France's new government laid out its plans to remake the country's decades-old labor regulations, opening President Emmanuel Macron's ambitious effort to give the eurozone's second-biggest economy the vigor it has long lacked.
Mr. Macron is trying to revise more than 3,000 pages of labor rules that employers say discourage hiring by making it complicated and financially risky to dismiss workers. His proposals include capping fines for unfair dismissals and giving companies more leeway to work around rules set by unions.
Continue Reading Below
"The world is changing and it's changing fast," said Labor Minister Muriel Pénicaud, who used to head human resources at French dairy company Danone SA. "We are obliged to change our social model."
The proposals will be refined and amended over the summer in preparation for the government to decree the changes in September.
Revising the labor laws is a major test of Mr. Macron's authority, two months after he won election as president by putting such change at the heart of his campaign.
The success or failure of his mission to reinvigorate France's economy will shape the future of the European Union and its shared currency, the euro. France's stagnation paired with neighbor Germany's recent strength has left the bloc's economy and politics deeply unbalanced. Recent optimism that the EU is turning a corner and leaving a crisis-hit decade behind it rests to a large extent on hopes that France can shake off its malaise.
The country suffers from a litany of problems that most other continental European countries have tackled with greater determination in recent years. French unemployment has been stubbornly high since the 1980s. Rigid labor regulations and high payroll taxes have deterred business from hiring workers on indefinite contracts with full benefits, leaving younger workers in particular stranded in insecure temporary jobs. A costly, poorly targeted welfare state strains the public finances.
Mr. Macron's agenda mimics in some ways Germany's reforms in the early 2000s under then-Chancellor Gerhard Schröder, who made widespread changes to labor rules and the welfare state, as well as overhauls in the Netherlands and Scandinavia. In all cases, the goal was to protect Europe's cherished "social model" of capitalism with a strong safety net, while adapting it to the competitive pressures of globalization.
One lesson emerged from European experience: No single reform is usually decisive in unleashing stronger growth. In Germany, the combination of changes by government and a parallel wave of overhauls at German companies put the country in a position to benefit from global export opportunities and led to a lasting improvement in job creation.
In Italy, in contrast, a recent labor reform with aims similar to Mr. Macron's appears to have had little lasting impact on companies' willingness to hire.
Mr. Macron's labor overhaul is the most politically charged part of his agenda, but its economic efficacy will depend on nitty-gritty details yet to be defined, as well as on corporate shake-ups, consumer and investor confidence, and a wider package of policy overhauls,.
The current economic climate favors Mr. Macron. The Bank of France recently raised its economic forecasts, saying it expects a rebalancing of the domestic economy with more foreign demand. And the consumer confidence reading jumped in June to its highest level in a decade.
Economists, business people and labor lawyers have also welcomed the thrust of Mr. Macron's proposals. "If Mr. Macron takes this through to the end, it will be a really deep reform of the labor code," said Baudouin de Moucheron, a senior partner specializing in labor law at Gide Loyrette Nouel.
A crucial aspect: Mr. Macron wants to let companies negotiate some working conditions with their employees, in ways that depart from sector-wide agreements between unions and employers' federations. Giving individual companies more flexibility in this way would make French labor relations more like those in Germany, where pragmatic deals between companies' management and workers' representatives are widely credited with boosting the competitiveness of many industries and with saving jobs in downturns.
But some economists warn that small French companies, which the government says hold the key to stronger growth and lower unemployment, may lack the size and institutional know-how to embark on negotiations with their employees. Olivier Passet, economist at French business consultancy Xerfi, notes that big companies used a 2003 law to negotiate overtime pay with employees and drive down costs, while small companies typically pay more because they stick to sector-wide scales.
"It's not clear that changing the law in France is the most effective way of rebalancing big and small companies," Mr. Passet said.
Other proposed measures include capping the cost for companies of legal settlements when laid-off workers go to court. Business lobbies in France and elsewhere in Europe have long complained that the time and unpredictable expense of laying off workers is a strong deterrent to hiring staff on indefinite contracts and leads to the heavy use of temporary jobs. Mr. Macron already tried -- and failed -- to introduce such caps when he was France's economy minister.
The government also presented measures that Mr. Macron hadn't flagged during the campaign, including a plan for a new type of labor contract tied to the duration of a project. It also wants to change rules for determining whether an international company can justify layoffs in France, a move that is likely to anger labor unions. Currently, many companies are barred from laying off employees if a subsidiary in another part of the world is considered in good financial health.
"It's the measure that has the least chance of getting through," said Mr. Passet.
The French leader says the changes to employment regulations are needed to stir the economy after years of high unemployment and low growth, and to restore France's credibility in Europe. Mr. Macron says that unless the country brings its labor laws more in line with its European peers, he will struggle to push Germany and the eurozone's richest members to provide a larger financial backstop for the bloc to cushion against future shocks.
German Chancellor Angela Merkel signaled last week she is open to talking about some of Mr. Macron's more ambitious demands, such as a eurozone budget and eurozone finance minister. But officials in Berlin still want to see evidence the youngest ever French president is making progress on labor reform.
Making deep changes to French labor laws proved too great a challenge for many of Mr. Macron's predecessors. The government of Socialist leader François Hollande, in which Mr. Macron served as economy minister, repeatedly scaled back attempts to change labor laws when faced with organized opposition.
To overcome the opposition, Mr. Macron is moving quickly to capitalize on his popularity among French voters. The National Assembly, where he won a commanding majority in elections earlier this month, is expected next month to give the government the power to change employment regulations by decree, a procedure that reduces the risk of lengthy and divisive parliamentary tussles. The government will then negotiate the details of the decrees with unions over the remainder of the summer, a period during which unions traditionally struggle to organize large strikes or demonstrations.
The radical leftist union CGT has called for a day of strikes and demonstrations on September 12, but other unions are cautious and haven't yet launched nationwide efforts to oppose Mr. Macron.
"I am neither naive nor suspicious," Jean-Claude Mailly, head of the Force Ouvrière, said Wednesday in an interview with French daily Le Monde. "The negotiation isn't useless," he added.
Write to William Horobin at William.Horobin@wsj.com and Marcus Walker at firstname.lastname@example.org
(END) Dow Jones Newswires
June 28, 2017 16:41 ET (20:41 GMT)