Cicero Policy Briefer

Issue 20, January 2008

The politics of pensions reform in France

By Mark Twigg

France's public services are widely recognised as being the envy of all other European Union member states. Everyone knows about the largesse of the relatively well-funded health service - one of the reasons why so many British pensioners retire there—and equally the pensions system cannot be faulted for its generosity. A new report from pension consultants Aon revealed that French public spending on pensions far outstrips many other European countries - including the UK, which incidentally has the meanest public pensions system in the EU.

The only problem with this status quo is the French can no longer afford it. In 1981, French public debt equalled 20 per cent of its gross domestic product. Today, debt levels have grown to equal 67 per cent of GDP. This growing public debt mountain has presented France with painful choices for years: since 2002, the budget deficit has exceeded France's obligations to maintain borrowing below 3 per cent of GDP under the European Central Bank's stability and growth pact - the mechanism for ensuring control over monetary policy in the Eurozone.

However, while any sanctions from the EU have proven to be toothless in reigning back France's borrowing levels, the domestic opposition has been both highly vociferous and politically much more influential. And following France’s presidential elections in May, Nicolas Sarkozy is newly incumbent at the Élysée Palace and intent on reforming France's over-burgeoning public services: a conflict with the trade unions was always going to be inevitable. Already, the political fall-out has been felt, with the country’s public transport network grinding to a halt last month amid the largest trade union strike in years.

The strike - given initial impetus by aggrieved rail workers seeking to defend their right to retire at 50—lasted for almost two weeks and is estimated to have cost the national economy around €400m per day in lost business. For once, however, public opinion favoured reform over the status quo, as President Sarkozy enjoyed 71 per cent public support in his attempts to see off the unions. Although the strikes are over, the deals between Government and unions are still continuing: Sarkozy is reinforcing the Government’s will to follow through with the reforms but also signalling possible salary increases and pension top-up schemes to reach a compromise.

His success matters not just for France, but for the whole of Europe. Faced with demographic changes that will have an impact on the whole continent, areas such as retirement planning, healthcare and funding for long-term elder care will become costlier and potentially unsustainable. Given the important role of public funding in these services, it is important to the future of Europe’s economy that we all—notably the major economies—are able to find public policy solutions to put these age-related services on a more sound financial footing.

As UK pensions reforms illustrate, governments can ill afford to give in to vested interests when considering fundamental reforms which will have an effect on all of us in an aging society. The changes announced by the UK’s Pensions Commission in 2005 will see the state retirement age increase to 68 by 2050, while a separate agreement was hatched to preserve the right of public sector workers to retire at 60 following the threat of public sector strikes. Quite apart from blowing a big hole in the UK government’s intention to put fairness at the heart of pensions reform, this special treatment for public sector workers will see taxpayers stump up the cost of billions of pounds worth of additional pensions liabilities over the next half century. Sarkozy must resist the temptation of similar short-term political fixes and instead provide Europe with a model of leadership in managing long-term reform.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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