By Stephen Sandelius
PARIS (MNI) – The reform of France’s pension system unveiled last
week by the government has prompted criticism from all sides and failed
to reassure markets about the consolidation of public finances.
Public opinion remains largely opposed to the proposed reform and
unions are counting on a massive turnout at protest rallies planned this
Thursday.
As the details of the reform were largely in line with the hints
and leaks orchestrated by officials, there was little immediate market
reaction the day of the announcement. France’s spread versus the German
Bund actually widened marginally.
The narrowing of this spread in the preceding days had been due
more to a general easing of market concerns over the solvency of the
peripheral countries than to France’s “minimal” pension reform measures,
explained analyst Rene Defossez of Natixis.
“Nobody really believes in the capacity of this reform” to assure
the financing of the pension system over the long term, he said. “It
goes in the right direction” but is “largely insufficient.”
Even Senate Finance Committee chairman Jean Arthuis, a former
finance minister still linked to the governing coalition, complained
that “the numbers don’t add up.”
By lifting the minimum retirement age by two years to 62 and hiking
contributions from investment earnings, stock options and the highest
income bracket, the reform aims to slice the shortfall in the
pay-as-you-go pension system from over E32 billion this year to E7.8
billion by 2015 and eliminate it entirely by 2018.
By that date, the various pension systems will have accumulated
“more than E60 billion in debt, which sooner or later will lead to
higher taxes,” Arthuis warned.
Even after 2018, the government will continue to shoulder an annual
burden of E15.6 billion to finance the pension shortfall for civil
servants, despite a hike in their contributions.
Like other analysts, Arthuis raised doubts about the economic
assumptions of the reform, notably the return to full employment over
the coming decade, which would allow the pension system to cannibalize a
projected E1.4 billion surplus in the unemployment insurance fund.
Labor Minister Eric Woerth argued again Sunday that this transfer
is “very cautious” since it represents less than 3% of the deficit
reduction in 2018.
For analysts at UBS, the hypothesis, “although not outrageous,” is
nevertheless “quite optimistic”.
The assumption of a return to long-term potential GDP growth rates
of 2.2% on average from 2014 onward has also raised some eyebrows among
analysts, who doubt that the enormous slack in the economy can be
absorbed during a period of massive budget tightening.
“Having the official medium-term growth projections at the upper
margin of consensus forecasts risks significantly underestimating the
size of the required fiscal efforts,” the IMF cautioned last week.
At UBS, analysts concluded that less than two thirds of the
system’s deficit will be eliminated by 2018.
A bigger issue is what happens after 2018, when the demographic
mismatch between a shrinking active population and a swelling pool of
pensioners becomes more acute.
“The question is all the more pertinent as the economic gains of
raising the retirement age wane over the long term,” reminded analyst
Axelle Lacan of Credit Agricole.
For the shorter term, the pension deficit is still only a fraction
of the total public deficit, which is expected to climb to 8% of GDP
this year. Doubts in the market about the government’s ability to slash
it to 3% over the coming three years help explain why France’s spread
against the Bund is among the largest of the triple-A sovereigns and why
this spread can easily widen by 20 bps at the slightest scare, explained
Defossez.
To alleviate these doubts, the government is preparing further
“announcements” of consolidation measures for the coming weeks, top
presidential advisor Claude Gueant told the Financial Times this week:
“Our budget for next year, and the plan for the next three years, will
be serious and determined. The trend to get to 3% will appear credible.”
For the public at large, the proposed pension reform is hardly
credible at all. Only 15% believe it will assure a lasting financial
balance, according to a BVA poll conducted last week. Yet 54% remain
opposed to even a two-year rise in the retirement age and 61% feel the
measures are “unjust.”
It may well be this impression of injustice — fueled by the social
fallout from the banking crisis — that explains the contractions in
public opinion and highlights the dilemma of any attempt to reconcile
the working population with the hard demographic realities of an ageing
society.
The government’s proposal integrates in part the demands of the
unions and the political opposition to enlarge the revenue base of the
pension system by taxing business, the rich and the golden parachutes.
It also makes exceptions for those who began work at an early age or who
have suffered physically at their jobs.
Still, the French remain more inclined to the strategies of the
unions or the Socialist Party, which defend the “social right” to
retirement at 60, according to a TNS-Sofres survey earlier this month. A
clear majority back the unions in their protest movements.
Buoyed by this wave of support, the nearly united front of unions
has called another day of rallies and marches this Thursday.
“I think we will have a very large protest,” Francois Chereque of
the moderate CFDT union said on Monday, pledging to maintain the
pressure on individual lawmakers during the summer vacation and perhaps
renew the movement when Parliament begins debating the proposals next
fall.
–Paris newsroom +331 4271 5540; Email: stephen@marketnews.com
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