A Horse Race In France Has The Markets In A Lather

Until now, France's presidential election campaign has been a tedious affair, with conservative Prime Minister Edouard Balladur easily outdistancing all his rivals. But suddenly, French politics are splintering into their more normal chaotic state. A telephone-tapping scandal involving Balladur's Interior Minister Charles Pasqua has sent the Prime Minister's strong ratings plunging. Now, the two-round election of Apr. 23 and May 7 is a horse race. Polls show Balladur running neck-and-neck or even behind his main opponents, Socialist candidate Lionel Jospin and neo-Gaullist leader Jacques Chirac.

As the candidates scramble for votes, their heated campaign rhetoric will bring many of the tensions in French society to the surface. Balladur, the probusiness centrist, stands for a France committed to a strong franc, tighter links with Germany, and European solidarity. Jospin embraces the old socialist visions of a protective state and a heavily regulated economy. Chirac will be stumping on a platform that puts French interests first and such Europolicy matters as a single currency second.

SCARED BY CHIRAC. The uncertainty brought about by this free-for-all is rattling the markets, which have pushed the franc down to record lows against the mark. Investors are noting nervously that Balladur, despite his free-market views and fiscal conservatism, has so far been unwilling to cut the deficit, which is stuck at 5.7% of gross domestic product. Fixing the deficit would force a slash in the French social safety net that any politician would dread making, especially with unemployment at 12.3%.

The market is hoping that Balladur, if victorious, would show more resolve as President and make the biggest effort to cut the deficit. Chirac is a scarier alternative. Balladur claimed on Mar. 1 that Chirac, who is now on his third presidential bid, would spend too freely and destroy the franc. Those are strong words for the mild-mannered Balladur, but the markets fear he may be right. If elected, Chirac could decide to cement his popularity by devaluing the franc, thus engineering a scenario to boost exports and cut interest rates. In bondholders' eyes, such a policy would do serious harm to the low-inflation image of France's economy. And it would weaken French plans to stay on an equal monetary footing with Germany. If Chirac emerges as the favorite after the runoff election in April, the pressure on the franc would rise.

PHONE-TAPPING FRACAS. Meanwhile, Jospin, a former Education Minister with a squeaky-clean image in a scandal-plagued nation, seems a throwback to discredited Socialist policies. He vows to halt France's march toward privatization, begun by Chirac as Prime Minister in 1986-88 and continued by Balladur when conservatives retook parliament in 1993. Jospin also wants a shorter workweek and higher taxes on investment income. His election would be a setback for France's efforts to build industrial competitiveness.

Jospin could only win in a reprise of the 1988 presidential race, when Chirac and his rightist rivals helped reelect Franois Mitterrand by tearing each other to shreds. It's Chirac who's fanning the phone-tapping sparks against Pasqua, who was purportedly trying to block a judicial probe into a political financing scandal that could hurt him and Balladur. Pasqua, a law-and-order, anti-immigration rightist, has lost his lead to become Balladur's Prime Minister as a result. Before it's over, the race to run France for the next seven years may hold a lot more surprises. And international investors will be nervously following every turn.

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