France: Raffarin Can't Afford to Wait on Reform

Jean-Pierre Raffarin is riding high. While his fellow European leaders Tony Blair, Gerhard Schröder, and Silvio Berlusconi are slumping in the polls, the center-right French Prime Minister has an approval rating above 60% and climbing. The self-effacing Raffarin has proven a masterful politician since taking office six months ago. Along with Interior Minister Nicolas Sarkozy, he is winning accolades after a 5% drop in crime this year. On the economic front, he has delivered a promised 5% across-the-board cut in personal income taxes, and, in a gesture welcomed by business, eased overtime restrictions to soften the 35-hour workweek, while lifting some draconian anti-layoff rules.

But the honeymoon probably won't last much longer. Within the next few months, Raffarin will have to tackle some of France's most politically explosive problems. And he'll have to do it in the middle of an economic downturn, with unemployment at 9% and the gross domestic product growing only 1% this year and probably less than 2% in 2003. Don't expect the 54-year-old Prime Minister to take many risks. The last time conservatives ran the government, in the mid-1990s, an economic restructuring program that included pension reform sparked strikes and led to a 1997 election victory by the Socialists. "He is obsessed with not wanting to repeat that experience," says economist Christel Rendu de Lint of Morgan Stanley.

Raffarin can't afford to wait, though. With the ranks of retirees growing, the publicly funded retirement system is running short of money. Pension expenditures are expected to rise from 12% of GDP today to 15% in 2015. Raffarin has pledged to unveil a pension reform plan during the first half of 2003 but hasn't given details. Another urgent task is reducing public spending. Swelling French budget deficits, likely to top 2.6% of GDP next year, are close to breaching the limits of the euro zone's Growth & Stability Pact. And the heavy charges employers pay to support the welfare state are hobbling France's competitiveness. Indeed, France ranks among the worst in Western Europe, according to a recent World Economic Forum competitiveness survey. "We like Mr. Raffarin, but we need to see strong action," says Bruno Vanryb, president of MiddleNext, which represents midsize companies listed on the Paris stock exchange.

The Prime Minister has some maneuvering room. He has told French workers that he won't take away their right to retire at age 60 with full pension benefits. But he could tighten rules for some public workers who can retire at 55 and enjoy more generous benefits than private-sector workers. Raffarin also has an opening to trim public spending by not replacing some of the 60,000 civil servants who will reach retirement age in 2003. But he seems unlikely to cut radically. The roughly 3,000 government jobs he has eliminated so far were almost entirely offset by law enforcement hiring. "The government relies too much on the advice of civil servants, who always [argue] that [bureaucratic reform] is impossible," says Michel Gurfinkiel, editor of the pro-market magazine, Valeurs Actuelles.

Avoiding labor strife will be a key challenge, and that's where Raffarin's political skills could come in handy. He has cultivated good relations with centrist unions such as the Confédération Française Démocratique du Travail (CFDT), while making clear he won't tolerate disruptive strikes. His poll ratings shot up in November after he and Sarkozy forced truckers to back off a threatened nationwide action by warning that police would quickly remove any roadblocks set up by strikers. The question is whether Raffarin's reservoir of goodwill is deep enough to sustain him as he steps up the pace of reform.

By Carol Matlack in Paris

Edited by Rose Brady

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