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The head of the hardline CGT union Philippe Martinez announced the decision after an emergency meeting with the government.
“After tough talks with the interior minister, the union and student organisations obtained the right to demonstrate on a route proposed by the interior ministry,” Martinez told a news conference, calling the U-turn a “victory for the unions and for democracy”.
Earlier on Wednesday the Paris police chief, who answers to the interior ministry, said security concerns meant he had “no choice but to ban the demonstration” after unions refused to hold their protest in a large square, wanting instead to march through the capital’s streets.
It was the first time a union-backed protest had been banned since the early 1960s, drawing condemnation from lawmakers across the political spectrum and stirring tensions within an already deeply-divided ruling Socialist Party.
Dissident Socialist MP Christian Paul condemned it as a “historic error”.
“We are within a hair’s breadth of reaching a compromise on the labour law and that’s when the prime minister chooses to harden his position even further,” said Paul, who heads the left flank of the Socialists in parliament.
Security fears over violence
Far-right leader Marine Le Pen called the ban a capitulation to the masked protesters known as “casseurs” (breakers). In a tweet, she called the move a “serious violation of democracy”.
Even former rightwing president Nicolas Sarkozy spoke out Tuesday against a possible ban, saying it would be “unreasonable”.
The government initially insisted on a stationary demonstration, saying it would be easier to control, but the seven unions and student groups organising the demo dug in their heels for a march.
The two sides finally agreed on a shorter 1.6 kilometre (one-mile) alternative route proposed by the interior ministry.
The last big Paris protest, which passed through the Montparnasse and Invalides neighbourhoods on June 14, was particularly violent, with at least 39 people injured and damage to dozens of shops, banks, bus stops, a nursery school and a government ministry – and the Necker Hospital for Sick Children, where windows of operating rooms were smashed.
Hundreds of masked protesters and police fought running street battles and police fired water cannon in the south of the capital to quell the rioters.
A draft law, supported by the government, overhauls labour rules which would make hiring and firing easier.
The proposed labour reforms are designed to boost the economy and reduce the country’s record-high unemployment, which stood at 10.2 percent in the first quarter.
But the reforms have split Hollande’s governing Socialist Party and are decried by critics as an erosion of workers’ rights that will cost jobs rather than create them.
The controversial bill is currently before the Senate, which will vote on it next Wednesday.
Unions have already called for demonstrations on the eve of the ballot.
They are furious the government rammed the reforms through the lower house of parliament without a vote.
Hollande, who faces a re-election bid next April, had hoped for a signature reform to reverse his approval ratings, which are among the worst of a modern French leader.