Sarkozy is not the French Thatcher

Just before his election victory, Nicolas Sarkozy received a gift from a most unlikely source: Germany’s biggest trade union, IG Metall, which has 3.4 million members. In marathon talks in Baden-Württemberg the union agreed to a new wage deal.

Like all such negotiations in the German engineering industry, you need to be a seer to penetrate the obfuscation which surrounds the final outcome. Economists at Barclays Capital have worked out that, on plausible assumptions, the deal adds up to an average annual wage-rise of about 3.2%. But wage increases in 2005 and 2006 were 2.9% and 2.8% respectively. So workers are not doing much better under the new deal than they did then. Productivity in the industry, however, has been soaring. It rose 5.3% in 2005 and a whopping 7.2% in 2006. German industry has never, since 1945, been as profitable as it is today. So German bosses have every reason to feel, quietly, very satisfied indeed with the new deal.

Remember, too, that this is just a pattern-setting deal, local settlements could be lower. Those who have been confidently predicting for years that the German economy would eventually turn the corner and recover its leading role in world export markets, have known that you need to look below the political Punch-and-Judy show conducted by unions, management and the government at national level if you want to understand the German economy. At the grass-roots, German workers and bosses have, for a decade, been accepting that what really matters in an economy which is struggling to gain traction in the face of intensifying global competition, is not what is said in Berlin but what deals are done company by company, plant by plant. And, for years, at this level, moderation has prevailed. In Germany, labour market ‘flexibility’, at least in terms of wage-setting, has been remarkable. According to the Commission’s figures, real (ie, after deducting inflation) unit labour costs in Germany have been falling year-on-year since the post-unification recession of 1992. Germany is becoming more and more competitive.

So the IG Metall deal should be a gift for Sarkozy. French politicians and trade unions can rail as loudly as they like about the ‘unfair’ competitive pressures from across the Rhine, but the IG Metall agreement suggests these pressures are not going to diminish. So the new president of France can point to France’s biggest rival as an example not only of how structural economic reform can pay off but of how France’s poor economic performance is weakening the country relative to its imposing neighbour. But will this have any impact?

A seminar in Brussels this week at the Bruegel think-tank suggests that the grounds for optimism are limited. Under discussion was a new book on economic reform in France by prominent European economists Jacques Delpla and Charles Wyplosz, ‘End privileges, pay to reform’. The basic thesis is that France is different from its European neighbours. You will not, in France, be able to get the ‘social partners’ around a table to hammer out an agreed reform programme as they did in the Netherlands. Nor will French workers sit down quietly and negotiate cuts in real wages and accept the outsourcing of jobs around the world as German employees have done. Even French management lacks discipline, said one participant. Instead, the book argues, what you need to do in France is pay off, on a grand scale, the beneficiaries of market mechanisms which stand in the way of reform, such as the Common Agricultural Policy. This would smooth the way for change - but at the cost of increasing France’s debt by around 20% of gross domestic product.

The book may, in part, be designed to provoke argument, but the pessimism underlying its prescription is palpable. As one participant noted, the UK press, now busily playing Sarkozy up as France’s answer to Margaret Thatcher, is dreaming. Unemployment in France may be running at close to 10% (a dem-oralising 20% for young people), the national debt may have been rising for a generation to its current level of 64% of gross domestic product (GDP) and the trade deficit may be stuck around 2% of GDP (compared with Germany’s 7% surplus). But do not expect the country to embrace just any old reform that ‘le petit Nicolas’ proposes.

Helmut Schlesinger, the former Bundesbank president, remarked in 2003 that he did not think that Germany would really get serious about economic reform until there was a crisis. The problem for France is that there is a crisis, but even this may not be enough to help Sarkozy secure the reforms that his country requires.

• Stewart Fleming is a freelance journalist based in Brussels.

Just before his election victory, Nicolas Sarkozy received a gift from a most unlikely source: Germany’s biggest trade union, IG Metall, which has 3.4 million members. In marathon talks in Baden-Württemberg the union agreed to a new wage deal.