Dole Blues

Up to 300,000 students demonstrated throughout France yesterday against a government measure designed to tackle the biggest scourge of the national economy - the 23% unemployment rate among young people, the highest in Europe.

And that's the official rate; in the "banlieues" that rioters set on fire late last year, it is 50%.

It's like a reprise of the May 1968 protests. The CRS riot police cruise the streets of the Latin Quarter in Paris, breaking up groups of protesters, and storm the Sorbonne where students staged a three-day occupation last week. Between 51 and 64 of France's 82 universities are now disrupted by the wave of angry protests.

Dominique de Villepin, the increasingly unpopular prime minister in a stand-off with Nicholas Sarkozy, the interior minister, over the rightwing candidacy for next year's presidential elections, has nailed his colours to the mast.

He plans to see off the youthful demonstrators and avoid the fate of one of his predecessors, Alain Juppé, whose government fell in 1995 when street protests undermined his economic reforms.

De Villepin told Paris Match his sole regret in introducing the "first employment contract" (CPE) - the decree at the centre of the protests - was that he had forced the issue too fast, without consultation with either unions or employers.

But he added: "Now, we have to explain and convince. And I will do it right to the end because I believe in this measure."

The CPE, based on a similar scheme among small and medium-sized firms (SMEs) that was introduced seamlessly, allows all companies to hire employees under 26 for a trial two-year period, during which they can be fired at any time.

To sweeten the pill, former employees can claim unemployment benefit after four months rather than on the current basis of working for six out of 22 months.

The government has drawn on the successful Danish model of "flexicurity" for its own scheme - one that combines high levels of unemployment benefit (90% of previous pay) with ease of hire and fire.

And it is easy to see why the model is attractive to a country in which the powerful trade union movement, although dwindling, has succeeded in protecting those in work at the expense of those kept outside the labour market.

French unemployment overall is 9.6% but this official figure masks a much deeper problem. Only a third of people aged 50 or more are in full-time employment so "work" has become the preserve of the 30- to 50-year-olds.

De Villepin sees his scheme as a first step to solving this conundrum, pointing out that young French people take twice as long to find a stable job on graduating - eight to 11 years - as those elsewhere in the EU.

He insists, moreover, that it has little or none of the punitive aspects of labour reforms in neighbouring Germany which have cut unemployment and social security benefits and forced people into accepting low-paid jobs. The French scheme at least guarantees pay levels agreed through collective bargaining.

But his problem is that in France, as in Germany, companies have been making record earnings (up 30% last year) while cutting labour costs.

Helmut Panke, BMW chief executive, said this week that the top German companies in the Dax-30 had shed 300,000 jobs in the last five years - mainly to recover the competitiveness lost when the Deutsche Mark entered the euro at an over-valued rate and to restore their position as the world's leading exporter.

BMW has, meanwhile, taken on 12,000 staff in Germany in the same period - largely through measures which have driven up productivity and flexibility in return for security of employment.

German companies have also circumvented national collective bargaining agreements and secured deals with workforce and unions tailored to their local or regional needs.

This option is less readily available in France, where the code du travail, or employment code, weighs 2.5 kilos and has grown by more than 800 pages in 40 years, according to Laurence Parisot, the woman heading the employers' body, the Medef.

She has been a stern critic of the CPE even though the Medef backs it overall, her reserves about the scheme arising largely because it covers all youth, regardless of professional qualification or educational attainment.

De Villepin, whose ministers have proven reluctant to back his scheme in public, refusing to go on primetime current affairs TV programs, for instance, has hit the enduring paradox of French politics: the popular demand for change without change, or revolution without reform.

The reaction to his scheme, mirroring the populist hostility to foreign takeovers in a country where one in seven works for an overseas firm and almost half the capital tied up in the Cac-40 index of leading companies is foreign, is profoundly conservative.

There is another problem. French growth rates - only 1.4% last year compared with the government target of 2.5% - are too low to create employment in the wake of improved investment and increased consumer spending: an even deeper problem across the Rhine.

Only by encouraging companies to take on more labor can this poor level of growth be improved. But the prospects for resumed growth have been rendered more insecure because of the decisions of another French leader - Jean-Claude Trichet, president of the European Central Bank - who is set on a course of raising the cost of borrowing to 3% by the end of the year to stamp out a nonexistent inflationary risk.

If de Villepin stays the course and sees his scheme bear fruit, he may well find its harvest diminished by the monetarists in Frankfurt, over whom he has no control.