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Political Crisis Exposes France's Economic Problems

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STEVE INSKEEP, HOST:

For much of Western Europe, the confrontation with Russia is all about economics. European countries have so many ties to Russia and have to consider that as they consider the response. Let's talk about the economy of one European country that's not doing so well - France. It has near zero growth, a record deficit and double-digit unemployment. Now President Francois Hollande is under pressure. He's under pressure from Germany and the EU to cut spending. But the left wing of his own party wants spending to go up. NPR's Eleanor Beardsley reports.

ELEANOR BEARDSLEY, BYLINE: The major players of the French economy gathered this week outside Paris for the annual meeting of the country's principal business lobby - the MEDEF. From corporate CEOs to entrepreneurs, this crowd thinks it knows what's ailing the French economy - too many regulations and taxes. But the main barrier to job creation, they say, is the rigid French labor code. Sixty-five-year-old Armand Carlier is the CEO of an aeronautical equipment maker.

ARMAND CARLIER: You just can't get rid of anybody in the company nowadays without being sued in court and paying lots of indemnities. So you are very reluctant to contract and to hire new guys, which is totally absurd, you know.

BEARDSLEY: A significant faction of the Socialist Party feels Hollande has betrayed them. They want an increase in the minimum wage and government spending to jumpstart the economy. They believe austerity measures will only plunge the country into recession. Hollande's attempts to carry out reforms while trying to revive growth is risky, says Christian Odendahl, chief economist with the Center for European Reform. Odendahl points out that former German Chancellor Gerhard Schroder did it, but he was not reelected.

CHRISTIAN ODENDAHL: The labor market reforms in Germany in the mid-2000s have also done by a center-left government against the fierce resistance of the left. I mean, it has basically split the Social Democrats in Germany and basically led to a long spell of government of the conservative party later on. And Hollande knows that.

BEARDSLEY: Hollande confirmed his tact to the right this week when he fired his left-leaning economy minister, Arnaud Montebourg, for criticizing the government's economic policies. Hollande replaced him with Emmanuel Macron, a young former investment banker and confirmed free-market capitalist.

(SOUNDBITE OF ARCHIVED RECORDING)

ARNAUD MONTEBOURG: (Speaking French).

BEARDSLEY: Speaking after his dismissal, Montebourg says he had tried to convince the president that deficit reduction measures without growth would never work. By killing growth, he said, they hinder their very objective, thus becoming absurd and unjust. Economist Odendahl says to his credit, Hollande is sitting union heads and employers down together to try to restructure the French labor market. The centerpiece of Hollande's reform - the responsibility pact - is a $40 billion package of tax and fiscal breaks for companies in return for their commitment to create jobs.

(SOUNDBITE OF ARCHIVED RECORDING)

PRIME MINISTER MANUEL VALLS: (Speaking French).

(LAUGHTER, APPLAUSE)

BEARDSLEY: Speaking at the business forum, Prime Minister Manuel Valls says France has to break with old attitudes that are killing the country's competitiveness and sapping its moral.

(SOUNDBITE OF ARCHIVED RECORDING)

VALLS: (Through translator) Who says the left has to be against the corporate world? No, the employer does not have to be against the worker, and unions and bosses don't have to be systematically opposed to each other.

BEARDSLEY: Valls called on France to support its businesses and make the economy stronger for everyone.

(APPLAUSE)

BEARDSLEY: He got a standing ovation. Jacque Chanut is head of the French Builders Association.

(SOUNDBITE OF ARCHIVED RECORDING)

JACQUE CHANUT: (Through translator) To hear a Socialist leader to make such a pro-business speech is incredible. I think mentalities are finally changing. At last, there's the possibility of real reform.

BEARDSLEY: Economists say Hollande's reform plan is a gamble. If it does bear fruit, it's likely not to be before the next election in three years' time, but it's a chance he has to take. Eleanor Beardsley, NPR News, Paris.

INSKEEP: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.

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