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. Last Updated: 07/27/2016

Failed Reform Alters the Political Landscape

France now has a government with a broken back. Dominique de Villepin came into office less than a year ago, promising to give the highest priority to tackling the unemployment rate, which is especially high among the young. Having abjectly had to abandon the youth contract plan that he had made his flagship reform, France's prime minister is most unlikely to dare to undertake any other structural reforms for his remaining spell in office.

That period may not be very long. For the political fallout of his retreat has been to dim his own chances of contesting next year's presidential election and, at the same time, to brighten the prospects of his rival on the right, Nicolas Sarkozy, and even more the political standing of opposition Socialist contenders to succeed President Jacques Chirac.

The pity of the affair is that de Villepin's "first job contract" proposal was never going to make an enormous difference to France's 22 percent youth unemployment rate. It was designed to encourage the hiring of inexperienced young people by allowing employers the possibility of dismissing workers during the initial two-year trial period of their contracts without management running the risk of being dragged before labor tribunals. So it was far narrower than the welfare reforms that Alain Jupp?, Chirac's first prime minister, tried in 1995. But it attracted almost equally big street protests from unions and from students who felt labor market reforms were bearing unfairly on them. While de Villepin was to blame for not properly explaining the measure before rushing it through parliament, the employers federation was culpable for not better promoting the plan's job-stimulating potential.

Sadly, the government has now dropped all idea of introducing labor contract flexibility and returned to the discredited notion of trying to subsidize young people into work. This has not and will not work because it does not tackle the root cause of French unemployment. These are a deadly combination of a relatively high minimum wage, relatively high payroll taxes and a relatively rigid labor code. Together these have the effect of pricing low-skilled or, in the case of the young, less-experienced labor out of the market.

However the whole saga has changed the domestic political landscape, de Villepin denied it had dented his presidential prospects because he was not interested in the job anyway. Sarkozy has sidestepped some of the damage by criticizing the style, though not the substance, of the prime minister's measure. But he must now fear that this affair has tainted the cause of reform on which he had hoped to campaign next year against a Socialist party buoyed up by the government retreat.

This piece ran as an editorial in the Financial Times.