Rouge Letter Day For The Right

The conservative victory in France's Mar. 21 parliamentary elections was so lopsided that even the winners seemed stunned. French voters so thoroughly rejected the ruling Socialists in the first round of balloting that conservatives should capture fully 80% of all parliamentary seats. That's a little too much for comfort, say some conservative politicians. They worry they'll have no alibis if they can't restart France's sputtering economy in the two years before the all-important presidential elections. "It's a very big responsibility on our shoulders," admits Edouard Balladur, the professorial Gaullist who is likely to become Prime Minister after runoff balloting on Mar. 28.

The risk is Europe's, as well. With their eye on the presidential prize, France's new rulers will be strongly tempted to please every special-interest group they can find--from fishermen who are rioting against cheap imports to labor leaders who want a franc devaluation to juice up the economy. To please farmers, conservatives promise an even tougher fight against the European Community's farm-subsidy deal with the U.S., thus scuttling a new round of world trade liberalization. The new regime also is expected to be more resistant to U.S. criticism of subsidies to the four-nation Airbus Industrie consortium.

The result may be a binge of go-it-alone protectionism that could knock fragile European unity on its ear. One fear in Brussels is that the conservatives will pick a brawl with fellow French citizen Jacques Delors, president of the EC Commission. The motive: to undercut Delors as the most credible Socialist successor to President Fran cois Mitterrand. "There's clearly a protectionist risk" under the new French government, says Norbert Walter, chief economist at Germany's Deutsche Bank. "In the short term it would hurt Europe," he observes. "In the long term, it would hurt France."

Indeed, a knee-jerk return to old French habits would be a tragedy for a country that has made stunning progress modernizing its economy. Ironically, the Socialists have hacked away at hoary controls. They have deregulated financial markets, ended wage indexation, eased restrictions on company layoffs, and liberated prices. No longer do cartels set the price of everything from baguettes to haircuts to funerals.

STRAW MAN. Such free-market moves have caused a riot of industrial restructuring that has boosted France's competitiveness faster than that of any European country. German companies, such as Volkswagen and Thyssen, are only starting the big layoffs and plant closings that took place in the 1980s at Renault and Usinor Sacilor. Under Mitterrand, France's manufacturing productivity has increased sharply and a score of big French companies have soared to the top of their industries, from tires to telecommunications. France has tamed inflation, and the franc is strong.

Yet the Socialists, along with France's economic growth, have run out of steam. They have clung to a welfare system that's a deadweight on business and to nationalized companies that are hobbled in a capitalist world. Now France's new rulers have a chance to attack those problems and propel their economy forward.

But the likelihood of success is only so-so. Right off the bat, electioneering will limit needed welfare cuts. The right, for example, probably won't touch France's gilt-edged retirement system even though deficits are soaring. Retirees typically stop work at age 60 and get 78% of their final salary. "Frankly, I have more faith in the Socialists to pursue conservative policies than in the right," says a top economist at the Organization for Economic Cooperation & Development.

France's lame-duck President won't make the Prime Minister's job any easier. A master manipulator who wants a Socialist successor, Mitterrand, 76, will do his best to make the conservatives look bad. He succeeded in the 1986-88 period of "cohabitation" with a rightist government by snarling parliamentary procedure.

To stymie the right this time, Mitterrand may even pass over its prime ministerial favorite, Balladur, and pick a weaker figure. Under the French Constitution, he can name anyone to the post, subject to a confidence vote in parliament. But the betting is on Balladur. Earnest and wry-humored, he's a behind-the-scenes negotiator who hates confrontation. Balladur vows not to devalue the franc, and he probably means it. Devaluing would be the deathblow for Europe's sickly monetary union. But he faces strong anti-European sentiment in his party. And skittish money markets can't forget that Balladur devalued the currency one month after becoming Finance Minister in 1986.

Conservative leaders argue that they won't need to devalue. The weak Socialist regime has lacked the clout to cajole Germany into cutting interest rates, claims Pierre Lellouche, an adviser to Gaullist party leader Jacques Chirac. "We'll have the strength to put on pressure," he promises. German diplomats argue that the French won't risk destabilizing the French-German relationship, because that would undermine France's own self-interest. But German interest rates could be a growing source of friction in the months ahead.

On the home front, privatization is one of the right's big economic goals. Although chairmen of nationalized companies have long claimed state ownership is irrelevant, they are now singing a new tune. "The state can no longer play its role as stockholder" because it lacks the funds to finance corporate growth, says Jean Gandois, chairman of Pechiney, the nationalized aluminum and packaging giant. "If Pechiney is not privatized, it will be a serious handicap."

MANIPULATIONS. One trouble is that what France has to sell are cyclical companies in the midst of an economic free-fall. Growth could be an anemic 0.5% this year, mainly because exports to Germany, which kept France afloat last year, are drying up. Conservatives had hoped to raise $10 billion a year from privatization, but the total could be half that, or less.

Free-marketers hope the conservatives engage in real privatization, rather than resorting to old French tricks, such as keeping a core ownership among banks and old-boy institutions. Another test of lingering dirigisme will be the right's support for bottomless-pit businesses based on nationalist grandeur. Computer maker Groupe Bull, for example, has soaked up $2.4 billion in state funds over the past 10 years, yet the company still can't make a profit.

But the ultimate challenge is joblessness, which is stubbornly stuck above 10%. That's what is costing the Socialists the parliamentary elections. Conservatives know they must do something or risk losing their third consecutive presidential election, two years from now. So they plan tax incentives to revive the moribund construction industry. They promise to free employers from welfare charges on new hires for three years. And they aim to launch a German-style apprenticeship system.

But in job creation, as in most areas, "the right's margin for maneuver is very small," says Francis Mer, chairman of steel giant Usinor Sacilor. Without a strong economic turnaround, France's shattered left could well come roaring back in 1995, as it did in 1988, after the last cohabitation. That assumes Mitterrand doesn't step down early. Although he's resisting calls to heed the electoral landslide and bow out now, his health is uncertain.

For now, Mitterrand and the triumphant right seem headed toward inevitable collisions--with each other, with Europe, and with the U.S. Backers of European unity are hoping French nationalism doesn't grow too strident in the process. If France's next Prime Minister can manage to play statesman at this crucial moment for European integration, that could yet prove the most nationalistic policy of all.