It appears that Chirac has surrendered to the protests against the CPE. While the replacement policy he has promised could revive moves towards greater labour market flexibility it seems unlikely he will risk a revival of the protests. Most likely the law will be replaced with a new measure which either introduces no significant change or an active harm such as 'job creation' (as Marginal Revolution notes even the economists still support such ideas in France).
As I have noted in an earlier post this situation appears to be the result of a political mainstream able to put the interests of an employed population interested in stability above those of the unemployed even with staggering numbers out of work. All this requires is a belief that the unfortunate are best helped by the state and a disturbing desire for security at any cost among French youth. The Economist was right to note that, for all their rebelliousness, they display a "chilling lack of ambition" when asked to face the more mundane risks of the job market.
If there was a chance for Sarkozy to demonstrate that he is something more than a political fighter this was it. Instead he has chosen to play this as another political game and humiliate a rival. While this is evidence of some political nous it does not suggest that he can be expected to achieve much if he becomes leader. While he has talked of a need to change the system this change will not come easy and is unlikely to be achieved by a leader who is not steadfast in its support. Perhaps this is not such a surprise, his support for 'industrial champions' over the years suggests that he shares the preoccupation of the French political class with an long out of date mercantilist approach to capitalism.
France has the potential to be an enormous success but if its leadership does not start showing some statesmanship it faces the same fate as Italy; chronic and banal decline. Even if a French Thatcher is not on the cards the competence and steady improvement of a Merkel would make a huge difference.