[attach id=267707 size="medium"]French President Francois Hollande. Photo: Philippe Wojazer/Reuters[/attach]

President Francois Hollande may only manage a lightweight reform of France’s indebted pension system, with trade unions preparing street protests and his own Socialist Party warning it would oppose painful measures.

Fellow Europeans say France risks damaging its own standing and that of the eurozone among investors, and upsetting southern members struggling with harsh reforms, if it fails to address the deficit in its pension funding.

But left-wing lawmakers are determined to prevent any erosion in the old-age provision enjoyed by the French.

Hollande, who has already excluded any outright rise in the retirement age from the bill due before Parliament in September, faces resistance to his more modest plan of extending the 41.5-year contribution payment period required for a full pension.

Aside from the risk of protests and strikes hitting Europe’s second-largest economy, Hollande’s room for manoeuvre is further crimped by the fact that even a tiny revolt among back-benchers would scupper his three-seat parliamentary majority.

“It will be an intermediate reform: one that is just enough to appease markets but not brutal enough to upset things at home,” said economist Henri Sterdyniak of France’s OFCE economic observatory.

A lot more than the deficit of the pay-as-you-go system by 2020 is at stake

Contrary to common international perceptions that the French enjoy cosy retirements, the average pension is only 60 per cent of working-age post-tax income versus the 69 per cent average for industrialised countries.

Yet the fact that pensions are almost entirely borne by the state means public spending on pensions is 14.4 percent of output versus 12.9 per cent in the EU.

The pension pot has been depleted by rising unemployment and without reform, the funding gap will balloon from €14 billion currently to €20 billion by 2020.

Hollande said on Thursday he was determined to achieve a reform sturdy enough not to require further tweaking before 2020, yet he was well aware of the dangers of forcing through more than unions and left-wing voters will swallow.

“We have to be very careful, but at the same time, we need to reform,” he told reporters over dinner at the Elysee Palace.

All past efforts at pension reform – including a modest 2010 revamp under conservative Nicolas Sarkozy aimed at tiding the system over to 2020 – have encountered weeks of demonstrations and costly industrial strikes.

Yet while France’s highly liquid bond market has held up well since it lost its last major AAA credit rating on July 12, analysts say foot-dragging on pension reform could see Hollande punished with higher borrowing costs.

“A lot more than the deficit of the pay-as-you-go system by 2020 is at stake,” said Deutsche Bank economist Gilles Moec.

“The pension debate could anchor Hollande in investors’ perceptions as a reformer, ready to take large political risks,” he said. “Any watered-down reform could fuel an already pervasive sense that ‘France doesn’t get it’.”

Hollande has no intention of touching the retirement age that Sarkozy raised to 62 from 60, having fulfilled a campaign promise to roll it back for those who started work early.

He believes a fairer way of making people work longer is to accelerate a process already under way to lift the mandatory pension contribution period to 41.5 years between now and 2020.

A government-commissioned panel has advised acting soon to extend that period to up to 44 years, while proposing other measures such as making well-off pensioners pay more tax.

While Hollande favours those options, his Socialist Party has stated its opposition to any speeding up of the extension of the contribution period before 2020. It has also come out against trimming annual pension increases to below inflation, another option under consideration.

Some observers see the party’s line more as political posturing than heralding a revolt by its parliament deputies.

But it risks raising the alarm in Brussels, where the EU wants France to deliver a substantial reform in return for giving it two extra years to bring its overall budget deficit into line.

“It sends the completely wrong message if a leading EU nation cannot meet agreed reform targets,” said a senior euro zone diplomat.

“A lot of very painful measures have been taken in southern Europe and there shouldn’t be double standards. The eurozone’s standing depends on these difficult decisions.”

Hollande has hinted he will spare the public sector from any major changes, avoiding the wrath of 5.3 million employees whose pensions are based on their last six months’ pay – typically the highest in their career – as opposed to the private sector which uses a formula based on a worker’s best earnings over 25 years.

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