A New Maginot Line

With the French raging against the demands of globalization, real reform could become impossible

French President Jacques Chirac thought he could win a fresh mandate for his beleaguered government by calling elections a year early. Instead, he has plunged his country into political chaos. In the first round of voting on May 25, French citizens threatened to erase Chirac's 175-seat parliamentary majority and perhaps even install his opponent, Socialist Lionel Jospin, as Prime Minister. More ominous, they voiced their disgust with a stalled economy and a reform plan that represents France's only current hope of turning from a hyper-regulated social democracy into a competitive world power.

No matter who wins the second round of voting on June 1, the electorate's mood spells trouble for Paris--and for Europe. Chirac's conservative coalition had pushed for privatization, deregulation, and other reforms that voters have made clear they'll resist. The Socialists, meanwhile, have stumped on a job-creation platform that's in direct conflict with the austerity needed for European monetary union to work. "The French are saying they don't want globalization, they don't want competition, they don't want an unraveling of their social system, they don't want monetary union if it means hardship," says Smith Barney Inc. international economist J. Paul Horne. "What they want is to build a Maginot Line against the world economy."

Their timing couldn't be worse. For several years now, governments across Europe have strained to cut budget deficits, pare debt, and reform costly welfare programs to qualify next year when the founding members of a single European currency are chosen. The rules require that EMU members' budget deficits be no higher than 3% of gross domestic product and that external debt be 60% or less of GDP.

WORRISOME. Over two years, Chirac has beaten France's deficit down to 3% from 5% of GDP. And as Europe's second-largest economy, France's participation in EMU is essential. But in response to voter sentiment, France's next government is likely to ask Germany for concessions that will weaken the criteria for monetary union, giving France leeway to stimulate its domestic economy. "This was a warning shot [on EMU] from the French populace," says researcher Peter R. Weilemann at the Konrad Adenauer Foundation, a think tank tied to German Chancellor Helmut Kohl's Christian Democratic Union.

What's worrisome is that the new French government may get its way, lowering Europewide standards for monetary union and virtually guaranteeing a weak euro, as the new coin will be called. For example, German Finance Minister Theo Waigel has already asked for revaluation of Germany's gold reserves so the gain can be applied to the country's budget, pushing German debt down to the mandated 60% next year. On May 28, the Bundesbank voted yes on gold revaluation but no on fudging the budget numbers. But the Kohl government could push the measure through anyway. France's Jospin is already crowing that Germany has caved in on rigorous application of EMU standards.

If Germany relaxes the rules, France would take more bookkeeping liberties to crawl in under the EMU wire. And Jospin would press for early inclusion of Italy and Spain--countries whose long-term commitment to budget austerity is questionable. Financial markets are expecting the worst. The German mark soared against other European currencies on May 28, as traders again considered it a safe haven.

The French Socialists' strong showing had other ripple effects in Europe. On the same day as the Bundesbank vote, Jospin joined forces with Germany's opposition leader, Social Democratic Party Chairman Oskar Lafontaine in calling for a Continentwide job-creation pact. Workers in 23 European countries held rallies to shout the message that unemployment, not budget restraint, should be their governments' principal concern.

The May 26 resignation of French Prime Minister Alain Juppe underscored that France's government is heeding the electorate's anger. In doggedly pursuing efforts to wean France from its welfare-state traditions, Juppe became a lightning rod for protest votes. In the first election round, the Socialists and their Communist allies claimed 33.7% of the vote, vs. the conservatives' 30%. That could position them for an absolute majority in the second round and force Chirac to establish an awkward alliance by making Jospin his new Prime Minister--a recipe for gridlock on reform.

Even if Chirac's coalition scrapes by, he will have to acknowledge France's antireform sentiment. To soothe voters who reviled the technocratic Juppe, Chirac may pick Philippe Seguin, the populist and nationalistic parliamentary speaker, as his next Prime Minister. Another possibility is Chirac's old political rival, Edouard Balladur. Although Balladur has always been pro-reform, in the wake of the election he is likely to slow Juppe's drive for a public-sector overhaul and to demand softer terms for EMU.

SLASHING. The Socialists, meanwhile, have promised to halt several planned privatizations and create 700,000 new jobs, half in the public sector. They also want to end the social-program cutbacks that Juppe had pursued to lower France's budget deficit and prepare it for EMU. Although the Socialists support monetary union, Jospin's agenda flies in the face of France's progress toward the single currency. That's one reason voters, most of whom despise the idea of monetary union, gave the Socialists the votes they did.

Yet with their commitment to EMU, the Socialists are in a tight corner. To keep France's deficit below 3% of GDP, the government needs to cut at least $10 billion from the 1998 budget to be prepared this fall. That kind of slashing was what got Juppe in trouble. And it would put the Socialists on a collision course with their Communist partners, who fiercely oppose the single currency but whom Jospin would need to maintain a leftist majority in Parliament.

Some business leaders believe that the Socialists may actually do better reconciling their program with a single European currency and European integration than Chirac's team would. "Jospin might be even easier for pro-Europeans than the Gaullists, who still believe in the nation-state," says Zygmunt Tyszkiewicz, secretary general of the Europewide employers' association.

But so far, the Socialists' gains don't look promising--either for France's long-term economic progress or for Europe's vision of a strong new currency union. Given the country's competitiveness crisis, "France is going to have to confront structural reform, whatever the [election] outcome," says Christian de Boissieu, economics professor at the Sorbonne. Yet voter rage has made the next government's job of dealing with these issues all but impossible.

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