Chirac: Last Days of Grace?

A weak economy could torpedo the President's popularity

This ought to be Jacques Chirac's finest hour. At a time when just about every other major European leader is facing unprecedented political pressure -- think of British Prime Minister Tony Blair, Spanish Prime Minister José María Aznar, and German Chancellor Gerhard Schröder -- France's 70-year-old President is riding high. Make that spectacularly high. Never in the 45-year-old history of France's Fifth Republic has a President enjoyed approval ratings like the ones Chirac can boast of today. Thumbing his nose at the U.S. and Britain on Iraq over the past two months has given him a 75% approval rating. "It would be hard to go even higher," says Pierre Giacometti, director of Paris polling firm Ipsos. "The public feels this is the first time in a long time that France is very influential on the world stage."

But with trouble brewing on two key fronts, the blissful lune de miel between Chirac and France could fall apart. Behind the domestic accolades Chirac is receiving for his international stance, the French economy is running out of steam. Unemployment is rising, bankruptcies are soaring, and government finances are in a ferocious squeeze.

Moreover, Chirac's very handling of the Iraq crisis is a high-risk policy that could easily backfire, isolating France. With new European Union candidates recoiling against the perceived high-handedness of Paris, the overall French position within Europe has been weakened. At the same time, French executives are increasingly fretful about strained relations with the U.S., France's largest export market outside Europe. "We've told the government privately just how worried we are," says the CEO of a major French corporation with extensive activities in the U.S.

The awakening could be rude. "I think reality is going to hit hard," says Pierre Lellouche, a free-market and pro-NATO gadfly in Chirac's own center-right party. "There really is a major economic crisis, and once the smoke screen of the Iraq crisis clears away, there will be a realization of the problems we face. If, on top of that, we are having a nasty economic war with the U.S., that can only complicate things further."

After outperforming most of its neighbors for the past two years, France's economy does look increasingly wobbly. Most analysts expect first-half growth of no more than 0.3%. Growth could slow even further if the Iraq war extends into May. Unemployment, already above the European average of 7.9%, is at 9.2% and rising, even though many companies are avoiding big layoffs as long as possible. Industrial order books have hit their lowest level since the aftermath of the September 11 attacks, while consumer confidence is at its lowest point since 1996. Addressing a group from tire giant Michelin on Mar. 31, Prime Minister Jean-Pierre Raffarin admitted that "there is a break in growth that is unprecedented in our recent history."

Harsh medicine may be needed. Already, Chirac is having to backpedal on a promised income tax cut this year, after a 5% reduction in levies last year pushed the budget deficit over the 3% limit set by the European Growth & Stability Pact. The ballooning deficit puts pressure on the President and domestic-policy point man Raffarin to reduce government spending. But that's political dynamite in a downturn, when more people turn to the government for help. It also means France can't easily use public spending to prime the economy as it traditionally has done. "Even if we see a rebound next year, growth will be seriously slowed by the government's need to control the budget," says economist Laure Maillard of Paris-based bank CDC Ixis.

Under the French presidential system, where the head of state sits at a semi-monarchical remove from day-to-day policy, the Prime Minister usually takes the heat first when things start to go awry. Sure enough, Raffarin, whose country-lawyer bonhomie made him the darling of the French electorate, is seeing a swift erosion in support. His popularity now stands at just 52%, the lowest since he took office last June. With Raffarin set to unveil the government's pension-reform proposal on Apr. 11, labor unions have called for a wave of strikes to disrupt public transit and air travel.

As Raffarin gets chewed up, Chirac could be next. What both men desperately want to avoid is a repeat of 1997, when the previous center-right government was thrown out of office in a snap election after its economic reform efforts sparked paralyzing strikes. Today, France's sense of national unity could evaporate when Chirac starts tackling tough issues. "He will become unpopular again if he manages economic problems badly," says Giacometti of Ipsos.

Given these threats and Chirac's populist record, few in French business think the French President can stay the course in a protracted struggle over badly needed reforms. "Will there now be a willingness to be more ambitious? That's not obvious, to say the least," worries Serge Weinberg, CEO of $29.5 billion retailing giant Pinault-Printemps-Redoute.

Chirac's domestic-policy challenge is not the only thing worrying France Inc. Few of the business elite have dared to criticize the government publicly on its handling of the Iraq crisis, but in private, many worry about the long-term effect on the image of France. Former U.S. Ambassador to France Felix G. Rohatyn, now on the boards of such French groups as aerospace and media giant Lagardère and utility conglomerate Suez, says French CEOs are "very concerned" about the breach in transatlantic relations.

Although France's tough position has won plaudits in Arab and African nations, that is unlikely to translate to a tidal wave of contracts for French businesses. The lion's share of France's external trade is with Europe and North America. Few French outfits are excited about redirecting business toward impoverished nations. "Chirac has won over the South," says Jean-Paul Betbeze, chief economist at Crédit Lyonnais. "But so what?"

There are signs that Chirac is seeking to repair some of the damage. On Apr. 1, Foreign Minister Dominique de Villepin told Parliament that "in this war, [France] is on the sides of its allies, the democracies." And while tensions remain high with the Americans, attempts are being made to repair relations with the British.

Yet some say Chirac, a man who loves dramatic political gestures, may have some more grandstanding up his sleeve. Advisers are hinting he is considering aggressive proposals on pushing forward European unification -- in part as an answer to critics who charge that his policies have divided the European Union as never before. Ideas being looked at range from integrating European armed forces to merging various German and French government ministries. Bold initiatives indeed. But Chirac may soon be playing with a weakened hand.

By John Rossant, with Carol Matlack and Christina Passariello in Paris

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