?

It is this fact which is reflected in campaigns conducted periodically by management. But if we scrutinize the figures, we find that the resources for social protection are financed only up to 35.1% by employer contributions. This is double the social security contributions paid by employees, but the employees are not only subject to social security contributions. They also have to pay the general social contribution (CSG) which has been rising continuously since it was introduced in 1991, and which now provides more than 13% of the funds for social protection.

Endlessly repeated, the argument that the burden of social security contributions is excessive is refuted by the numbers. There is nothing very surprising about this: in patrimonial capitalism*, the share of value added between companies and employees has long been distorted to the advantage of the former and at the expense of the latter. It is observed in the wage-profit sharing in the respective weight of employee and employer contributions.

So should we further reduce employers’ social contributions, which are not large, thus increasing the burden on employees in the form of an increase in the CSG, or the consumer in the form of increased VAT?  Should we deepen this inequality yet more ?

Within the employers argument, there is yet a grain of truth, and it is this: financing of social protection has the drawback that it relies, three-quarters, on earnings [from activity]. This is also  highlighted by the High Council of Financing Social Protection report: ‘In 2010, 77.3% of the resources of social protection consisted of payroll taxes on earned income (…) . The other contributors to financing of social protection were much more marginal: up to 4.8% for household consumption, 2.5% for welfare payments, 2.0% for capital income and 1.0% for other taxes linked to production.’

One figure is worth noting in particular: revenues from capital income contribute only 2% of the resources for social protection. So, we could imagine that there is room for action, but they are not often mentioned in the public debate. Why do we talk incessantly about a possible rise in VAT and the CSG to finance social protection, measures which affect income from savings only marginally ? This is another element of hypocrisy in the current debate.

It is Germany that is the odd man out

Is the cost of labour too high in France?

This is the main blunder that was committed François Hollande: when he launched the debate on competitiveness, he reduced the problem to labour costs, while he [seperately] pursued many other issues, such as research, innovation, expanding the  range of products made, etc..

But even if we reduce the debate to just the question of the cost of labour, the employers’ thesis that it represents a drag on competitiveness appears very weak.

France has higher labour costs than the European average, but still lower than Belgium and Sweden – which are not really doing that badly. But more importantly, since the main comparison for France is Germany, the situation is almost the same in both countries. This is less true in tradable services, but at this time of rapid globalization, it is industry trends that matter.

And above all, the report shows that the problem in recent years in Europe, has not been the behaviour of France, but above all that of Germany, due to policy of wage deflation. This passage runs completely contrary to today’s neo-liberal orthodoxy, and employers’ demands on the government, and so it deserves to be read carefully:

“As regards its evolution, the hourly cost of labour in France between 1996 and 2011 experienced a growth close to the median in European industry and was lower in tradable services. However, it is in relation to Germany that changes in hourly labour costs were higher in France during the last fifteen years: these costs rose 58% in France between 1996 and mid-2012, against 25% in Germany during the same period and are now no longer lower in France than Germany in the manufacturing industry as was the case at the start of the period.

In this respect Germany has followed an atypical evolution in Europe, particularly between 2003 and 2007, using predominantly wage moderation to contain the increase in the cost of its workforce, with an earlier rise later clawed back. ‘

Clearly, and contrary to what the employer and government experts say, French wage costs have not soared out of control. Rather, Germany has been pursuing a policy of wage dumping.

And the report adds: ‘The evolution of social contributions paid by employers are also explained in a small part by these divergent hourly labour costs. The share of employers’ social contributions in the total cost of the workforce has been stable in France since 1996, it was 28.7% in mid-2012, 28.6% against sixteen years ago. This results from the combined impact of cuts in social security contributions on low wages and changes in nominal contribution rates; add to this a rise in taxes imposed on wages (participation in construction efforts, transportation payments, etc.).

‘In Germany,  in the tradable sector the share of employers’ social contributions in the total hourly cost decreased from 23.1% in 1996 to 20.8% in second quarter of 2012, partly due to the substitution on January 1, 2007 of a portion of employer contributions to VAT (equivalent to 1 point VAT). These differences in funding policies for social protection can, however, explain but a small portion of the gap in the evolution of hourly labour costs between the two countries. The bulk of this difference comes from the…sharp slowdown in gross wages observed in Germany following reunification. ‘

These findings thus highlight another great hypocrisy in the debate on labour costs. As always, the Right and employer circles  – and now the government – refer to the German model and its use of VAT to finance social protection. But the report notes that the effect of the VAT reform was only marginal and the real reason for Germany’s competitive was a policy of driving wages down.

The ulterior motives in the debate on competitiveness have been revealed. For many, it is about questioning the very foundations of the French social model and, in addition, promoting a policy of severe wage austerity. This is the ‘shock’ advocated by Louis Gallois.

Laurent Mauduit is a writer and journalist specialising in the economy

La Federation Pour Une Alternative Sociale et Ecologique

Translated/edited by Revolting Europe

* ‘Patrimonial capitalism’ is a system in which the key determinant of success is how close you are to those in power, according to political scientist Oliver Schlumberger

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope

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