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Why Labor Mayhem in France Could Benefit Sarkozy

by | October 15th, 2010 | 10:42 am
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French labor unions are preparing to block President Nicolas Sarkozy’s proposal to raise the French retirement age by two years.1 They plan open-ended strikes to shut down France’s transport and energy infrastructure, hoping to repeat their success in 1995 when street protests forced President Jacques Chirac and Prime Minister Alain Juppe to abandon their proposals to reform the public pension system and government finances more broadly. This time, however, the unions are certain to lose. In fact they could actually end up strengthening the reelection chances of President Sarkozy.

The reason is that 2010 is not 1995 in France and in Europe. Fifteen years ago, French government bond yields were falling rapidly in tandem with German bonds, as Europe prepared to introduce the euro in 1999. Financial markets (however irrationally) did not care much about the long-term fiscal sustainability of European sovereigns. Other issues dominated.

Today, post-Greece, the situation is different in what is now the eurozone. Financial markets care about the character of sovereign finances and have proven ready to apply large sovereign default premiums on governments not implementing sustainable policies. Similarly, today Europe has a Stability and Growth Pact, soon to be tightened, which it will be politically costly to breach. Hence, financial markets and France’s EU partners will look much more critically at any inability of France to reform its finances.2

A failure to extend the retirement age may even cause France to lose its AAA rating. And without that rating and the associated imprimatur of financial strength, France will become a second-tier large member of the European Union (sort of like Italy today), increasingly dominated by a financially resilient Germany. The Franco-German EU axis would then change into an “EU velocipede” with France the small rear wheel.

Obviously President Sarkozy and his advisers know this. Pushing pension reform may hurt his political base, the Union for a Popular Movement (UMP), in Parliament, but prove advantageous in the long run. Success in office is often determined by the quality of your predecessor, and electoral success is often determined by the quality of one’s opponent.

Up for reelection in April/May of 2012 and doing poorly in the pools today, Sarkozy can leverage his pension reform proposal to shape the kind of opponent he will face in 2012. The further left his opponent is, the greater his chances of reelection are.

That is what pension reforms are producing. They are radicalizing the French left wing and labor movement, reducing the chance for a centrist to become the Socialist Party’s presidential candidate in primary elections scheduled for June 2011.

In the first round in 2002, splits in the left wing among multiple presidential candidates undermined Prime Minister Lionel Jospin’s candidacy and led to a runoff between Chirac, who was deeply unpopular, and the far-right leader Jean-Marie Le Pen. Therefore, to avoid a repeat of 2002, another factor pushing the Socialists to the left is that any Socialist presidential candidate must have the support of at least some of France’s many far-left factions, like the French Communist Party (Parti communiste français), the Workers’ Struggle (Lutte ouvrière) or theRevolutionary Communist League (Ligue communiste révolutionnaire).

In today’s political climate in France, opposition to Sarkozy’s pension reform plans is therefore becoming a litmus test for any would-be Socialist presidential candidate. As a result, only someone who vows to repeal Sarkozy’s pension reform and return to age-60 retirement after 2012, the old platform of President Francois Mitterrand, can win the Socialist party primary. Opposition to these reforms is already the official stance of Socialist leader Martine Aubry.

For President Sarkozy, an opponent running on a far-left and fiscally unsustainable electoral platform is likely to be a gift.

All Washington-based inside-the-beltway types should therefore take note: Dominique Strauss-Kahn, managing director of the International Monetary Fund, who has publicly come out in favor of raising the retirement age in France, has no chance of becoming the Socialist presidential candidate or therefore French president. He will thus likely remain as Europe’s last fund chief, and one of its highly effective ones of modern times, for a long time.

Notes

1. The proposal intends to increase the earliest age of retirement on a reduced pension from 60 to 62 and the age of retirement for a full pension from 65 to 67.

2. France today has among the lowest effective retirement ages in the world and the longer expected time in retirement. As its population ages, the costs of pensions will correspondingly explode.

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