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Insight: Making France work again

By Mark John

ECUEILLE, France (Reuters) - Shirt manufacturer Marc Roudeillac was delighted when 48 of the 49 staff in his factory in central France voted to adapt their strict 35-hour week contracts to meet the up-and-down demand of the fashion trade.

Then the labor inspector stepped in and ruled the contracts must not be changed. So Roudeillac began an overtime system with 25 percent hourly bonuses. Again, the seamstresses were happy - until the government this year scrapped tax breaks on overtime.

"Now, no one wants to do overtime anymore - they say it's just not worth their while," Roudeillac said at his Confection du Boischaut Nord (CBN) company in the region of Indre, a two-hour drive south of Paris.

CBN is a small miracle of manufacturing: it is one of the few firms in Indre's once-buoyant local textiles sector to have withstood the onslaught of foreign competition, first from southern Europe, then North Africa and now Asia.

Yet the overtime episode is a telling insight into a France struggling with itself: the France whose appetite for work sits uneasily with the France whose priority is to sustain one of highest standards of living in the world.

In just over 30 years after World War Two, France lifted itself from the ignominy of Nazi occupation into a sleek and modern Group of Seven economy with world-beating industrial champions in sectors such as energy and aerospace.

Its welfare system is among the most generous in the world. A road and rail transport network means its companies are within hours of tens of millions of potential customers. It is a leader in luxury goods and is the world's top tourist destination.

But somehow that Gallic vigour is being lost.

Unemployment is at 14-year highs as plant closures mount, France's share of export markets is declining, and the fact that no government in three decades has managed a budget surplus has created a public debt pile almost as big as national output.

Louis Gallois, the industrialist charged by President Francois Hollande to address France's waning competitiveness, even warned in a November report: "French industry has hit a critical threshold below which it risks breaking apart."

The euro zone's debt crisis too has shone a harsh spotlight on France. The International Monetary Fund believes France could get left behind as Italy and Spain are pushed by the crisis into profound economic reform. Ratings agencies Moody's and Standard and Poor's have stripped French debt of its AAA rating.

Diagnosing France's ills has created a whole new literary genre - the work of the self-appointed "declinologues" whose tomes compete on bookshelves to explain and fix the problem.

But the simplest test of France's health is whether a business like CBN can keep selling the world its shirts.

THE GLORIOUS...

One hundred years ago, local entrepreneur Marcel Boussac put Indre on the world textiles map when he ended what was known as the "black look" in France by introducing color into the clothes manufacturing process.

Boussac founded a conglomerate that acted as its own bank and insurance broker and in 1946 bankrolled the first Paris fashion house of an up-and-coming designer called Christian Dior. He had a stable of racehorses, a country chateau and was at one point reputed to be Europe's richest man.

Boussac, like millions of French, was the beneficiary of France's "Glorious 30" - 30 years of uninterrupted boom in which post-World War Two U.S. aid and heavy state planning wrenched its transport, energy, housing, financial and farming sectors into the second half of the 20th century.

It was a period of high wages, high consumption, full employment and very little foreign competition. And it all came to a juddering halt when the 1973 oil crisis sent energy costs soaring and capped the Western world's growth rates for good.

There are no racehorses or country estates for Roudeillac and business partner Richard Boireau, who arrive for work in modest family saloon cars and share a desk in a cramped six-meter-square office.

If their company survives, it is largely thanks to a 20-year alliance serving a major Japanese fashion brand - whose name they asked should not be published - and a manufacturing model pared right down to the bone.

A trained engineer, Roudeillac, 45, says 80 percent of CBN's costs are labor - the local mushroom-picker, beautician or school-leaver whom he and Boireau meticulously train to contribute to the CBN production line.

Because CBN gets the client to purchase the raw materials, and all other overheads are low, CBN's slender gross margin of around six percent depends on optimizing what Roudeillac calls the "productive minute" of the seamstresses.

"What we do is sell French labor - by the minute," he says of their daily output of 200 shirts and 90 jackets.

Now CBN wants to strike out and revive an 86-year-old French brand of shirt called "Lordson" which fell prey to the textile sector's decline but which CBN believes has potential in the high-end quality segment of the market.

The "Lordson" will feature a rich cotton that feels smoother on the back after three years of washes, sleek three-millimeter seams about half the size of normal stitching, and buttons stuck on with a special machine of which only three exist in France.

There is one snag.

"Given our costs, it is impossible to retail a "Made in France" quality shirt for less than 140 euros," said Boireau, who entered the trade sweeping factory floors.

"At 120 euros a shirt it works. But at 140 - not sure."

...AND THE PITIFUL

If veteran textile entrepreneurs like Boireau fear they cannot hit the price point on their signature shirt, it is a direct result of choices made by France after the oil crisis.

By 1980, French economic growth had shrunk to two percent compared to its pre-oil crisis rate of above six percent - a rate which France and most rich states have not seen since.

In the years that followed, governments around the world reacted in their fashion: Britain's Margaret Thatcher faced down Britain's unions in a drive to free up labor markets, while Scandinavian leaders sought to free their economies of debt.

In France, governments of left and right chose entrenchment: strong rises in public spending which helped ease the social and employment shocks but which sent national debt soaring from 20 percent of output in 1980 to its current record of 91 percent.

The next three decades are sometimes called the "Pitiful 30"

Unwilling to switch from a pre-oil crisis policy of boosting consumption with low sales taxes, French politicians used labor to fund the bulk of the welfare spend. The result, 30 years later, is that French labor charges are among the highest in the European Union with those in Sweden and Belgium.

The high productivity of its workers might have compensated for their rising cost. But decisions such as the 1997 cut in the working week from 39 to 35 hours meant many French were also starting to work less.

A 2008 paper on "the Liberation of French growth" by Jacques Attali, ex-adviser to Socialist President Francois Mitterand, calculated that while the French lived 20 years longer than they did in 1936, they worked 15 years less over their lifespan - a shortfall he labeled "35 years of extra inactivity".

"Even given that each French worker produces five percent more per hour than an American, he produces 35 percent less over his working life," he found in the 245-page report.

Even that would not be disastrous if employers simply hired more people - the whole point of the 35-hour week after all was to reduce unemployment by requiring more workers to be taken on to do the same job.

But small companies like CBN insist it was plain unrealistic to assume they can simply hire more people for the same cost and without disruption to existing work patterns.

"When they brought in the 35-hour week, I wrote a letter to our clients saying, "Sorry, but as of tomorrow, prices are going up 11 percent," recalls Boireau.

INSIDERS AND OUTSIDERS

French laws which make it difficult to lay off workers have created the perverse incentive for employers to stop offering permanent contracts that in many cases equate to a job for life.

Instead they turn to temporary contracts when they need extra labor, creating for millions of French the very labor insecurity which the law was supposed to prevent.

While today the majority of French workers still benefit from a permanent contract, three out of four new jobs are on fixed-term contracts, often for no more than a month.

The split personality of the labor market is, experts agree, a major drag on its economy. At one end there is expensive but inflexible labor and at the other cheap but ill-trained and often demoralized fill-in workers.

Roudeillac acknowledges that CBN is one of the employers who turn to temporary labor to help with peak production periods - but he would prefer not to. "We could take on six or seven more people. But in France, hiring people is a risk," he said.

For think tanks such as the OECD, the solution is simple: the first group needs to hand over some of their job security to the second group by accepting more flexible contracts. Surely such a burden-sharing should be easy for a country built on the ideals of "Liberty, equality and fraternity"?

Not a bit of it. In the past 30 years, France became not one country but two: the France of the "insiders" and the France of the "outsiders". And the reason it is so hard to reform is that the insiders are determined to keep the rest out.

Those "in" the system include workers on long-term contracts, labor groups protecting their interests, and the mostly large companies who have found an accommodation with the system. Those left "out" are the growing army of temporary contract workers, small firms such as CBN who do not have the economies of scale to allay the high cost of labor, and of course France's three million-plus unemployed.

"Neither the employers nor the trade unions want real reform - they are both in the insiders' camp," explains Eric Chaney, chief economist for insurer Axa Group. "The employers are scared of strikes and unions don't want to change anything in the system because the people they are protecting are insiders too."

Hollande has begun his plan to restore France's competitive position with corporate tax credits linked to labor hires. He has also launched a public investment bank aimed to make up for France's lack of venture capital. At his behest, French trade unions and employers have a year-end deadline to negotiate rules offering more flexibility and greater job security.

Yet it is unclear whether any accord will crack the mould. A dramatic cut in labor charges is not on the table and the 2013 budget stays clear of spending cuts sought by the reform lobby.

As CBN's managers gear up to bring the world the Lordson shirt next year, they will need Hollande to go a few steps further in helping them sell the product of French labor.

"We need something better adapted to the world now," said Boireau. "It needn't take very much."

(editing by Janet McBride)

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