Q&A: French Growth This Year Will Take a Hit (extended)
With the U.S. economy sputtering and Japan in a stall, will Europe become the engine of global growth? Or will it be the next to succumb? And could a slowdown make the already-difficult path to European economic and political integration even more rocky? Those are some of the questions on the minds of European Finance Ministers as they gather in Washington for a Group of Seven Finance Ministers meeting on Apr. 28 -- and none more so than France's Laurent Fabius.
A veteran Socialist politico who served as Prime Minister under François Mitterrand, Fabius is known for his free-market views and for his support of European economic integration, especially the introduction of the euro currency that will go into circulation in January, 2002.
Socialist Prime Minister Lionel Jospin brought Fabius, long seen as a potential political rival, into the government early last year in a move to restore confidence when economic reforms sputtered after the resignation of former Finance Minister Dominique Strauss-Kahn. Besides pushing for tax cuts and spending reductions at home, Fabius has spearheaded the Eurogroup, an informal organization of eurozone Fnance Ministers that aims to give them a unified voice on economic matters -- but that is seen by some as an effort to counterbalance the power of the European Central Bank. Fabius recently talked with BusinessWeek European Regional Editor John Rossant and Paris Correspondent Carol Matlack. Following is are edited excerpts of their conversation:
Q: How well can Europe withstand the global downturn?
A: Certainly there may be an effect here, caused by what is happening in the U.S., in Asia, and on the markets. Our projections for growth in France have been revised downward a bit. You have to be a realist. But Europe remains strongly resistant. Here in France especially, we have been less affected than some other European countries and consumption remains strong. We've also had improvements in productivity and in technological developments that are not even reflected on the books yet.
Europe is starting to believe in itself. So my prediction for this year is positive, and if the situation in the U.S. eases somewhat, the rate of growth in Europe should improve next year. There will not be a deep crisis, and things should start improving during the second half of this year. I am confident, vigilantly confident.
Q: Does it worry you that the ECB refuses to cut interest rates?
A: It's necessary to be coherent. I fully support the independence of the central bank. When you are a Finance Minister, you can't be in favor of an independent central bank and at the same time give them orders. The ECB -- they are intelligent people, they see economic realities, they make their decisions. It's not up to me to second-guess.
Q: Then what is the role of the Eurogroup?
A: It allows us to have, increasingly, a common economic and financial culture in Europe. When there are important decisions to make, European Finance Ministers now talk among themselves about it, and we try to take a common approach. It doesn't happen every time, but it is happening more and more. As a result, we are stronger in our national decisions.
For example, when we had the massive increases in the price of petroleum, certain countries began saying they would have to cut taxes dramatically. We had a meeting, and we decided that it would be extremely dangerous to create a direct link between the decisions of OPEC and our fiscal policies. We reached a consensus not to have a massive tax cut. That doesn't mean it's necessary to institutionalize the Eurogroup. It's important that we remain visible, and it's important that we become accustomed to making decisions together. After that, institutionalization.
Q: What changes do you expect from the introduction next January of euro currency?
A: For individuals, I think that after a while it will go smoothly. But I am still not sure that smaller businesses are adequately prepared. They must understand that everything within their enterprise must be prepared -- the accounting, the computer systems. The introduction of the euro is going to produce a considerable element of modernity, of Europeanization.
You can't, when you have the same currency as your neighbors, fail to understand that your economic situation is linked to theirs. As soon as the prices of different goods are set in the same currency, the determinants of these prices are going to be more harmonized. The financial markets will become more and more European. You've already seen movement in this direction, with the creation of Euronext [the stock exchange formed by last year by the merger of the Paris, Brussels, and Amsterdam exchanges]. It's going to continue to converge. And the business leaders I see here in my office -- now they are thinking about all of Europe and the world. When I was Minister of Industry 15 years ago, the feeling was very different.
Q: France has the highest tax burden of any major European country. With economic growth still relatively strong, isn't this the time to make structural reforms?
A: The tax system plays a key role not only for the competitiveness of companies but also for individual creativity. While the difference [in tax burdens] is not as great as sometimes said, certainly there are elements that need to be reformed. This is one of my most important objectives, and I continue to pursue it.
But we have done some important things: We have already adopted a plan to reduce taxes by 120 billion francs [$16.4 billion] over three years. I have also cut the budget deficit. We went from a 290 billion franc [deficit] in 1997 to 186 billion. You have to ask first where France's growth came from. It came, at least in part, from our policies, because confidence is important for growth, and our economic policy boosted confidence.
We have made decisions costing tens of billions of francs in an effort to give a push to our economy. We have created, during the past four years, 1.6 million jobs, and unemployment has dropped by more than 1 million. This has been our major achievement.
There is still much to do, but we have started the process. We've been accustomed in France, since 1789, to do things by revolution rather than by reform. Now we want to do things differently. It is safer. If we want reforms, we have to convince people and get the majority on our side. After all, we've been able over the past four or five years to have one of the highest growth rates in Europe and the lowest inflation rate last year. More jobs, less taxes, and a series of necessary reforms -- we must stay on the same path.
Q: The pace of privatization in France has slowed after some very important privatizations in the late 1990s. Why?
A: That is not true. It's taking place at a good pace. We have already had a second round of privatizations at several companies where the process began several years ago. For example, last year we had Thomson Multimedia and Banque Hervet. But it's not a matter of religion with us. Privatizing has to be useful to the industrial and economic strategy.
Take Electricité de France [EDF, the government-owned electric utility]. It's a company that's performing very well -- and therefore we don't plan to change it. Gaz de France [the government-owned gas utility] is a little different. My position is that it needs to change -- to become a public company, and to permit more outside investment. For example, we have talked about EDF or Total, and employees, taking a stake. We developed such a proposal, but we met political resistance.
However, I'm convinced that there will be a reform of Gaz de France because there is more and more competition in this sector. Now, all the big gas companies are simultaneously producers, transporters, and distributors, and other big enterprises -- oil companies, for example -- have taken stakes in them.
Q: Some say that Germany has become the dominant economic power in Europe, and that its vision for Europe is eclipsing France's. Are Franco-German relations getting strained?
A: There is one major point that we have in common with the Germans: Europe can only advance on the basis of our mutual friendship. It can't be directed by just one country. For example, the euro -- it was a very bold idea, and it came from the French and the Germans.
The fact that Germany has unified, and that a new generation of leaders has arrived, and the enlargement to the East, gives them greater economic force. You have a Germany that has more land and a greater population. For France, things are different. We are interested in both Eastern and Southern Europe.
[Regarding enlargement of the European Union,] we have been having discussions with the Germans over the past two months with the goal of exploring this subject more deeply. But so far as our relationship is concerned, I am optimistic. We are the closest neighbors having a central position in Europe. History is always about geography.