France: Is Chirac Finally Ready To Roll Up His Sleeves?

Seldom has a powerful new leader come to grief as quickly as French President Jacques Chirac. Just six months after Chirac won office, his approval rating has plunged to a mere 14%. It's easy to see why. Although he pledged to cut taxes, his government is raising them instead. And despite Chirac's vow to create jobs, unemployment has started rising--to 11.5% in September from 11.4% in August--after falling from a peak of 12.5% last December. Prime Minister Alain Juppe has taken only a modest stab at a third Chirac promise: cutting budget deficits. That has soured investors on France and threatens efforts to create a common European currency.

Now, Chirac and Juppe are scrambling to repair the damage. It's a last-chance effort for Juppe, whose approval rating has sunk below Chirac's. Partly, that's because of the regime's first big scandal: revelations that Juppe and his children got publicly owned apartments at cheap rents. If confidence stays low, Chirac may dump Juppe in a few months. His likeliest successor: centrist Raymond Barre, a free-market economist adored by financial markets.

SINKING. Juppe's job hinges on plans for fiscal rigor, outlined by Chirac on Oct. 26. The "priority of priorities," the President declared, will be to cut budget deficits--from 5% this year to 3% in 1997. That's a requirement for European monetary union, but it's also supposed to build investor confidence and permit lower interest rates, thus juicing an economy that is sinking toward possible recession late next year. Since Chirac announced his new tack, he and Juppe have publicly jawboned the Bank of France to cut rates.

Will Chirac and Juppe finally make good on their promises? The markets think so. The Paris Bourse--Europe's worst performer this year--jumped 5% in the two days after Chirac's deficit-cutting pledge. "There's a change in tone--I'm more encouraged about France than I've been in a long time," says Darren Williams, an economist at Merrill Lynch & Co. in London. Yet there's plenty of reason for skepticism. French deficits this year--from the health-care system to the state railway--are topping forecasts. "They will become more difficult to control as the economy weakens," warns Ulrich Ramm, an economist at Germany's Commerzbank.

The first test will come on Nov. 13, when Juppe will give Parliament his plan to halve France's $12 billion social-security deficit. He'll likely propose a 1% income-tax surcharge, contributions by retirees, and a small deductible on every medical claim. Juppe is also expected to make public employees work longer for full pension benefits--a reform applied to private-sector workers two years ago.

ARSON. But Juppe is sure to meet strong resistance. State workers shut France down on Oct. 10 in a warning strike on benefit cuts and privatization. On Oct. 30, 3,000 tradesmen set fire to the welfare office in Bordeaux, partly to protest high social-security taxes. And public employees threaten new strikes. Many observers think Juppe's resolve will wither, further weakening the franc.

It's not just marchers who are upset with Juppe. Business leaders wish he would cut state spending instead of hiking taxes. The Patronat, France's employers' association, has been strongly critical, an unusual reaction to a conservative government. Even Chirac's backers in Parliament, where he enjoys an 80% majority, have grown restive: Recently, they voted a $2 billion spending cut and told Juppe to figure out where to apply it. "Chirac is pleasing nobody," says James Lister-Cheese, an economist at Independent Strategy, a London investment adviser. Since his popularity can't get much worse, the time seems ripe to start the controversial reforms his country needs.

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