Why Jospin Is Squandering France's Chance For Reform

It should be one of the best times ever for France to tackle long-overdue economic reforms. The economy is growing at a 3% clip. The government is getting $9 billion more than expected from tax revenues. And most of France's neighbors on the Continent are finally hurrying ahead to slash taxes, restructure their pension systems, and create conditions for faster economic growth. Indeed, European Union leaders are meeting for a summit in Lisbon on Mar. 23-24 to debate how they can create a continental New Economy.

But suddenly, French Socialist Prime Minister Lionel Jospin seems incapable of bold action. His government is adrift as his approval rating has sunk from more than 60% to below 50% in the past few weeks. One reason is his blunder on a recent trip in the Middle East, when he backpedaled on France's longtime policy of supporting the Palestinians. Another is ferocious opposition from the country's powerful public-sector unions, which represent more than 20% of the workforce, to almost any effort to streamline the welfare state. On top of that, Jospin is gearing up to battle Gaullist President Jacques Chirac in 2002. The Prime Minister badly needs to appease disgruntled left-wing constitutents.

ABANDONED PLEDGES. That's largely why Jospin is abandoning earlier pledges to modernize the economy. On Mar. 20 he scrapped a plan to streamline France's inefficient tax collection system after tax collectors staged a nationwide strike. Just a few weeks earlier, Jospin handed out more than $1.5 billion to striking health workers. He has also promised more money to teachers, who have been striking since early March. And in another bow to fellow leftists, he rejected proposals to let workers join private pension plans--even though the government retirement system is near bankruptcy.

If Jospin's government continues to waver on reform, the danger is that France will fall behind the rest of Europe in creating a competitive economy. True, the private sector is in good shape after massive restructuring--and is generating jobs. But the public sector is another matter. While most European governments have curbed spending, France's public sector grew last year to a record 54% of gross domestic product. To support lavish welfare benefits, French employers pay some of the world's stiffest taxes. And while neighboring countries have privatized most state-owned companies, the French government clings to vast holdings, including 63% of France Telecom and 44% of Renault.

Now, privatization and radical welfare reforms seem further than ever from Jospin's mind. Many analysts say the die was cast five months ago, when former Finance Minister Dominique Strauss-Kahn was forced to resign in a corruption scandal. The powerful Strauss-Kahn might have helped defuse opposition on the left, while implementing important reforms. His replacement, the low-key bureaucrat Christian Sautter, championed Strauss-Kahn's agenda but lacked his clout. Now Sautter is so discouraged he'll probably resign after the EU's Lisbon summit. In fact, Jospin is hinting at a major Cabinet shakeup soon--an almost desperate bid to shore up his government's position. No one expects him to pick aggressive reformers.

For now, Chirac is reaping political gain from Jospin's retreat. Chirac's popularity rating--well over 60%--is on the rise. The President and his allies are stepping up their attacks. "The Jospin method is not flexibility, it's flaccidity," declares Alain Madelin, who heads the pro-market Liberal Democracy Party. As the election fight picks up, there's little doubt that Jospin will become more and more distracted from France's structural economic problems. He's missing a key window of opportunity. Later, when economic growth slows, taking tough actions will prove much more painful.