Cablegate: Economic and Labor Reforms That Will Change The

DE RUEHFR #1513/01 2171721
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1. (SBU) The French National Assembly has adopted four
key economic and labor reforms that will ease many
services and labor market constraints, boost purchasing
power, promote entrepreneurship, and allow individual
firms to negotiate overtime hours with their employees.
The fours laws in question -- Law on the Modernization of
the Economy, Law on the Modernization of the Labor
Market, Law on Social Democracy and Work Time Reform, and
Law on the Rights and Duties of Jobseekers Q are
touchstones of the Sarkozy reform program and should
boost French competitiveness over the long term. End

LME: Easing restrictions on product and services market
--------------------------------------------- ----------
2. (SBU) The French National Assembly on July 9 adopted
the Law on the Modernization of the Economy (LME). The
law includes many of the recommendations on improving
retail competitiveness proposed by the Commission on
Economic Growth, chaired by former EBRD President Jacques
Attali. The LME introduces greater flexibility in the
retail market by liberalizing restrictions on price
negotiations between suppliers and retailers, originally
designed to protect small retailers. Together with an
earlier reform which legalized below-cost selling, the
GOF claims the LME will lower retail prices by some two
percent. Economy and Employment Minister Christine
Lagarde stated the reforms could represent a gain of
1,000 Euros in purchasing power per year for every French
household. The draft law also lifted zoning restrictions
for retail establishments of up to 1,000 square meters.
However, this provision was amended by Senate to keep in
place the 300 square meter threshold in towns of more
than 15,000 inhabitants. (Comment: September elections
to renew a third of the Senate undoubtedly influenced
this move. French Senators are elected by local
authorities, who want to keep their powers to veto big-
box retailers. End comment.) To further these retail
reforms, the LME merges FranceQs two existing competition
regulators into a new, more powerful single authority.

LME: Improving the business environment
3. (SBU) The other key aim of the bill is to promote
entrepreneurship. The LME allows employees and retirees
to become self-employed entrepreneurs without paying
registration fees or taxes, provided sales do not exceed
a limit to be determined in a later decree. It further
introduces a maximum 60-day statutory limit for payment
terms, and encourages growth by firms with less than 10
employees by reducing taxes and payroll taxes on
additional employees. The LME also institutes a French-
style Small Business Act that will reserve a 15 percent
share of public procurement for innovative firms that
invest a to-be-determined minimum amount in research and

LME: Other measures
4. (SBU) Other notable features in the LME include:

-- the end of the postal system monopoly on the so-
called Livret A state-administered savings account (Note:
A regular IMF Article IV recommendation for improving
FranceQs financial sector efficiency. End note);

-- the development of high-speed internet access through
fiber-to-the-home (FTTH) networks from 2012;

-- a more favorable income tax regime for foreign
professional workers assigned to France (QimpatriatesQ).
Among other changes, this regime applies not only to
employees sent to France by their foreign employer, but
also to individuals recruited directly by a French
employer from abroad.

The GOFQs second economic reform package since last
summerQs major tax reform bill, the LME will require over
120 implementing decrees and come into force on January
1, 2009.

Lifting Labor Market Restrictions
5. (SBU) On July 24, French parliamentarians approved a
path-breaking bill on QSocial Democracy and Work time
ReformQ which opened up the possibility for employers and

PARIS 00001513 002 OF 002

employees to set overtime and compensatory time
arrangements on a firm-by-firm basis, rather than through
national agreements. This effectively ends the 35-hour
weekly work limit by allowing company agreements to
depart from national agreements and/or the 35 hour work-
week law.

6. (SBU) At the same time, the new law reinforces
Qsocial democracyQ by ending the virtual monopoly of
FranceQs five major unions on labor negotiations.
Elections will determine the weight of a union in the
workplace, and more than 10 percent of the vote will be
required for an organization to be able to represent
employees and negotiate agreements. A company-level
agreement becomes applicable to all employees if approved
by 30 percent (and not opposed by over 50 percent) of the
workforce. These new rules allow companies to negotiate
an increase in the number of overtime hours, with a cap
of 405 hours each year. These hours will be paid an
additional 25 percent or 50 percent per hour (depending
on various factors), and companies will not pay payroll
taxes on the overtime hours.

7. (SBU) The Law on the Modernization of the Labor
Market, for its part, introduces the possibility of
terminating an employment contract by mutual consent.
This measure should help reduce the number of challenges
to dismissals brought before labor courts, a major
headache for French employers. A Law on the Rights and
Duties of Jobseekers completes the labor market reform.
Jobseekers will be cut off from unemployment benefits if
they turn down more than two QreasonableQ job offers.
The law is accompanied by the merger of the national
employment agency (ANPE) with the unemployment benefits
agencies (UNEDIC). The new merged group aims to provide
better guidance to jobseekers, as well as better access
to training. The merger is also designed to reduce the
potential for fraudulent unemployment claims.

8. (SBU) The economic and labor reforms approved by
Parliament during its extraordinary July session will
help create a more dynamic French economy over the long
term. Critics of the Sarkozy government accurately
point out that the measures do not lift all major
constraints weighing on the French economy. The LME does
not liberalize some of FranceQs most coddled professions,
such as notaries or pharmacists, and the Law on Social
Democracy and Work time Reform does not altogether scrap
the statutory 35-hour work week. However, from shaking
up supplier/retailer relations to prying open the labor
market, the reforms break with a number of shibboleths
and open the way for more change. Whether due to a
political opposition in disarray, the summer doldrums,
or what critics call Qlegislative proliferationQ (42
government reform bills have been pushed through the
National Assembly since last October) having overwhelmed
the body politic, the Sarkozy government has managed to
set important change in motion with barely a squeak from
the French street.


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