European labour cost study adds fuel to French campaign

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A Eurostat survey revealing huge labour cost differences across the 27 EU member states unveiled yesterday (24 April) has provided fuel for the French election campaign, where the two contenders are battling over plans for a "social VAT" to protect French producers against social dumping.

Hourly labour costs for 2011 range from €3.5 in Bulgaria to €39.3 in Belgium, the highest in the European Union, and just ahead of Sweden (€39.1), the Eurostat figures show.

The average hourly labour cost for the eurozone is of €27.6, higher than the EU-27 average (€23.1).

Other EU countries with cheaper labour costs include Romania (€4.2), Lithuania (€5.5), Latvia (€5.9), Poland (€7.1), Hungary (€7.6), Estonia (€8.1), Slovakia (€8.4), the Czech Republic (€10.5).

In Germany, the hourly labour cost is €30.1 compared to France's €34.2.

This difference in wages has stoked tensions between Europe's two largest economies and the dominant nations within the 17-country eurozone. Labour costs in Germany grew at a slower pace than any other EU country last year, while in France, costs grew twice as fast.

Campaigning on a protectionist ticket

The survey results are close to similar figures collected since 2008. But seen in the context of the eurozone crisis, the fresh data may give ammunition to politicians campaigning on protectionist tickets.

French President Nicolas Sarkozy is campaigning for re-election on 6 May with proposals that include a "social VAT" to tax social dumping. Last month, on the initiative of Sarkozy's ruling centre-right UMP party, the parliament adopted an "anti-outsourcing" measure aimed at taxing consumption instead of labour.

The Socialists, who hold the majority in the Senate, rejected it, but following a voting marathon, it was approved by the Chamber of Deputies.

The measure seeks to transfer some of the cost of social protection to the consumer to help reduce employers’ labour costs and make French goods more competitive to export.

But Sarkozy's challenger, Socialist candidate François Hollande, has vowed to reverse the social VAT law. He contends the effort to boost French competitiveness needs to focus on quality and innovation rather than price.

Neither EU nor world trade rules prohibit the introduction of a social VAT. Two other European countries have already enacted such levies: Denmark at the end of the 1980s and Germany in 2007.

The tax is unlikely to significantly improve French competitiveness with regard to emerging countries such as China and India because differences in labour costs are too great.

Eric Heyer, an economist at the French Observatory of Economic Situations (OFCE), said the social VAT would primarily mean increasing competitiveness relative to countries with comparable labour costs, notably other EU members.

"The effects of such a measure are close to those of a competitive devaluation of the currency, which is no longer possible with the euro. It reduces the cost of labour and creates inflation," Heyer said.

Background

The final round of the 2012 presidential election in France is on 6 May. Polls have given François Hollande the edge.

The election is seen as a potential game-changer for the European Union. If France turns left, as opinion polls indicate, the near-monopoly of the centre-right European People's Party in Europe would be broken.

In case of another mandate for incumbent President Nicolas Sarkozy, Europe could move faster towards a two-speed

Union and a revamp of the bloc's Schengen area that could see Greece excluded from the passport-free travel zone and further EU enlargement frozen.

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