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Analysis: Steel reprieve comes at price for France's Hollande

France's President Francois Hollande speaks at a news conference at the end of the first session of a two-day European Union (EU) leaders su
France's President Francois Hollande speaks at a news conference at the end of the first session of a two-day European Union (EU) leaders su

By Mark John

PARIS (Reuters) - Francois Hollande's bid to rescue steel furnaces in France's historic industrial heartland was to be the mark of a president on the side of the workers and a state with the courage to bring a multinational to heel.

But the two-month stand-off over steel giant ArcelorMittal's Florange plant in Lorraine has unnerved investors in the euro zone's second largest economy, confused France's unions and exposed his six-month-old government to international ridicule.

His Socialist allies have hailed as a victory a late-Friday compromise under which ArcelorMittal agreed to invest 180 million euros to expand the site near the German border over five years and hold off making forced redundancies.

But as the European steel sector struggles to cope with over-capacity, the furnaces themselves will remain shuttered for now, and questions remain over the exact fate of the some 630 workers employed there and further funding needed for expansion.

With unemployment at 14-year highs of 10 percent and his popularity ratings at record lows for a president only half a year into his mandate, there was clear political advantage for Hollande to lock horns with Indian steel magnate Lakshmi Mittal.

But the result is at best a no-score-draw, and the tactics used - anti-business rhetoric and the threat of nationalization - could damage his wider reform effort.

While his pugnacious, micro-managing predecessor Nicolas Sarkozy led from the front, Hollande let his ministers lead the fight, creating confusion over who runs industrial policy.

Arnaud Montebourg, the firebrand leftist industry minister who pushed the nationalization option hardest, declared Mittal a persona non grata in France and revealed he had found an anonymous potential buyer ready to invest in the plant.

That was lapped up by international critics including London mayor Boris Johnson, who told executives in New Delhi that the "sans culottes" revolutionaries had taken control in Paris and advised them to bring their investment rupees to Britain.

RHETORIC VS REALITY

Montebourg later retracted his personal attack on Mittal but then had to watch as aides of Prime Minister Jean-Marc Ayrault, who announced the final accord, briefed media that his putative investor was neither "credible or solid".

Facing opposition calls to resign, Montebourg went on local television on Saturday to announce he had Hollande's support and insist he felt "not betrayed, merely let down" by the outcome.

But worse than the damage done to the credibility of one of Hollande's most high-profile ministers, many fear the cacophony further shakes France's image as a place to do business just when it needs all the help it can get to avert recession.

"It has been a disaster," a senior French banker said last week as the episode unfolded.

"Even for sophisticated investors who understand that in France there is a difference between the rhetoric and the reality, this is hugely unnerving."

Elie Cohen, economist at the CNRS public research institute, told the commercial i>Tele television network that by raising the option of nationalization, Montebourg risked encouraging copy-cat demands by workers at other struggling sites.

It is still too early to say whether the Florange wrangling will hurt foreign investment in France, which Bank of France data show has grown modestly since the 2008/2009 global turndown to hit 30 billion euros or 1.5 percent of output last year.

Barely noticed last week, U.S. online giant Amazon said it was opening a new distribution centre in northern France that will create up to 2,500 jobs - four times the number at the Florange furnaces and a reminder that 80 percent of France's economy is now in the services sector.

UNIONS FEEL BETRAYED

Vital to France's long-term prospects is whether Hollande obtains in coming weeks the overhaul of the country's unwieldy and expensive labor regulations which he has tasked employers and unions to achieve in negotiations by year-end.

For that, France's trade unions must make unprecedented concessions to allow business more flexibility in hiring and firing. But the government handling of the Florange tussle has left many labor leaders feeling betrayed.

"Until the last minute, basically, we were made to believe that temporary nationalization was essentially a given," Edouard Martin, head of the Florange chapter of France's large CFDT union, told RTL radio.

"We did not understand this last-minute fix-up in which Jean-Marc Ayrault unveils an option never before discussed ... We get the feeling he was lying to us all along."

A big test now will be whether unions have been riled so much that they stonewall in the labor reform talks. It could also make some more prone to protest if the government makes the extra public spending cuts that analysts say could be needed next year to ensure France hits its deficit-cutting target.

For now, both sides hope the battle of Florange is over.

ArcelorMittal has welcomed a deal that includes commitments on voluntary redundancies and re-deployment of furnace workers elsewhere in its French activities that go little beyond what it would likely have offered without government intervention.

Hollande's office concedes he did not manage to get the furnaces re-opened as he promised during his election campaign, but argue the deal to expand activity in the current poor economic climate is a victory of sorts.

Whether the accord goes ahead in its entirety partly depends on variables outside the two parties' control, including 400 million euros' worth of European Commission funding.

It may not be quite the end of the story.

Referring to the nationalization threat, one Hollande aide noted: "We are still keeping that revolver on the table."

(Additional reporting by Nicholas Vinocur, Julien Ponthus and Elizabeth Pineau; Editing by Will Waterman)

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