France's Economic Reforms: Fizzling Out?

Is economic reform the latest victim of France's deadly summer heat wave? Only three months ago, Prime Minister Jean-Pierre Raffarin and his center-right government were celebrating their overhaul of the pension system. Another round of reforms looked set to get under way soon. But now the momentum seems to have evaporated. Raffarin says he won't offer a health-care reform plan, originally scheduled for this fall, until late 2004. He's also delaying a plan to reorganize the education system. And while Raffarin had called earlier for trimming 30,000 jobs from the government bureaucracy in 2004, the budget proposal he unveiled on Sept. 25 calls for only 4,500 job cuts.

AN EXODUS OF SUPPORT. What's slowing Raffarin down is political heat. His approval ratings have melted, from about 60% in January to less than 40% in recent polls. Although he won plaudits for facing down nationwide strikes to win pension reform, the fight cost him support. The August heat wave only made things worse: Many French say Raffarin's government bears some blame for an estimated 14,800 deaths because public health-care facilities were understaffed, and many officials were on vacation and slow to respond to the emergency.

Raffarin's friends say he hasn't lost his zeal for reform. "He's really deeply involved in the process," says Jean-Paul Betbeze, chief economist at Crédit Lyonnais. Raffarin, while pursuing some reforms, such as privatizing state-controlled companies, has resisted making deep budget cuts for fear of plunging France's economy into recession. But he's also worried about local and regional elections next March. Although no parliamentary seats are at stake, the vote is shaping up as a referendum on the government's performance since it took power in June, 2002. Conservatives fear that if they push now for changes in health care and education, interest groups such as doctors and teachers could whip up antigovernment sentiment. The public already has doubts: A recent survey by pollster BVA showed that two-thirds of the French disapprove of the government's economic policies.

Yet Raffarin can't afford to wait much longer to trim France's costly welfare state. Although the national health-care system is supported by some of the world's heaviest payroll taxes, it's running a deficit of nearly $12 billion this year, with spending rising 6.4% annually. The government has proposed a few stopgap measures, such as increasing hospital patients' out-of-pocket payments and reducing reimbursements for certain drugs. But that will save only about $3.5 billion. To achieve bigger savings, the government would need to take far more radical steps, such as clamping down on generous prescription-drug benefits. France already faces the threat of stiff fines by the European Union if it fails to reduce its budget deficits, which for the third year have breached the 3% ceiling set by the euro stability pact. Just as important, it risks falling behind neighbors, such as Germany, that are finally getting serious about reform. "There is political agreement now in Germany that they really have to do something," says Eric Chaney, chief euro zone economist for Morgan Stanley (MWD ) in London. "So far, we don't see that in France." For Raffarin, the hot spell isn't over yet.

By Carol Matlack in Paris

Edited by Rose Brady

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