Up to a Better Tomorrow

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Leaving reform in the hands of a bureaucracy that can be a part of the problem is at best unsatisfying. Absent from the list of changes that have happened in France are the two that economists say matter most: a long-overdue revamp of convoluted labor-market regulations and a streamlining of the nation's gargantuan public sector, which now employs 22% of the workforce and consumes more than half the nation's gross domestic product every year. The conditions are ripe for substantial cuts; over the next 10 years, 850,000 civil servants will retire. But so far, no politician has had the nerve to announce a detailed approach to the issue.

Labor reform is even more fraught, as Villepin discovered. But it's not impossible: France created 1.5 million new jobs between 1997 and 2001, the biggest surge since the beginning of the 20th century, in part thanks to a policy change that slashed the social-security bill employers had to pay for low-wage workers. Cutting the workweek to 35 hours also added some jobs, although it raised companies' costs. Tinkering such as this, however, has failed to make a lasting impact on high unemployment; indeed, the various cures have made the disease worse.

The French employment system is now hideously complex, with more than 20 different types of labor contract and a plethora of overlapping agencies set up to deal with the jobless. Villepin didn't set out to tackle the core problem. Instead, he simply added to the complexity by inventing a new type of contract that was designed to give employers greater incentive to hire young people by allowing them to be fired without cause. His forced retreat was widely viewed as another indication of Gallic intransigence.

But not by Laurence Parisot, who heads the national employers' organization Medef, which understands the dynamics of change in France better than most. Parisot was never more than lukewarm toward the government's proposal. But the national debate it led to has given her reason to hope, because it touched on issues that had previously been taboo. "Finally we can say that there's a link between the extreme rigidity of the labor code and high unemployment," says Parisot. She's pressing for a much more comprehensive cleanup of the messy labor laws.

French companies would benefit hugely from less expensive and cumbersome labor regulations. Many French firms are world leaders in their industries and have managed brilliantly to grow and adapt to changing global conditions. They include companies from glamorous businesses such as the luxury-goods giant LVMH to makers of basic electrical appliances (Legrand), right through to those who trade highly complex financial derivatives (Société Générale). The French public may be terrified of the idea of jobs leaving its shores, but CapGemini, a computer-services company, is a leader in global outsourcing. Indeed, in terms of private-sector profitability, 2005 was a banner year. But leading companies all complain about the huge costs and legal difficulties of hiring in France, and increasingly prefer to do so elsewhere instead.

Rose-Marie van Lerberghe knows the private sector well; she worked for a time as a senior manager for the food company Danone. But these days she's trying to inject greater efficiency into the French health-care system. In 2002 Lerberghe took over as director of the Paris hospital network, the biggest in Europe with 38 hospitals. It treats more than 1 million patients per year and employs 90,000 people. When she arrived, the place was a financial wreck. She closed some of the 208 separate laboratories analyzing blood, urine and tissue samples, and squeezed the cost of peripheral items such as the hospital restaurant budget. Instead of 29 different suppliers of chicken, Paris hospitals now have just two. Overall, the finances of Paris hospitals are back in order. Now Lerberghe is pushing for greater efficiencies in the delivery of care itself. Beaujon hospital, a 1930s red-brick structure in the suburb of Clichy, has been the first test. Its emergency services were stretched to breaking point, but with the help of consultants McKinsey, the hospital's staff has figured out how to slash average treatment times by up to 40%.

The Paris hospital network is a microcosm of France. Lerberghe says change is possible, but first, people must be won over to the idea that it will make things better, not worse. The doctors are now on her side — and saving her skin. In an echo of the national battles over reform, Lerberghe has to contend with ferocious opposition to her plans from the chairman of the hospital network's own board of directors. He's a communist politician named Alain Lhostis, a member of the Paris city council. What does he have against her? "What is someone who makes yogurt doing at a hospital?" he retorts. "Nobody in any developed country is reducing medical costs."

But in a sign of the times, Lhostis has been outvoted on key decisions with the help of doctors' representatives on the board. Jean-Yves Fagon, a specialist at the Georges Pompidou Hospital, says the Paris hospital network is "a big house that needs to be modernized. It's been a complaint for years that it doesn't operate very well." Lerberghe herself shrugs off the opposition. "Too often in France, the idea of good management seems contradictory to public service," she says. "That's a French curiosity."

Reform and modernization are not yet embedded in French culture. Granted, the economy has picked up; Credit Suisse First Boston now expects it to grow by 2.5% this year. But at a time of seismic changes in the world economy, when low-cost competitors such as China and India are challenging Europe, hanging with the pack isn't good enough. "France needs to find something that makes it stand out. It's not enough for it to do almost as well as its neighbors," says Bernard Liautaud, the chairman and founder of French software company Business Objects, which he built from scratch into a billion-dollar firm.

That's an argument many French don't like to hear. Change, reform and globalization still don't win popular approval. In December 2005, researchers for the German Marshall Fund of the United States asked people in the U.S., Britain, Germany, Poland, Italy and France who would benefit from freer international trade. France was the single biggest recipient of foreign direct investment into the European Union during the 1990s, and 6 million jobs (or about 1 in 4) depend on trade, yet the French were easily the most negative in the poll; just one-third of those asked thought trade liberalization would benefit them.

Back at the Finance Ministry, Parent admits that his house "has the capacity to explode." He has nonetheless managed to negotiate a continual reduction in the workforce. Nobody's being fired — that hasn't happened in the French civil service since the 1930s. The issue is how many of the people who are retiring should be replaced. "I think it is better to have a regular and reasonable effort than to proceed by a coup," Parent says. Sautter, the Finance Minister who lost his job in 2000 after proposing such a coup, acknowledges that much of what he advocated back then has now taken place. To be sure, as he says, change is happening "at a glacial rhythm — very, very slowly." But those who think that France never changes, never reforms, never modernizes, are simply parroting the prejudices the French themselves love to glorify. And they are wrong.