Bank of France head backsBlair over social reform

12th July 2005, Comments 0 comments

PARIS, July 12 (AFP) - The head of the Bank of France Christian Noyer said on Tuesday that France, Germany and Italy should look to Scandinavia for lessons in how to reform their social and economic policies.

PARIS, July 12 (AFP) - The head of the Bank of France Christian Noyer said on Tuesday that France, Germany and Italy should look to Scandinavia for lessons in how to reform their social and economic policies.

Noyer, speaking in an interview with the Financial Times newspaper, said he tended to agree with British Prime Minister Tony Blair that the European social model was in need of structural reforms.

He also said that he did not expect the bomb attacks in London to have much economic effect.

Noyer, a member of the governing council of the European Central Bank, also answered pressure for a cut in the key ECB interest rate, saying that if markets considered that the rate had been cut for the wrong reasons, they might well push up long-term market interest rates.

He spoke at some length about structural reform in the European economy. The European Commission and the ECB have been urging governments in the eurozone for years to introduce far-reaching and politically difficult reforms, arguing that they will increase efficiency in the economy and therefore growth and employment.

They have linked this to reduction of government overspending as required by the Stability and Growth Pact. However, they have been answered by some who hold that cutting spending would worsen weak growth and high unemployment, and would be unacceptable to voters.

Tony Blair, in taking over the presidency of the European Union at the beginning of the month, sharpened the debate by urging many governments to review the basis of their social and economic policies. This is a hot issue in France, partly because Blair singled out subsidies for French farmers.

In this context, Noyer said that although "structural reform is a difficult issue", the only way to tackle unduly high unemployment was to "raise potential growth and the only way to raise potential growth is via structural reforms".

He continued, referring to theoretical "potential" growth which an economy can achieve without generating inflation: "Our problem (in France) is not that growth is far from potential but that the potential growth rate is too low."

Asked if France was losing its competitive edge compared to Germany, he said: "Germany has done a remarkable work in restoring competitiveness. When we look at France, we did not make the same remarkable progress over the past decade. But Germany was a unique case because of the reunification years."

He said: "The main problem is non-price competitiveness -- for instance in the functioning of the labour market, the flexibility that you have in hiring and firing and in adjusting working hours."

Noyer said that opinion polls suggested that one of the main reasons why French people had rejected the European constitution was because they were frightened of unemployment. They had not voted against the euro, and any suggestion on financial markets that the eurozone might break up was "absurd".

He said that in France the so-called Scandinavian social model was receiving a lot of attention.

"One of the key elements of the way these countries work is that they have mixed a greater level of flexibility in labour and product markets -- a bit like the UK economy -- with a high degree of social protection, which is traditional in continental Europe.

"This kind of model might be the appropriate one for continental Europe. You could never repeat it exactly, but it is full of lessons for countries such as France, Germany and Italy.

"To me, the Scandinavian model shows that you can have both flexibility and protection -- but not protection in the sense of a job for life, even if your company is sinking."

Copyright AFP

Subject: French news

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