Tax Cuts Or Strikes? A Lose Lose Proposition For France

Autumn is protest season in France, when labor leaders try to whip up strikes and demonstrations to bend government policy for the coming year. Last year, street plebiscites worked beautifully. Weeks of protest marches led to a December strike that crippled France for three weeks and quashed plans to cut civil servants' benefits. Now, the labor boss who led that triumph, Marc Blondel of the Force Ouvriere union, thinks he can stop the budget-cutters again. "All the ingredients are there for a general explosion," he says.

This time, however, France's once-burned Prime Minister, Alain Juppe, has more street smarts than last year, when he was a bungling novice with only a few months on the job. He has launched a broad tax reform, including $5 billion in immediate income-tax cuts, to defuse discontent.

The move shocked some economists. It forces Juppe to struggle that much harder to cut France's budget deficit and qualify for Europe's planned single currency, scheduled to begin in 1999. Juppe claims that lower taxes will stimulate the stagnant economy, boosting state receipts. "That's a dream," says Eric Chaney, economist at Morgan Stanley Co. in Paris.

Still, Juppe's transparent grandstand play may prove smart. Nothing would kill Europe's monetary union more decisively than prolonged strikes in France. A frozen economy would cut government tax revenues and increase welfare payments. Juppe might also have to backtrack on budget-cutting to get protesters off the streets. That would sink the franc, already at a six-month low against the German mark, in part from fear of another hot autumn.

KEY MOMENT. Juppe's skill in silencing French protesters is critical for Europe. France is the swing country for monetary union, and 1997 is the target year for getting Europe's budget deficits down to 3% of gross domestic product. The French won't make it, but they must come close enough to let negotiators gloss over the shortfall. Morgan Stanley's Chaney forecasts a French deficit of an acceptable 3.3%, thanks to a new Juppe plan to grab $7.5 billion of the proceeds from the privatization of France Telecom, the state phone company. Without that, he pegs the deficit at 3.6%.

Monetary union is the root cause of much unrest all over Europe. German unions on Sept. 8 gathered 250,000 workers in several cities to protest budget austerity. However, Germany is now pulling out of a minor recession and may hit the 3% target for the new Euro currency. Three years of austerity in France, by comparison, have kept the country in a state of chronic near-recession and have held unemployment above 12%.

ALPINE TRAGEDY. While Juppe toils to keep France on track for the single currency, he hopes his tax cuts will pump oxygen into the sickly French economy. France can use it. In the second quarter, the economy shrank by 0.3%. Consumers have been so tight with their money that even top restaurants are closing. The latest is the Auberge de l'Eridan, a gastronomic palace in the French Alps that won the ultimate third star in the Michelin Guide last year and expanded as a result. Now, business is down, banks won't renew loans, and owner Marc Veyrat expects to close in October.

France also needs to address its stigma as one of the world's most heavily taxed nations. Its top personal income-tax rate is 56.8%. Juppe's new tax plan will gradually cut that rate to 47% over five years and reduce lower brackets even more. Juppe urges consumers to spend the savings--in advance, if possible. He hopes they won't notice that sales taxes on gasoline, alcohol, and tobacco will rise to partly offset the revenue loss. In mid-September, Juppe will submit a 1997 budget that will hold government spending to 1996's level, a real cut of 3% after inflation.

France's conservative leader also has strong partisan reasons for tax cuts. Both he and his boss, President Jacques Chirac, remain deeply unpopular. They came to power in May, 1995, promising to lower taxes. Instead, they raised them by $24 billion this year to help cut the deficit. Conservative legislators who fear losing their jobs in the 1998 elections have been urging Juppe to make good on the promise. The $5 billion cut for 1997--0.3% of gross domestic product--is only a start, he vows.

Labor bosses rightly argue that Juppe's largesse is minuscule. Yet some analysts think that the Prime Minister may have upstaged them. Protest organizers should have a tougher time rousing the rank and file than last year, when the government was proposing sweeping reforms of public-sector jobs. This year, union complaints are more diffuse. After the hard lessons he learned last year, Juppe stands a good chance of staying one jump ahead of them.

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