Hollande says debt crisis is 'over.' But is France really out of the woods?

Experts say that, despite Hollande's comments this past weekend, France could join Southern Europe's economic crisis if it does not introduce urgent reforms.

French President François Hollande assured his hosts on a visit to Japan over the weekend that Europe was a safe place to invest.

"What you need to understand here in Japan is that the crisis in Europe is over," he said.

Indeed, the drama that began in 2009, with a debt crisis that required bailouts for several countries, doubts about whether Greece could stay in the eurozone, and even more doubts about whether the entire project itself might implode, has eased.

But it’s far from over, and in many ways it’s a lack of suspense today that many observers say spells trouble – perhaps first and foremost in France itself.

The country entered into recession in the first quarter of the year. Unemployment sits at nearly 11 percent, with no signs of easing downward, despite President Hollande’s pledge to lower it by the end of the year. And France has gotten urgent warnings from the European Union and International Monetary Fund that it must reform its pension system and labor laws to increase its sagging competitiveness.

To be sure, France is much better off than its neighbors to the south. Even if its unemployment rate refuses to budge, it’s still well under half that of Spain, which sits at a staggering 27 percent. But observers say that is precisely the problem, and that France is at a crossroads today.

“We don’t have a crisis like the Mediterranean countries, but if you project one or two years, France could be like Spain or Portugal,” says Nicolas Bouzou, an economist and head of Asteres Consultancy in Paris.

But Hollande has not communicated a sense of urgency – underscored by his comments over the weekend. “The crisis in France is not strong enough," says Mr. Bouzou. "In France, people are living quite comfortably. They don’t understand the necessity of change.”

He adds: “French life is not a stimulus to change."

Need for reform

French unemployment grew to 10.8 percent in the first quarter of the year, growing for nearly two straight years, according to national statistics.

Its unemployment rate is better than that of the EU on average, which is at a record 12.2 percent. But it sits in the middle of humming northern economies, like that of Germany, and ailing Southern Europe, and its economy could go either way. 

The IMF, in its recent annual assessment, said that without economic reform, the gap between France and other European countries could increase. “We see deep structural issues affecting growth potential in France due to loss of competitiveness,'' said Edward Gardner, the chief of the IMF's mission to France.

And the European Commission wrote, in its recent country-by-country recommendations, that high labor costs and a generous pensions system require urgent reforms. “France’s competitiveness remains a significant challenge, as the strong erosion of its export markets shares in recent years shows.”

In France, where the retirement age is 62, and the workweek is 35 hours, it is hard for companies to fire workers, and those dismissals often result in lengthy lawsuits. Social spending as a percentage of GDP is the highest of any country in the eurozone.

The European Commission recently gave France, along with other countries, two additional years of breathing space to get the deficits to below 3 percent of GDP. “This extra time should be used wisely to address France’s failing competitiveness, as France’s enterprises have suffered a worrying loss of competitiveness in the last decade, indeed we can say in the last 20 years,” European Commission President Jose Manuel Barroso said.

Resistance to change?

But Hollande said the commission could not “dictate” what France does, even as his government eyes pension reform to cut down on spending, with a panel review expected in days. “As far as structural reforms are concerned, especially pension reforms,” he said, “it is up to us, and us alone, to say which is the best path to attain this objective.”

The social model of France dates back to the close of World War II, but demographic shifts have overburdened it. In the 1960s and 1970s, there were far more workers than those retired. “By the 90s, the situation was totally reversed,” says Alexandre Kateb, professor of economics at SciencesPo. 

But the French, he says, fear a major overhaul to their system. When presidents have attempted to push through social reforms in the past, the French have taken to the streets. When Hollande’s processor Nicolas Sarkozy raised the retirement age from 60 to 62 in 2010, hundreds of thousands protested.

“People still have this memory of the ‘golden age,’ when year to year benefits were growing and children were living better,” he says. “Now people are seeing their children live worse than they did.”

Jan Techau, director of Carnegie Europe in Brussels for the Carnegie Endowment for International Peace, says that French leaders on the left and right in France, both in business and government sectors, know that France needs drastic reform. “But that kind of conviction does not find any correspondence in the wider public," he says. "And the president is too weak to mobilize the forces needed.”

Hollande’s popularity sits at just 26 percent.

'Where France goes, there goes the EU'

Mr. Kateb says Hollande has scored two successes: a tax credit to incentivize hiring and a labor law to reduce costs of firing. But many observers, inside and outside France, say this does not go far enough, fast enough.

France is still considered a safe haven by investors; behaviors of the market and long-term interests rates do not reflect a sense of demise, says Bouzou. 

But if markets aren’t worried, political observers are. Constanze Stelzenmueller, a senior transatlantic fellow with the German Marshall Fund of the United States in Berlin, calls France's slow pace of reform “the single biggest threat to the future of the EU."

Its economy is the second largest in the EU, after Germany's, and France is a pillar, both politically and financially, of the entire EU project.  “I’m not worried about Greece, or Italy, or the Brits, I’m worried about the French,” she says. “Where France goes, there goes the EU.”