By Stephen Sandelius

PARIS (MNI) – The details of France’s public pension reform to be
unveiled in coming days will be scrutinized closely by concerned
citizens and protesting unions, but also by investors worried about the
deterioration of public finances.

Last week’s 27 basis point jump in French government debt yield
spreads compared to the benchmark Bund was a pertinent reminder that
even AAA borrowers are not immune to contagion from the Eurozone’s
high-debt peripheral countries.

Not only is budget consolidation advancing more slowly here than
elsewhere, but the widening shortfall in the pay-as-you-go pension
system is a ticking time bomb that could derail efforts to shore up
public finances over the longer term unless tough measures are adopted
in coming years.

Last week, the Social Security Accounts Commission projected a rise
in the pension system deficit to E9.3 billion this year, close to double
the shortfall of two years ago. Including other pension systems — for
example for civil servants and farmers — the deficit could top E30

“The numbers highlight the urgency of the situation we are in,”
warned Labor Minister Eric Woerth, who is coordinating consultations
with social partners over the reform.

By crippling the labor market, the economic crisis has accelerated
the long-projected deterioration in the pension accounts. This year’s
projected shortfall had not been expected until 2011. And the
demographics of an aging population could easily multiply the deficit
each coming decade.

While the first phase of the reform launched in 2003 created the
mechanism for a gradual extension of the period of contributions
required for a full pension, the legal age for retirement at 60 was
considered too controversial to tackle at the time.

Now the issue has become the focus of heated debate and is likely
to be the litmus test for the financial markets as well.

“To be certain to convince the markets, the retirement age would
have to be lifted to 65 — at the least,” observed analyst Dominique
Barbet of BNP Paribas. “But if the government decided that, it would
have the entire country marching in the streets. There’s no solution
that will satisfy the markets entirely.”

With memories of the long rail workers strike against an earlier
reform attempt in 1995 still vivid in leaders’ minds, the government is
likely to tread cautiously over this sacred cow, proposing an increase
to 62 or 63 years, while limiting the numerous existing exceptions to a
few occupations with clear health or security risks.

Even though the legal retirement age has become largely symbolic,
since most people today no longer accumulate the required 41 years of
contributions by 60 anyway, unions have united in opposition to any
tampering with what they consider a “social right,” arguing that those
who started work very young would be unfairly penalized.

After some hesitation, the opposition Socialist Party’s leadership
has joined the unions’ ranks, no doubt hoping to reap some benefits in
the general elections in 2012.

Opinion polls show that the French are, understandably, concerned
about the security and size of their pensions but at the same time
reluctant to give up the theoretical claim to retirement at 60. A BVA
survey last week showed that two thirds would back a general strike over
the issue, even though less than a third believed this would have any
impact on the government’s decision.

Press reports portray divisions within the government over whether
to hike to 62 or 63 years. The prime minister and the economics and
budget ministries tend to favor the higher threshold to assure the
solvency of the system beyond 2020 and to reassure financial markets.

“There is genuine concern, even in the president’s sphere, over
yield spreads with Germany,” reported the business daily Les Echos on
Friday. “And the legal age is the most closely watched criterion in
matters of pension reform. To stop at 62 might be perceived badly.”

Other leaders up for re-election in two years, including the
influential head of the Social Affairs Committee in Parliament, would
prefer to stop at 62 now, with the eventual option of an extension later

The reaction of the markets and the EU’s fiscal watchdogs will also
depend on how the reform is presented and on the government’s commitment
to finding a lasting solution.

Another “determining factor will be the impact on the deficit in
2011 — whether steps are taken to reduce it rapidly,” noted analyst

President Nicolas Sarkozy has conceded that the “fiscal shield” he
offered to high income earners at the start of his mandate — protecting
at least half their revenues from “confiscation” by taxes — will be
pierced by the reform. Levies on investment incomes may be hiked and
civil servants will probably be obliged to contribute a little more each
month to limit the advantage they enjoy over private sector employees.

Depending on the final outcome, the reform could begin generating
additional revenues of up to E5 billion next year, when the government
has ambitiously pledged to slash the overall public deficit by two full
points to 6% of GDP, Barbet estimated. “The problem is that won’t plug
the hole, not even the hole that exists today,” he said.

Summer is traditionally the preferred season for pension reform,
since it is harder to mobilize protesters and difficult to go on strike
when you are already on vacation.

By starting a bit earlier this time around, the government must
also take account of the distraction of World Cup soccer. The longer
France’s team stays in the running, the less attention will be paid to
presentation of the reform.

If the national team managed to clinch the championship as in 1998,
the public at large might wake up to prospects of later retirement only
after a summer of celebrating.

–Paris newsroom +331 4271 5540; Email:

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