Mixed response greets French contract U-turn

Fund management groups are divided about the investment impact of the French government’s decision to scrap the controversial contrat premi籥 embauche (first employment contract) last week.

The French government decided to abandon the reform in the face of strong opposition and protests. Some argue this embarrassing climbdown has killed prospects for economic liberalisation.

The measure had aimed to get more young people into employment by allowing employers to terminate their contracts within the first two years, without needing a reason. Unemployment is high in France, especially among young people – one in four of whom are jobless. The hope was that this added flexibility would encourage employers to recruit.

Richard Batley, European economist at Schroders, says it is not ideal that the bill was scrapped. “Any movement that would make the labour market more flexible is preferable”, he says. “But I’m not sure if it’s as dire in France as some people make out.”

Batley says it was not the law itself that people objected to so much as the way it was handled. “With the CPE bill, the approach to reform was limited and aimed at a particular group and young people felt victimised. Also there was no consultation,” he says.

“There is a danger of becoming too pessimistic on the prospect of labour reform and it could be argued that it is closer than some people think. Germany made lots of labour reforms and now it is ultra-competitive.

“Sometimes you need to reach a crisis point in order to make fundamental changes and France simply has not reached that point yet,” Batley adds.

Andrew Milligan, head of global strategy at Standard Life Investments, says it is unfortunate that France abandoned the reforms.

“We are simply seeing the status quo continuing” he says. “It would be very positive indeed if there had been structural reform in France. That would have provided a positive backdrop for investors. But we are still seeing the French economy improving. French companies are doing quite well, and that is encouraging people.”

Milligan says the longer-term question for investors is whether or not the growth rate of these companies can continue much further into the future.