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French pensions: big problem, small reform

AFP

French Prime Minister Jean-Marc Ayrault (pictured) on Monday held talks with trade unions over plans to put the country’s pension system on a sounder financial footing, one of the thorniest and most controversial issues in French politics.

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France’s Prime Minister met trade union representatives on Monday to discuss plans to cut the country’s pensions deficit following a television appearance in which he sought to tread a careful path towards tackling one of the thorniest and most explosive issues in French politics.

In an interview on France 2 late Sunday, Jean-Marc Ayrault ruled out raising the minimum retirement age and left the door open to raising taxes in order to trim an annual shortfall in the pension budget that is projected to hit 20 billion euros in 2020, and “guarantee” that the system is built to last.

- The current legal retirement age is 62.

- French people currently have to work around 40.5 years before being able to retire on a full pension.

- That "pay-in period" is already due to rise to 41.5 years in 2020.

- The current French administration may propose raising it to 44 years from 2020, government sources say.

(REUTERS)

Reaction among economists and politicians to Ayrault’s comments was mixed, with some predicting a positive step in the right direction and others saying reforms are likely to be insufficient. Whatever the outcome, there was broad consensus that the stakes are high.

Dominique Barbet, a Paris-based economist at BNP Paribas specialising in France and the Eurozone told FRANCE 24 that he expects the government to tackle the issue by raising taxes.

“My feeling is that the final decision is likely to include a significant increase in contributions,” Barbet said, adding that if voters see that taxes are going up in order to secure the long term future of the pensions system, they are more likely to accept the increases.

"There will be street protests, that is quite obvious," Barbet said. But these are likely to take place on less of a grand scale because the Socialist Party is in power, and will be backing the measure, he said, underscoring the widespread belief that only the Left is in a position to deliver significant reform.

While Ayrault is unlikely to find a way to fully balance the pension books by 2020 simply by raising taxes, it is likely to be a “step in the right direction,” Barbet said.

Other observers were less upbeat about the likely outcome.

“I think it’s going to be lightweight,” Fredrik Erixon, the Brussels-based Director of the European Centre for International Political Economy, told FRANCE 24.

Meanwhile, the senator and former conservative Prime Minister, Jean-Pierre Raffarin, took to Twitter to snipe at the government’s plans following Ayrault’s remarks on television.

“The government is exposing itself to a major loss of international and financial credibility with its fake pension reform,” he blasted.

The stakes are always high when a French government attempts to overhaul the pension system, which is one of the pillars of the country’s much-loved social welfare apparatus.

In 1995, Jacques Chirac backed away from plans for pension reform after rolling strikes brought the country to a virtual standstill. And in 2010, Nicolas Sarkozy had to confront major protests in order to push through what were widely seen as rather timid changes.

The stakes remain high now, as President François Hollande and his government seek to trim France’s budget deficit, keep down borrowing costs, and assuage the concerns of the European Commission in Brussels, which recently gave France an extra two years to balance its budget in return for a pledge of more reforms.

“The markets are watching France very closely,” said Barbet, noting the high levels of debt that burden the country and have fuelled concerns that France’s borrowing costs could get out of control as lenders demand an extra risk premium.

As well as irritating Brussels, inaction on pensions could also worry other EU countries like Germany, and would set a bad example to other EU states with fiscal problems to tackle, he said.

From Brussels, Erixon said he doesn’t expect the French government’s pensions revamp will be enough to placate the European Commission.

The Commission, he said, would like to avoid a clash with France, which is the Eurozone’s second largest economy after Germany. But the body is not willing to see its recently-reinforced budget surveillance powers watered down, he said.

Erixon also said France’s efforts to balance its pension system will be something of a litmus test of François Hollande's ability to tackle the country’s problems.

“It is going to tell us a bit more about what is to come from the rest of his presidency,” he said.

Ayrault’s discussions with unions will continue on Tuesday, with the government set to put the final touches to its plan later this week.

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