Sarkozy pushes on with reforms as headwinds mount

By James Mackenzie - Analysis

PARIS (Reuters) - French President Nicolas Sarkozy's reform drive passed a major milestone last week with the dismantling of mandatory 35-hour working week rules but with economic headwinds growing, the payoff is still some way off.

As he prepares to leave for summer holidays at his wife Carla's Riviera villa, Sarkozy can look back on a series of reforms to business regulation, working hours, pensions, government institutions and union-employer relations.

His method has been less spectacular than his election pledges of "rupture" with the past had suggested -- he did not scrap the much-criticized 35-hour working week, for instance, he merely allowed firms to negotiate their own agreements.

But he can claim to have done more to overhaul the French economy in the year since his election than any of his recent predecessors and he rode out a series of union protests that were less well supported than organizers had hoped.

"Every single month, sometimes every single week, you've got quite a major reform going through and people just don't realize how significantly it's going to matter for the economy," said Guillaume Menuet, an economist at Merrill Lynch in London.

The one thing that Sarkozy, whose other election pledge was to be "the president of purchasing power," has been powerless to influence is the mood of France's increasingly morose consumers whose morale has hit 20 year-lows, according to recent data.

Any boost from last year's 11 billion euro stimulus package, based on tax breaks for homebuyers and overtime work, was washed away by resurgent inflation fuelled by oil prices that have only recently retreated from highs of $147 a barrel.

"Unfortunately for the French government, the most obvious source of hope comes from something over which it has no control whatsoever: the oil market," Gilles Moec, an economist at Bank of America remarked in a research note last week.

FOUR MORE YEARS

Some economists see France on the brink of recession and while Sarkozy's poll ratings have picked up from a low of just 29 percent, they are still stuck below 40 percent.

With public finances straining against European Union debt limits, the government has no margin to spend its way out of trouble but Sarkozy remains convinced his reforms will eventually produce a more dynamic, flexible economy.

"I see everything that we have achieved in a year, and there are four more to go," he told reporters last week.

The victory on the 35-hour week, long attacked by Sarkozy as a deadweight on French competitiveness, should help lift output given that OECD figures show French workers are among the most productive in the industrialized world on an hourly basis.

The government hopes other measures, such as reforming universities, tightening unemployment rules and cutting back the sprawling public sector by not replacing one-in-two retiring civil servants will have a longer term, structural effect.

And despite problems ranging from the economy to occasional tensions with his own centre-right UMP party, Sarkozy holds a potentially decisive trump.