Will Les Affaires Lead To Reform In La France?

It should have been Edouard Balladur's day of glory--the formal launch of the French Prime Minister's seemingly unstoppable campaign for France's presidency. But as journalists jammed a Paris hotel on Feb. 13 to hear Balladur intone his sleep-inducing plans for an ailing nation, far more compelling political dramas were unfolding elsewhere.

In Lyon, a media glare inaugurated the trial of a local businessman accused of lavishing gifts on French luminaries to help the career of his father-in-law, Lyon Mayor Michel Noir, also a defendant. In Grenoble, a judge refused to free the city's mayor, in jail since October pending a slush-fund probe. And in Paris, key Balladur ally Interior Minister Charles Pasqua was embroiled in a kickback scandal. So Balladur got only fifth billing on the nightly newscast, well behind these updates on les affaires. That's what the French are calling the many bribery, political financing, and self-enrichment scandals that have dogged many politicians and executives for a year.

NO LETUP. The scandals are just part of the problems afflicting France, where everything from corruption charges to high jobless rates suggests that corporate and government institutions are adrift. The turmoil raises doubts about the leadership of France's ruling elite, which until now was trusted to run the country with no need for public accountability. Faced with the obvious necessity for change, France's elitist system "is still resisting," says Yves Meny, a French political scientist and author of a book on corruption. But he expects criticism of France's dense concentration of power to mount.

There's certainly no letup in the bad news. Banking giant Credit Lyonnais is in need of its second government bailout in less than a year. Despite efforts of France's best financial minds to stanch the losses, some $18 billion in bad loans continue to hobble the company. Just one day after Balladur's speech, telecom blue chip Alcatel Alsthom had to deny another allegation of corporate misbehavior--that a subsidiary overbilled a French electric utility. The company is already facing charges that it massively overbilled France Telecom Group. Meanwhile, as the French read about corporate bailouts and allegations of wrongdoing, the economy as a whole is only meekly recovering, with joblessness at a stubbornly high 12.6%.

OLD BOYS. Although the French are worried about their jobs, they have not yet erupted in anger at their elected officials over les affaires, as happened in Italy last year. Partly that's because no top national leader has been tainted, and probes have produced few actual indictments--even though three Cabinet members have resigned and several corporate biggies have been questioned. Yet indictments and trials seem certain. The trial unfolding in Lyon is a precursor. Defendant Pierre Botton, a pharmacy executive, admits he spent $2.8 million on vacations and favors for nearly a dozen of France's elite, including the country's top TV anchorman. But he denies illegally using his company's money to fund this largesse.

A thorough courtroom exposure of how France's elitist system operates could provide a much-needed jolt to Gallic complacency. Liberals are hoping for a debate on how all these problems--kickback scandals, failed government bailouts, poor economic performance--connect with each other within the French system of dirigisme. Guided by this interventionist policy, the national government has long exerted far more economic and social control than is possible in most of the world's developed economies.

Dirigisme has provided the sense of protection and order the French cherish. Yet it also blurs lines, fairly begging industry to curry favor. "Business and politicians are in cahoots," says Antoine Gaudino, a private French fraud investigator. That's true especially at local levels. Observers aren't surprised that two companies that provide water and other municipal services have been at the center of several probes--Generale des Eaux and Lyonnaise des Eaux-Dumez. Crusading magistrates, meanwhile, are probing dozens of such questionable deals, throwing light on how France works.

On the international level, the cozy connections fostered by the country's protectionist model are highlighting France's competitiveness problem. Such arrangements may have been acceptable in a closed economy managed, in academic Meny's words, by "a network of extremely competent people that has great difficulty in adapting itself to the internationalization of the world economy." The country's airline, computer, telecom, and other protected industries seem doomed unless the French open up their system to let market forces work.

France made strides towards changing its system in the 1980s but never completed the process. Yet rival Germany has started to accelerate its transformation under the pressures of unification and competition from Asia and the U.S. Says Philippe Claude, a French venture capitalist at Atlas Venture: "The speed of change outside of France is accelerating quickly."

Meanwhile, the French keep making protectionist noises that seem increasingly out of place, as other Europeans commit to deregulating and opening their economies. For example, at a recent meeting in Bordeaux, European culture ministers shot down a French proposal to impose quotas on U.S. movies and television programs.

THWARTED EFFORTS. France--and Europe--need a strong leader in Paris to move the country away from protectionist leanings and clean up the corruption. Yet so far, the evidence is scant that Balladur is that leader.

Sure, he's firmly pro-European, and he'll fight to protect the franc--key to monetary union. He's also privatizing French industry. But he has continued the wasteful French penchant for subsidizing weak "national champions" such as computer maker Groupe Bull, Air France, and especially Credit Lyonnais. He's also a pushover for special interests. In late 1993, he fired Air France's chairman for resisting strikers' demands. In February, he cancelled a planned reform of French technical schools after students took to the streets. That bodes ill for selling French opinion on needed social and fiscal change, says Albert Merlin, an economist at glassmaker Saint-Gobain.

It's still possible Balladur could grapple forcefully with France's problems, once he has an electoral mandate of his own. Backers say he'll continue nudging France toward free markets and will tackle deficits seriously. Yet his new program seems skimpy. To create jobs--his top goal--he would switch some welfare costs from employers to taxpayers, boost training, and encourage part-time hiring. "These aren't measures--they're measurettes," says Philippe de Villiers, a right-wing splinter candidate for the presidency. Other French politicians don't have much more to offer.

The siege of scandals may yet lead to basic change. The government has outlawed corporate political giving. Shareholder activist Colette Neuville thinks a mood of accountability will spread in France, where corporate brass often act like minor deities. Says Bernard Liautaud, the 32-year-old chief of Business Objects, one of France's few successful high-tech startups: "When executives fail, they should not rebound to another company, like in musical chairs," a game played repeatedly in France Inc.

Yet old habits die hard. It may take more serious affaires than have surfaced so far, along with setbacks out in the global marketplace, before France's new rulers decide to make a clean break with business as usual. This is a crucial year for France.

Why France Is Adrift

The scandals are just part of the country's problems. With the recovery anemic, joblessness remains at a stubbornly high 12.6%. Banks are loaded with bad loans. All this disturbs the French, long used to trusting a technocratic elite

DIRIGISME State support of companies such as Credit Lyonnais leaves France unready to compete globally

TOUGH MAGISTRATES Judge Renaud Van Ruymbeke is investigating illicit political contributions

SPECIAL INTERESTS Government finds itself paralyzed by demands from students, unions, and other beneficiaries of state spending


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