US embassy cable - 05PARIS2825

UNCLAS SECTION 01 OF 03 PARIS 002825 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/TPP, EUR/ERA, EUR/WE, EUR/PPD, DRL/IL AND 
INR/EUC AND EB 
COMMERCE FOR NAAS 
DEPT OF LABOR FOR ILAB 
DEPARTMENT OF COMEMRCE FOR ITA 
 
STATE FOR USTR 
 
E.O. 12958:  N/A 
TAGS: ECON, ETRD, PGOV, PREL, ELAB, PINR, FR, EUN 
SUBJECT: THE FRENCH REFERENDUM ON THE EUROPEAN CONSTITUTION: 
A PRETEXT TO BLOCK PUBLIC SECTOR REFORMS 
 
 
NOT FOR INTERNET DISTRIBUTION 
 
SUMMARY AND COMMENT 
------------------- 
 
1. (SBU) The current debate over French referendum on the EU 
Constitution has highlighted France's deep-rooted economic 
and social malaise.  With unemployment at a five-year high 
of just over 10 percent, labor groups and public sector 
unions have linked outsourcing to this general malaise to 
justify their "no" vote.  Feeding a public fear of 
outsourcing, public sector unions, who have opposed the 
government's plans to cut jobs and freeze pay increases in 
the civil service organized massive protests in France in 
March, calling the European Constitution "neo-liberal" and 
predicting it will undermine social conditions in France and 
lead to even greater job losses.  The government, unable to 
deny that the new Constitution will bring reforms, counters 
that the new Constitution would protect France's "social 
model."  Nevertheless, the public sector's demonstration in 
March, and its influence with leftist parties highlights 
France's growing social divide between the "protected" state 
sector, which has successfully blocked or considerably 
slowed down government efforts to implement economic and 
social reforms, and the "exposed" private sector, which 
looks to the government for policy initiatives and 
leadership to dispel its misgivings about a more global and 
deregulated world.  End summary. 
 
SHADES OF MAASTRICHT 
--------------------- 
 
2.  (U) This is not the first time that the future of the 
European Union has been exploited by France's 
"fonctionnaires" to safeguard their privileges against 
government plans to trim down the state sector and make it 
more efficient.  They disrupted the referendum on the 
ratification of the Maastricht Treaty in 1992, and the 
French EU Presidency in 2000, in the name of "jobs and 
social rights 
 
A CHANCE TO SAY "NO" TO FRENCH REFORMS 
-------------------------------------- 
 
3.  (U) Public sector unions have been looking for a 
political hook to rekindle their demands for pay increases 
and a lifting of the freeze on hiring.  The Government 
announced last year its intention not to replace 50 percent 
of the civil servants who retire in 2005, i.e. 30,000 civil 
servants.  Furthermore, it offered civil servants a 0.5 
percent pay raise, which unions said compared unfavorably 
with an estimated 2 percent inflation rate.  In order not to 
antagonize the traditionally unruly public sector during the 
campaign on the French referendum, the GOF went back on its 
plans earlier this year: a pay raise was granted and civil 
servant staff reduction dwindled to 7,200, including 3,000 
in the state education system. 
 
4.  (U) Buoyed by their success, civil servant unions 
pressed on, and on March 10, teachers, along with hospital, 
postal, electricity and gas workers combined into one common 
protest for "improved working conditions and purchasing 
power."  These wide-reaching slogans were designed to tap 
into growing private sector concerns about job losses due to 
company relocations and outsourcing.  The French economic 
magazine "L'Expansion" estimated that outsourcing from 
France to destinations in Eastern Europe and Southeast Asia 
cost an unprecedented 11,000 jobs in 2004, a figure "more 
than enough to feed a growing social malaise." 
 
RIDING ON THE FEARS OF A WORSENING JOB DRAIN 
-------------------------------------------- 
 
5.  (U) A poll jointly carried out by "L'Expansion" and 
pollster CSA in October 2004 shows that relocation of French 
companies or multinationals is seen as a "serious 
phenomenon" by 88 percent of the French population and as a 
"lasting" one by 70 percent.  A third of the population 
further believes that they or someone they know will loose 
their job.  This is considerably worse than a decade ago, 
when globalization was perceived as a negative consequence 
on French jobs.  Globalization was demonized by French 
public sector unions during the 1992 campaign on the 
ratification of the Maastricht Treaty.  France was then 
facing an unprecedented wave of company closures and 
restructurings. 
 
6.  (U) Today, many French economists stress that the fear 
of relocations and outsourcing is "irrational" as they 
accounted for only 1 percent of job losses in 2004.  They 
say this figure is more than offset by the 20,000 jobs 
created by foreign investment every year. However, the 
people polled show more level-headedness as to the reasons 
for the relocations, according to the poll by "Expansion." 
Some 74 percent believe that "something can be done to 
prevent relocations," and an overwhelming 84 percent say 
that the most efficient way is to lower payroll taxes. 
 
PROMOTING TRAINING AND HIGH-TECH JOBS 
------------------------------------- 
 
7.  (U) Outsourcing and relocations alone are not to blame 
for job losses in France, according to French Economist Elie 
Cohen.  He told us recently that over the past three years 
France had "destroyed" jobs in the high-tech sectors, where 
it could be a leading player.  He blamed the situation on a 
lack of proper training and adequate funding of research. 
Another French economist, Lionel Fontagne, underscored the 
need for better training to allow job seekers to find work. 
He further noted that preventing outsourcing and relocations 
could prove harmful to French companies, in terms of 
competitiveness and productivity.  Companies often need a 
presence near their growth markets.  As a case in point, 
French carmakers Renault and PSA Peugeot Citroen are aiming 
their production efforts at Eastern Europe, where demand 
could triple in the coming decade.  Renault already 
manufactures half of its vehicles outside France. 
 
8.  (U) A recent government-sponsored report on France's 
declining industrial base reflects these concerns and takes 
note of "signs that the French manufacturing industry is 
starting to lose ground," mostly because it is not 
sufficiently high-tech oriented.  To support R&D in France 
beyond the tradition nuclear science, aeronautics and space 
activities, it calls for a "new industrial policy," 
spearheaded by a new Agency for Industrial Innovation. 
Recommended by Saint Gobain CEO Jean-Louis Beffa and 
approved by President Chirac, the new agency will administer 
industrial initiatives associated with major technological 
innovation and geared to European or other world markets. 
Under the direct supervision of the Prime Minister, the new 
agency will be allocated an initial budget of 2 billion 
Euros in 2007.  Chirac's timely support for this agency and 
a pro-industrial policy appears to be at least partly 
motivated by the need to promote employment on the eve of 
the EU referendum. 
 
9.  (U) To address French unemployment, which has recently 
exceeded the 10 percent "psychological threshold," Chirac 
has asked his Minister of Employment, Labor and Social 
Cohesion Jean-Louis Borloo to speed up implementation of his 
"Social Cohesion" plan, a comprehensive 15.8 billion dollar 
effort to simultaneously develop employment, housing and 
equal opportunities over the next five years.  Since the 
March 10 public sector demonstrations, many of the original 
ambitions of Chirac's long-time wish to "bridge France's 
Social Divide," have been dropped to focus on government- 
subsidized contracts and training programs to help 800,000 
jobless youth, especially from "disadvantaged 
neighborhoods."  However, many of the jobs created will be 
in civil service and public hospitals, both locally and 
nationally.  This defeats the original purpose of the Borloo 
reform, which was to break with the "logic of dependency." 
 
FLEXIBILITY IN THE FRENCH LABOR MARKET POSTPONED 
INDEFINITELY 
--------------------------------------------- ---- 
 
10. (U) Efforts to promote employment through greater 
flexibility in the French job market were cut short by the 
resignation of former Economy, Finance and Industry Minister 
Herve Gaymard.  Based on a report entitled "From employment 
uncertainty to mobility," drafted by two well-known French 
economists, Pierre Cahuc and Francis Kramarz, Gaymard had 
decided to open up regulated professions such as 
hairdressers, taxi drivers, butchers, veterinarians, 
chartered accountants, physiotherapists, hotel managers, 
notaries, and architects.  Cahuc and Kramarz advocated that 
the quota system for taxi drivers, veterinarians and 
physiotherapists be lifted, and that the "excessive" 
qualifications for chartered accountants, hairdressers and 
butchers be removed.  They estimated that between 200,000 
and 500,000 new jobs could be created as a result of the 
deregulation of these professions.  The reform has been 
shelved for the time being, given protests from a number of 
protected professions, especially architects, not to mention 
the extremely adverse reaction of French trade unions to the 
EU Services directive -- (aka the Bolkestein directive). 
 
WHAT HAPPENS NOW? 
----------------- 
 
11. (U) The GOF had originally wanted to make 2005 the year 
of "individual freedom of choice," through greater 
flexibility in work time, labor market regulations, and a 
lighter, more responsive state structure to ensure "a 
successful start to the second half of the five-year 
mandate" of President Chirac.  However, the May 29 
referendum altered the French political landscape, as it 
will be the last national election before the 2007 
Presidential and Parliamentary elections.  Chirac organized 
it in the hope that his party would recover from a 
humiliating defeat in the March 2004 regional elections on 
the basis that "no politician could possibly oppose" the EU 
Constitution.  He allegedly further hoped that the 
referendum would force the realignment if not the 
"implosion" of the Socialist Party, coerced into choosing 
between the Social Democratic pro-EU approach and the more 
Marxist alternative. 
 
12. (SBU) Instead, the old French demons of the ratification 
of the Maastrich Treaty reappeared, and the announcement of 
the referendum heightened protests and fears.  Public sector 
demands were met, subsidies to farmers, and wine growers 
were distributed, and pro-active industrial policy actions 
announced.  The state, which should have been trimmed down, 
through attrition, is now bigger than ever.  The impression 
that Chirac and his government lack a global vision for 
France and the determination to impose it has been 
reinforced, making rival presidential contender and UMP 
President Nicolas Sarkozy a more viable alternative to carry 
out the necessary reforms, which he claims French people are 
ready to accept.  If the outcome of the upcoming referendum 
matches current negative predictions, Chirac will ironically 
have paved the way for his political succession rather than 
his posterity.  As one French political commentator 
succinctly put it: a "No" win on May 29 would be represent a 
major blunder in the face of history, and would make for a 
dismal epitaph. 
Wolff