Hollande industry goal meets Peugeot town reality

SOCHAUX, France Fri Jun 22, 2012 5:01am EDT

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SOCHAUX, France (Reuters) - When France's new Socialist president, Francois Hollande, pledged to turn back the clock on France's long manufacturing decline, the townsfolk of Sochaux could have taken it personally.

With unemployment at 12 percent and household income just 15,000 euros ($18,900) a year, life is tough in the yellow blocks of social housing overlooking a slate-grey Peugeot car plant, where 35,000 jobs have disappeared since the 1980s.

That trend, writ large, has stripped France of more than three quarters of a million manufacturing jobs in a decade, leaving it among the least industrialized nations in the Western world.

Many in Sochaux and beyond fear Hollande's plans to boost industrial investment will take many years to bear fruit, too slow to alleviate an economic downturn in Europe that is already biting hard.

"Life is difficult here. This town depends on the plant. There's nothing else," said Kamel Oulmi, a 65-year-old retiree who came from Algeria 40 years ago for work. "The Socialists say they want to change things, but what can they do?"

It is more than 200 years since France's largest carmaker first set up business here, near the Swiss-German border, making bicycles and coffee mills, and it is still the town's biggest employer, with a workforce of 12,000.

Peugeot also owns the local soccer team, and tourists flock to the company museum, which celebrates a time when France's car industry was the world's largest. A century ago.

The downturn in Europe has hit Peugeot harder than any other carmaker.

To counter rising competition from emerging markets and Germany it has automated production and moved jobs overseas, but it still needs to shrink or close French plants to stem losses compounded by a weak domestic economy and collapsing demand in Spain and Italy.

Unions are warning of more job cuts after the carmaker struck an alliance with General Motors to cut $2 billion of costs. It has already announced plans to cut 350 temporary workers at Sochaux and briefly halt production this month to cut inventories.

Facing a rising wave of factory closures across France, Finance Minister Pierre Moscovici, who represents Sochaux in parliament, has promised laws to stop firms firing workers just to boost profits and moving factories overseas.

"The Socialists have good ideas, but implementing them is going to be more difficult," said Bernadette Boujon, representative of the GCG union at the Sochaux plant. "If a company wants to move production elsewhere because it is cheaper, what can the government do to stop them?"

RISE OF FAR RIGHT

As in many parts of eastern France, frustration at unemployment has helped the far right in a town where women in headscarves are a common sight on the busy main street. National Front candidate Sophie Montel won 25 percent of the vote in this month's parliamentary election.

"There are people here who live in despair, and they are losing their trust in traditional parties," said Sochaux's Socialist mayor Albert Matocq-Grabot, who received death threats earlier this year when he authorized the construction of a mosque.

"There is a high level of unemployment, and that affects people's spirit," he said, welcoming Hollande's industrial plans while acknowledging their limitations. "There will be no miracles. The crisis is a European and a global one."

While many Western economies have shifted from industry to the services sector, in France the swing has been particularly abrupt. Industry accounted for almost a quarter of jobs in the 1980s but now provides just over a tenth.

At the same time, France's share of global trade has roughly halved from 5 percent in 1980 to just 2.6 percent, hit by competition from emerging powers like China and from across the Rhine.

Since the start of the year, 136 factories have closed, and many more are under threat as the economy stagnates.

To lead a fightback, Hollande has named Arnaud Montebourg as Minister for Industrial Renewal. The 49-year-old lawyer is the vocal leader of anti-globalization sentiment in the Socialist party. Montebourg has called for European governments to prioritize local production and proposed a carbon tax for imports from less environmentally friendly economies.

Courts, however, have already struck down one attempt by his ministry to freeze a corporate lay-off plan.

"You cannot ban companies from firing staff. If you do that you are going to have a huge competitiveness problem," said lawyer Mabrouk Sassi, a specialist in labor law. "Compared to all other European countries, that would be a huge step backward."

Despite years of decline, the car sector remains a powerful lobby group, employing 600,000 people. The government is studying a request from the second-largest producer, Renault, for the reintroduction of state aid used during the crisis, such as incentives for drivers to scrap old cars and buy new.

But critics accuse the Socialists of seeking an impossible return to "the glorious 30" - the three decades after the Second World War when wages and living standards grew strongly and a dirigiste economy boomed under state guidance.

"This is an outdated struggle," said Bruno Cavalier, economist at Oddo Securities in Paris. "We are in a service economy and going to stay that way. The real question is why are French firms losing more market share than their competitors?"

MITTELSTAND FRANCAIS

A steady rise in wages has made it more expensive to produce in France. Over the last decade, unit labor costs have risen about 17 percent, while in neighboring Germany they remained flat. At the same time France went from a trade surplus to a record 70 billion euro deficit as its share of export markets declined.

The previous conservative government planned to lighten labor costs by moving onerous social charges from labor to consumption via a "Social VAT", as Germany did in 2007.

The Socialists, however, say they will repeal this measure because it would hurt workers' purchasing power. They plan to increase salary costs by raising the minimum wage.

Pointing to research showing it is quality of goods that matters in France's export markets, the Socialists have unveiled plans to increase investment in research and development, provide tax incentives for capital spending, and increase the supply of credit to smaller firms.

The government wants to emulate the success of Germany's regional governments in promoting new technology and create a French equivalent of the "Mittelstand" - the innovative medium-sized firms that are the backbone of German industry.

"If you want to encourage industrial innovation, the state has to play a role. Look at Germany, Japan or China," said Elie Cohen, an economist who has advised Hollande. "But for 30 years in France, industrial policy has been a dirty word."

In an effort to plough more corporate profit into investment, the government plans a 3 percent tax on dividends to discourage firms from simply handing money back to shareholders.

That is just part of a multi-billion-euro rise in taxes due to hit French companies as the government eliminates numerous exemptions and slaps surcharges on energy firms and banks in a bid to meet its 3 percent deficit target for next year.

The head of France's MEDEF business chamber, Laurence Parisot, warned that such measures risked "systematically strangling" business, just as confidence hits record lows.

"What the government is proposing will have a boomerang effect," said Jean-Michel Boussemart, economist at the COE-Rexecode think-tank. "Instead of reviving industry, it will make French companies think twice before investing or hiring."

Industrial investment will only pick up once profit margins - running at their lowest level in nearly three decades - start to recover, economists say.

Despite his opposition to the "social VAT", Hollande has hinted that he could shift welfare charges from labor onto an environmental tax or onto the CSG social charge paid by workers.

"It's essential to reduce company's costs in the short term to give them some breathing space," said Patrick Artus, chief economist at Natixis bank. "With the worsening of the economic outlook, thousands of companies risk going bust."

Even those sympathetic to the government's strategy realize it will take time, and short-term fixes are also needed.

"Investment in education and research will work, but that is going to take 10 years," said Harvard economics professor Philippe Aghion. "If you're looking for something with an immediate impact, the government needs to liberalize product markets."

($1 = 0.7933 euros)

(Additional reporting by Nicholas Vinocur; Editing by Will Waterman)

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