France's New Finance Minister: Moving Left To Right

Strauss-Kahn is proving more pro-business than expected

French Prime Minister Lionel Jospin's Socialist Party swept to victory in June by promising voters that it would create new jobs, slam the brakes on privatization, keep factories open, and shorten the workweek. Yet the stock market rose and business executives were sanguine. Many top managers even quietly voted for Jospin, believing the French left had a better chance of reforming the economy than the discredited right. Their bet was on the hidden agenda of Finance Minister Dominique Strauss-Kahn, whose Socialist exterior conceals an inner core of free-market beliefs.

A former Minister of Industry who has hobnobbed with most of the corporate chieftains in France, Strauss-Kahn is Jospin's secret weapon. Saying little in public but working deftly behind the scenes, the 48-year-old economist has put several privatizations back on track and is laying the groundwork for public-spending cuts. He is quick to admit that the state must become more efficient. "In a modern economy, the role of the state has to shrink," he says, in a rare departure from the Socialist party line.

TWO-FACED? Dressed in banker's pinstripes, Strauss-Kahn concedes during an interview in his modern office overlooking the Seine that he didn't do business any favors on July 21, when he imposed a 15% surcharge on corporate profits to help France meet the guidelines for the European monetary union. In the next breath, he insists that corporate profits are healthy enough to bear the tax and that France's real problem is weak consumption. Will the real Strauss-Kahn please stand up?

No, he won't. If he did, he would alienate a large number of his party colleagues, not to mention French voters, and would undercut his own power. Careful to clothe his words in Socialist rhetoric, Strauss-Kahn's reward has been the post of superminister in charge of finance, economy, industry, and the budget. He wields more power over public spending than any previous Finance Minister in the Fifth Republic. Now, his job is to walk a tightrope between voter-pleasing measures that will keep the Socialists in power and economic reform that will kick-start growth. "He's making gestures in two directions. He does one for the Socialists and then one for the free-marketers," says Philippe Moreau Defarges, a senior adviser at the French Institute of International Relations.

How does Strauss-Kahn pull off this balancing act? Blessed with a gift for communicating, Strauss-Kahn wins over his adversaries by negotiating behind closed doors. Unlike former Economics Minister Alain Madelin, who was ejected from Prime Minister Alain Juppe's government in 1995 after calling for unpopular spending cuts and civil-service reform, Strauss-Kahn avoids open confrontation.

YANKEE FAN. In addition, Strauss-Kahn's upbeat, debonair profile makes the French feel good about themselves. He is married to a popular TV journalist, Anne Sinclaire, and within Socialist Party ranks is probably one of the most business-savvy politicians. He is known to be far more supportive of U.S. economic policy than other leading Socialists, and, as Industry Minister, he helped smooth some controversial corporate restructurings. "He is attempting to give a pragmatic inclination to the government's economic policy," says Jean-Francois Mercier, European economist at Salomon Brothers in London.

Strauss-Kahn has shown how to avoid embarrassing his party while seeking compromise. For example, Jospin insists on reducing the French workweek from 39 to 35 hours with no cut in pay--a key Socialist campaign pledge--but Strauss-Kahn is already working to modulate its effects on business. Taking a leaf from German and Dutch policy, he has called for a national conference on employment and wages in September, at which he hopes employers and unions will take working hours and productivity into their own hands.

Similarly, insiders say Strauss-Kahn has persuaded Jospin to accept the privatization of France Telecom, insurer GAN, and defense-electronics giant Thomson CSF. "He's letting economic reality educate Jospin," says a senior corporate executive.

A hands-on minister, Strauss-Kahn works long hours--writing his own speeches and preparing press conferences on a Macintosh personal computer. But perhaps his greatest advantage is his personable style. Quick to smile, he can argue against tired ideology with party colleagues without offending them.

The outcome of such tactics will ultimately determine the longevity of Jospin's new government. Strauss-Kahn's goal is to bring France's economy into the 21st century without wiping out its cherished social benefits. But unlike Britain's new Prime Minister, Tony Blair, who brought his clever mix of pro-business and pro-labor policies into an already booming economy, Strauss-Kahn must try to push through his reforms in the face of high unemployment and sluggish growth.

The finance czar's big test--and the project that occupies most of his time these days--is the 1998 budget, due to be presented to the National Assembly in September. To reassure Germany that France can make the grade for European monetary union by posting a 1998 budget deficit no more than 3% of gross national product, Strauss-Kahn will have to tackle unpopular reforms. Last week's corporate-tax increase was only a stopgap measure. This fall, Strauss-Kahn will need to wield the ax on social security spending, hospitals, and public-sector pay.

Such moves are likely to provoke a backlash from an electorate already fed up with persistent double-digit unemployment. "The government will face social and political unrest" this fall, predicts Eric Chaney, a senior economist at Morgan Stanley in Paris. Already on France's best-seller lists is a dire book, L'Horreur Economique, by a popular writer who laments that mankind has been stripped of dignity by demands of the global economy--demands she says France should ignore.

PROSPERITY NEEDED. Indeed, some believe that Strauss-Kahn's efforts at compromise could turn into political impasse. "The Socialist Party can't change its view of the economy," insists Pascal Salin, professor of economics at the University of Paris. Since Jospin's majority relies on Communist support, Strauss-Kahn may find himself with his back to the wall.

Strauss-Kahn is betting that an economic recovery in France will grant him greater room to maneuver. But if reforms don't come fast enough, business may accelerate investment outside France, shifting production and jobs to more attractive locations such as Britain or the Netherlands, and undercutting the growth he's anticipating. Auto-parts maker Valeo announced on July 16 that it is considering shifting more production overseas if the new government's policies undermine productivity.

French executives say Jospin's superminister has two years to prove himself. So far, he has done an admirable job of straddling two political mandates. But the toughest part of the job for this master strategist still lies ahead.