Sarkozy Tries Again

Wall Street Journal Europe
Wednesday, June 11, 2008

Nicolas Sarkozy may be getting a second reform wind. If so, notch that up as potentially the best news for France's and his own future in a long while.

The first wind died just months into his term. The French President misspent his enormous political capital from last year's elections and diluted his reform platform. But in recent weeks he has consulted the supply-sider's manual to come up with plans to deregulate the retail sector and get the unemployed back to work. His challenge now is to show the kind of resolve he lacked when he enjoyed a 63% approval rating, almost twice as high as it is today.

Finance Minister Christine Lagarde last week pushed a draft law in the lower house of Parliament that promises to shake up France's sleepy retail market. The bill goes next month to the upper house. Opening the sector to more competition should lead to more shops, more jobs and lower prices. Morgan Stanley projects that the resulting price pressure could cut inflation by up to 0.3 percentage points next year. With $130 oil, this should be an easy reform to sell.

Perhaps only French mandarins could have come up with the rules that protect small shops. To open a new store bigger than 300 square meters (3,229 square feet), entrepreneurs need approval from, well, their direct competitors. Both maman et papa shops and larger supermarkets sit on special neighborhood commissions that rule on such applications. Not surprisingly, not too many stores get a green light.

The proposed legislation would raise the threshold for the commission's approval to shops bigger than 1,000 square meters. This would smooth the way for hard discounters to enter the French retail market. The bill would also allow retailers to sell goods below cost. Using this technique to attract customers is a big non-non in France.

The bill has also something in store for France's supermarkets. The draft law would remove the gatekeepers from the commission deciding on licenses for shops above 1,000 square meters. Without the incumbents blocking potential competitors, the approval of new supermarkets should become much easier.

The reaction of France's supermarket chains has been lukewarm. While the proposed legislation offers growth opportunities it also invites new competition, including from abroad. But the pressure on profit margins will be good for consumers and should stimulate productivity and create jobs.

Another part of the bill seeks to encourage entrepreneurship. The law would free small businesses from the kind of red tape that has convinced many French that it's better to become a bureaucrat than to deal with one. Small businesses would be able to register online, for instance. The true innovation, though, is the tax change. The legislation would replace all the various taxes and levies with a single, low tax on sales: A flat rate of 13% for goods and 23% for services. This might not necessarily translate into a lower tax burden than the 33% rate on corporate profits. But the simplification will allow small businesses to waste less time on paperwork.

Another key reform in the pipeline, and separate from the retail market bill, is the "welfare to workfare" program. If implemented, unemployed workers would lose their benefits if they refuse to accept a "reasonable job offer." A reasonable idea, one would think, but controversial for the unions.

After three months on the dole, the unemployed would have to accept work that pays up to 5% less than their previous job. After six months, they'd have to swallow a 20% pay cut. And to get older people back to work, those unemployed above the age of 57 would have to show they are actively searching for a job – something the unions also oppose. In their static view of the economy, getting people to retire early is considered a smart way to "share" the supposedly finite numbers of jobs.

Mr. Sarkozy has steadily chipped away at the 35-hour week. Unions already had to swallow his proposal to allow employers and employees to negotiate longer working times. Now he wants to lower the bar even further: Under a proposal released last month, to win approval of a deal on longer hours, firms will need the approval of unions representing just 30% of employees rather than 50% as agreed earlier.

Why France doesn't scrap the silly 35-hour workweek altogether may escape the understanding of the economically sane. But we'll concede that these Sarkozy reforms are brave by French standards.

To succeed, Mr. Sarkozy will have to resist pressure from both the unions and his own center-right party. Once stolidly behind him, the ruling party has not unreasonably come to doubt the President's hot-cold approach to reform, and politicians fear for their own political lives. In his first year, Mr. Sarkozy has succeeded in mobilizing the left against his announced changes, then disappointing the right by watering them down. He has pleased no one.

Last year's failure of resolve is behind Mr. Sarkozy's steep drop in popularity. Having campaigned on "rupture," Mr. Sarkozy is surely savvy enough to know that a repeat performance would be politically suicidal.