FRANCE FACES TOUGH LABOR CLIMATE IN RUNUP TO G8

UNCLAS PARIS 000378 SENSITIVE SIPDIS C O R R E C T E D COPY CAPTION STATE PLEASE PASS DRL LABOR PLEASE PASS ILAB (LIPKE) E.O. 12958: N/A TAGS: PREL ELAB EIND ETRD SOCI FR SUBJECT: FRANCE FACES TOUGH LABOR CLIMATE IN RUNUP TO G8 LABOR MINISTERS MEETING REF: STATE 15333 This message in sensitive but unclassified. Please handle accordingly. Summary -------------- ¶1. (SBU) The financial crisis has dramatically reversed a once positive employment story in France. After hitting a 25-year low of 7.2 percent in mid- 2008, the jobless rate climbed to 7.8 percent at the end of 2008 and could reach 9.8 percent during 2009. In the context of a gloomy socio-economic mood -- there was a nationwide general strike on January 19 and another is planned for March 19 -- President Sarkozy and Labor Minister Brice Hortefeux have slowed some reform initiatives (such as eliminating Sunday blue laws and instituting educational restructuring that would cut jobs) in favor of demand-side stimulus measures to complement the broader package of investment measures unveiled by President Sarkozy in late 2008. The stimulus effort centers mainly on tax cuts and a boost in unemployment benefits. Nonetheless, Hortefeux remains committed to President Sarkozy's plans to create a more competitive, market-oriented economy in France. At the March 29-31 Rome meeting, he will be open to U.S. ideas on how to address the financial crisis, but his primary concern will be to find ways to stem the deterioration of France's employment landscape. End summary. Unemployment Rising Again in France, Youth Hurting -------------- -------------- ¶2. (U) After hitting a 25-year low of 7.2 percent in mid-2008, France's unemployment rate is on the upswing, hitting 7.8 percent in mainland France in December 2008. Including France's overseas possessions, the unemployment rate was 8.2 percent. Most economists expect a significant deterioration in the unemployment situation when the next statistics are published in April (France reports its unemployment rate on a quarterly basis). At its last peak in 1997, unemployment in mainland France reached 10.9 percent. As in prior economic downturns, the unemployment rate among low-skilled labors and youth is especially high. The jobless rate for people under the age of 25 increased to 20.4 percent in December 2008, up from 18.3 percent a year earlier. The European Commission predicted in January that French unemployment overall could reach 9.8 percent in 2009 and reach 10.6 percent in ¶2010. ¶3. (SBU) In the past, France's stubbornly high unemployment rate has been attributed to its rigid labor market. To encourage hiring, the French government has invented short-term probationary work contracts during the last decade, making it easier for businesses to hire and fire workers. One of President Sarkozy's most important reforms, passed in 2007, exempted all overtime wages (above 35 hours per week) paid by firms with under 10 employees from income tax. Stimulus on the Front Burner -------------- ¶4. (SBU) The government has also slashed its GDP projections to minus-1.5 percent for 2009, a forecast considered optimistic by many private economists. On the heels of a general strike in late January, which saw some 1 million protesters (mostly public sector workers) take to the streets to express their concern about how the economic crisis is affecting them, the president announced February 18 a new 2.6 billion euro (USD 3.3 billion) supplemental stimulus package targeted at lower income families, the temporarily unemployed and youth. The plan comes in the wake of a 26 billion euro (USD 33 billion) stimulus package announced last December that focused on creating jobs through infrastructure programs and accelerating tax refunds for business. ¶5. (U) The new plan's principal points include: an LABOR MINISTERS MEETING income tax cut for some 4 million low-to-middle income households; an unemployment benefit hike guaranteeing 90 percent of net pay for those facing temporary layoffs (a problem currently plaguing the French auto industry); a one-time payment of 500 euros (USD 633) for job seekers under the age of 25 who have not worked enough to be eligible for traditional unemployment benefits; a 200 euro voucher (USD 253) to subsidize home care for the disabled; and a 150 euro (USD 190) school allowance that will be paid in June to about 3 million families. Finally, the government will also set up a "Social Investment Fund" with an initial 800 million euro (USD 1 billion) to finance vocational training for workers. The fund could receive as much as 3 billion euros (USD 3.8 billion) in total. Other possible measures, including profit-sharing, will be the subject of continued negotiations between unions and employers. However, some private economists worry that French consumers may boost savings rather than consumption during 2009. Another general strike has been scheduled for March 19. Labor Minister Hortefeux: A Top Sarkozy Confidant -------------- -------------- ¶6. (SBU) Facing these thorny issues is one of President Sarkozy's closest confidants, Labor Minister Brice Hortefeux. Hortefeux is new on the labor brief, having moved to the job in January as part of a minor cabinet reshuffle after heading the Ministry of Immigration for the first 18 months of Sarkozy's presidency. A member of the governing center-right UMP party, Hortefeux believes a market- friendly economy remains the best way to ensure French prosperity. He has vocally supported President Sarkozy's initiatives since taking the reins at Labor, emphasizing in a March 9 television interview that the tax exemption on overtime pay is a "wonderful initiative" that will help France react to and emerge from the economic slowdown. While Hortefeux will be open to hearing U.S. ideas on labor issues, his priority coming into the March 29- 31 Rome meeting will likely center on ensuring that any multilateral steps taken to address the financial crisis have no negative effect on France's employment landscape. PEKALA