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France: Where is the new pension reform going?

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  • France: Where is the new pension reform going?

The French government might want to rethink pensions reform, argues Cécile Sourbès.

There's an old French proverb that goes something like "buying is often cheaper than asking". In other words, asking for a favour often pushes us to make greater concessions than we originally expected and can lead to a bit of humiliation.

That saying probably sums up the feelings of François Hollande, the French president, last week after the European Commission granted France a further delay to correct its "excessive" deficit.

The good news for the government was that Brussels took into consideration its request after it argued that two more years would be necessary to bring the deficit under the EU limit of 3% of GDP. But the concession came at a price.

In return for the delay, the Commission recommended France tackle a number of fiscal measures to revive its economy. Among the recommendations, one was directly linked to new pension reforms, something on which the government is currently working.

The humiliation for France on this was not insignificant. So, instead of endorsing the recommendations, Hollande rejected that France needed any lessons from Brussels on to how manage its economy. After all, many member states in the EU would be likely to take a similar approach.

This sort of grumbling and political posturing is often a last resort for countries at the end of their rope where deficits are concerned. Of course, France is aware of the numerous factors that are having a dampening effect on its deficit. That's why the government is looking at a number of measures, including the introduction of a new pension reform.

Earlier this year, a panel was tasked with advising the French government on this reform. It includes senior officials, two sociologists and an economist, among others. Most of them come from the Conseil d'Orientation des Retraites (COR), which published the controversial economic forecasts serving as the foundation for the 2010 reform of the French pensions system.

The panel was originally asked by the government to send its final conclusions at the end of May. Even though its report is not in the public domain as yet – and should only be made public over the course of next week – French media have recently highlighted some of the major points made by the panel. Tax exemptions on pensioners, squeezing future payouts and reviewing civil servant pensions are among the recommendations.

However, there is one standout recommendation. The panel reportedly recommends a small rise in employer contributions, thereby utterly ignoring the European Commission's advice.

Last week, the Commission specifically called on France to take measures by the end of 2013 while avoiding an increase in employers' social contributions. According to Brussels, higher contributions would lead to an additional drag on small and mid-cap companies. Moreover, they would come in direct opposition to the measures already taken by the government to help businesses become more competitive. This, in turn, could have a serious impact on an unemployment rate that keeps on growing.

Nothing is written in stone, of course, and the measures suggested by the panel are mere rumours for now. But if the government were really to increase employer contributions, it would hurt not only its relationship with Brussels but, more importantly, its own businesses. At a time when all eyes are fixed on the unemployment rate, the government would do well to think through pensions reform more carefully.

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