Can A Lame Duck Keep French Reform Alive?

It's the ax that didn't fall. Just about everyone in France expected Prime Minister Jean-Pierre Raffarin to lose his job after the poor showing of the ruling center-right coalition in elections on Mar. 21 and 28, when opposition Socialists won nearly 60% of the vote and control of all but one of the 26 regional councils. Instead, President Jacques Chirac asked Raffarin to preside over a new government for at least the next 100 days.

It looks like another shrewd political calculation by the wily Chirac. Serving as Prime Minister for the next three months is bound to be a bruising experience. With the government set to unveil a revamp of the cherished national health-care system, anti-reform labor unions are promising nationwide strikes by early summer. Along with a sluggish economy and 9.6% unemployment, this is likely to have voters in a sour mood when European parliamentary elections are held on June 13. If the elections produce another drubbing for the conservatives, as seems likely, Raffarin can easily be offered up then as the bouc émissaire -- the scapegoat.

Damn the Torpedoes

But what's good for politics could be bad for policy. Raffarin, who faced down widespread strikes to overhaul the government-financed pension system last year, has pledged to keep pushing on other controversial reforms. Besides overhauling health care, he aims to privatize state electricity and gas monopolies and downsize the bloated public bureaucracy.

The damn-the-torpedoes rhetoric hasn't reassured France Inc., though. Business leaders fret that a government headed by a wounded Raffarin will be too weak to keep the effort on track -- even with a boost from energetic reformers such as the new Finance Minister, Nicolas Sarkozy, who won kudos from voters for his law-and-order program as Interior Minister. "One thing we have learned is that reforming softly doesn't work," says Sophie de Menthon, head of the French employers' group Ethic.

Certainly, the government needs to do something fast about France's yawning budget deficit. It's expected to reach at least 3.6% of gross domestic product this year, breaching the euro growth and stability pact limit of 3% for the third year. But there's growing fear that the government, despite Raffarin's rhetoric, will shy away from big changes in favor of less controversial stopgap measures.

Health-care reform will be a key test. Plagued with runaway costs, the system is running a $13 billion annual deficit. Creating incentives for cost control, such as requiring patients to pay more out-of-pocket, is sure to spur protests. Instead, the government might simply pour more money into the system -- for example, by raising taxes earmarked for social spending, says Eric Chaney, Morgan Stanley's (MWD ) chief European economist. More taxes, slower growth. Slower growth, higher deficit. "There's a chance they could make things worse," Chaney says.

Of course, Raffarin could still surprise the skeptics and keep reform rolling. Much will depend on whether Chirac backs him up more forcefully. Since his landslide 2002 reelection, the President has spoken out only occasionally in favor of economic reform, letting the Prime Minister bear the brunt of protests. But Chirac, whose popularity ratings have plummeted to around 35%, may be reluctant to risk further diminishing his own standing with voters. It's looking more and more likely that France will remain Europe's reform laggard.

By Carol Matlack in Paris

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