France's Hollande in tight spot on pension reform

France's Hollande in tight spot on pension reform

PARIS - President Francois Hollande may only manage a lightweight reform of France's indebted pension system, with trade unions preparing street protests and his own Socialist Party warning it would oppose painful measures.

Fellow Europeans say France risks damaging its own standing and that of the euro zone among investors, and upsetting southern members struggling with harsh reforms, if it fails to address the deficit in its pension funding.

But left-wing lawmakers are determined to prevent any erosion in the old-age provision enjoyed by the French.

Hollande, who has already excluded any outright rise in the retirement age from the bill due before parliament in September, faces resistance to his more modest plan of extending the 41.5-year contribution payment period required for a full pension.

Aside from the risk of protests and strikes hitting Europe's second-largest economy, Hollande's room for manoeuvre is further crimped by the fact that even a tiny revolt among back-benchers would scupper his three-seat parliamentary majority.

"It will be an intermediate reform: one that is just enough to appease markets but not brutal enough to upset things at home," said economist Henri Sterdyniak of France's OFCE economic observatory.

Contrary to common international perceptions that the French enjoy cosy retirements, the average pension is only 60 per cent of working-age post-tax income versus the 69 per cent average for industrialized countries.

Yet the fact that pensions are almost entirely borne by the state means public spending on pensions is 14.4 per cent of output versus 12.9 per cent in the EU.

The pension pot has been depleted by rising unemployment and without reform, the funding gap will balloon from 14 billion euros ($18.40 billion) currently to 20 billion euros by 2020.

Hollande said on Thursday he was determined to achieve a reform sturdy enough not to require further tweaking before 2020, yet he was well aware of the dangers of forcing through more than unions and left-wing voters will swallow.

"We have to be very careful, but at the same time, we need to reform," he told reporters over dinner at the Elysee Palace.

All past efforts at pension reform - including a modest 2010 revamp under conservative Nicolas Sarkozy aimed at tiding the system over to 2020 - have encountered weeks of demonstrations and costly industrial strikes.

Yet while France's highly liquid bond market has held up well since it lost its last major AAA credit rating on July 12, analysts say foot-dragging on pension reform could see Hollande punished with higher borrowing costs.

"A lot more than the deficit of the pay-as-you-go system by 2020 is at stake," said Deutsche Bank economist Gilles Moec.

"The pension debate could anchor Hollande in investors' perceptions as a reformer, ready to take large political risks," he said. "Any watered-down reform could fuel an already pervasive sense that 'France doesn't get it'."

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