Published in Business Spectator (Melbourne), 21 October 2010

http://www.businessspectator.com.au/bs.nsf/Article/France-economy-unions-politics-government-pensions-pd20101020-AE5WA?opendocument

Gone are the days when Julius Caesar began the accounts of his Gallic Wars with the famous words “Gallia est omnis divisa in partes tres” (“All Gaul is divided into three parts”). Today, some 2,000 years later, modern France is divided along very different lines, although the battles are not much less fierce than under Caesar.

For months, the French republic has been shaken by growing resistance to president Nicolas Sarkozy and his plan to increase the retirement age from 60 to 62 years. Whether the new pension system is eventually implemented or not, the tumultuous scenes in the streets of Paris, Marseille and other big cities leave only one conclusion: France is an unreformable country.

Over the past week, hundreds of thousands again took their protest to the streets, paralysing public life with widespread walkouts from public transport to oil refineries and, rather bizarrely, schools. French students have learnt that participating in strikes is as much a national pastime as sipping café au lait. So they joined the protests against pension reform from which their generation was likely to benefit most. But maybe they just did not cherish the prospect of spending more than a third of their precious lifetime at work?

The longer these French protests go on, the more it becomes clear that pension reform was just the trigger, not the sole cause. In fact, not even the French would deny that they can no longer afford to retire earlier than anyone else in the industrialised world, with the possible exception of the Greek.

Opinion polls in France reveal that a majority actually believe an adjustment of the pension age to increased longevity may be necessary and in fact unavoidable. Other surveys, however, show that similarly large majorities support the protests against this very policy.

So what is going on? Are the French trying to have their croissant and eat it too? What is this conflict really about?

The biggest problem of the pension reform is its inventor. After three years in office, President Sarkozy’s approval ratings have hit rock bottom. The former interior minister had started his presidency as a tough law and order man and aspiring economic reformer. His actual politics hardly lived up to these carefully designed images, though.

Sarkozy’s private life – his divorce quickly followed by marriage to glamorous pop singer Carla Bruni – not only annoyed many French but also seemed to distract him from the presidency itself. During the financial crisis, Sarkozy confused friend and foe in Europe with his uncoordinated and often unpredictable activities and statements. More recently, he snubbed his European partners with the deportation of the Roma gypsies from France, which was in clear violation of EU law.

On the domestic front, too, Sarkozy lacked a clear line. Early steps towards economic reform ended in the financial crisis, after which Sarkozy returned to traditional French dirigisme. He was also accused of being involved in a scandal around illegal donations to his UMP party in return for tax favours.

Tax policy is among the key issues that fuel the current wave of protests. After assuming the presidency, Sarkozy had introduced a rule that limited the tax burden to 50 per cent of a taxpayer’s income. Benefiting from this policy, about 18,000 French households received a tax refund worth €600 million ($850 million) last year.

It is telling that in France this rule is now widely regarded as an unjustified gift to the rich – not just by Sarkozy’s left-wing opponents but even by members of his own conservative party. A large group of UMP parliamentarians have publicly supported the abolition of the measure. Even Treasury minister François Baroin called it “a symbol of injustice” in a TV interview.

Although tax policy and pension reform have little to do with each other, their combination is politically dangerous. The general public feel they are being asked to pay for the continuation of privileges of the better-off. It has become almost impossible to hold a sensible debate about what really needs to be done.

Such a debate should not be too difficult, though. The figures leave little room for interpretation. Earlier this year, the government-appointed Pensions Advisory Council revealed the shocking state of France’s pension system. According to their report, the funding shortfall will be €40 billion ($56 billion) by 2015. By the middle of the century, the deficit of the country’s pension system could be between €72 billion ($102 billion) and €114 billion ($161 billion), if it does not adapt to the ageing population. In light of these forecasts, an increase in the retirement age by just two years can only be a modest first step.

As the violent clashes of the past week show, even this step is more than the French are willing to tolerate. Instead of reacting to tomorrow’s challenges, they would rather return to yesterday’s policies. And instead of making public expenditure future-proof, they yearn for the seemingly easy path of taxing the rich for more than half their income. Never mind that this would make France an even less attractive place for business.

Overcoming such challenges would require the strategic brilliance of a Julius Caesar. For Nicolas Sarkozy, however, it may well mark the beginning of the end of his erratic presidency. His Ides of March are looming in the 2012 presidential elections.