French Elections: The Impact on Business

With the first round of France's presidential contest coming soon, it's far from clear whether economic reform will be a winner

For advocates of free-market economics, there's good news and bad news as the first round of France's Presidential election approaches on Apr. 22.

First, the good news: The left almost certainly will lose. Socialist Ségolène Royal has run such a lackluster, gaffe-prone campaign that she fell to neck-and-neck in the polls with a relatively unknown centrist candidate, François Bayrou. Though the latest numbers show Royal pulling ahead of Bayrou and advancing to the May 6 runoffs, the same surveys consistently show her getting trounced in a matchup against conservative front-runner Nicolas Sarkozy. Figures released on Mar. 25 by polling group Ipsos show Sarkozy winning the second round 53% to 47% over Royal.

Now, the bad news for free-marketeers: Even if Sarkozy wins, it's far from clear that France's ailing economy will get a serious dose of reform. True, a President Sarkozy would be the closest thing to an economic liberal that the Elysée Palace has seen in years. The energetic head of the center-right UMP party has promised tax cuts and increased labor-market flexibility, lambasting Socialist measures such as the 35-hour work week that have hobbled French competitiveness.

"Nicolas Sarkozy understands our problems and is presenting real solutions," says André Garreta, a real-estate agency owner from southwestern France who recently attended a meeting with Sarkozy in Paris, organized by a group of small-business owners.

"No Longer Competitive"

But Sarkozy has also shown a decided dirigiste streak, saying the government should act as a "strategist" for key sectors of the economy. As Finance Minister in 2004, he helped engineer a state bailout of industrial group Alstom. More recently, he questioned the "morality" of shareholders in Airbus's parent European Aeronautics Defence & Space Co. receiving dividends if the planemaker carried out a plan to lay off 10,000 workers.

Certainly, such populist rhetoric is aimed at attracting voters worried that right-leaning Sarkozy would be a French version of Margaret Thatcher. But that could be just what the country needs. By almost any measure, France is in far worse economic shape today than when voters last chose a president in 2002. Growth in 2006 was 2%, well below the euro zone average of 2.8%, and this year doesn't look much better. Industrial output and consumer spending are sagging. And while the unemployment rate has declined over the past several years, at 8.4% it's still far above the Western European average of 7%.

Equally unsettling to French pride is the revival of Germany. As recently as three years ago, Germany lagged France on a host of economic indicators. But after a series of tax and labor-market reforms enacted under former Chancellor Gerhard Schröder and his successor Angela Merkel, Germany has now pulled well ahead of France. Its economy grew a robust 2.9% in 2006, while unemployment fell to 7.7%, according to OECD estimates. While France's trade deficit is rising, reinvigorated German businesses are exporting at record levels. "We are no longer competitive," says Pierre Nanterme, an official of the leading French employers' association, known as MEDEF.

Crippling National Debt

Yet many French still seem to expect reform without sacrifice. Just one example: Public spending consumes 53.7% of France's economy—one of the highest proportions of any country in the world—dampening growth because employers must pay heavy payroll taxes to support it. Yet a poll in early March by Ipsos found that 52% of French opposed the idea of whittling down the size of the civil service even by leaving positions vacant when workers retire.

Indeed, a yearning for painless reform seems to be a key element in the campaign of Bayrou, the third-party candidate who is drawing 19% support in recent polls, compared with 25% for Royal and 30% for Sarkozy.

Bayrou, a former Education Minister from the centrist UDF party, has said he would devote half the revenues generated by economic growth to paying down France's crippling national debt, which now totals almost 70% of the economy. But he hasn't said how he would address a key problem behind the debt: the fast-ballooning cost of a generous health-care and social security system. Sarkozy likewise has said little about how he would curb such costs.

Welfare State a Sacred Cow

At least, voters seem to realize that big-spending Socialist initiatives won't do the trick. Royal's poll numbers didn't budge after she released long-awaited details of her economic plan, which calls for raising government-paid pensions and unemployment benefits, and boosting the minimum wage to $2,000 a month.

Even leading Socialists fretted that she shouldn't promise such extravagances without explaining how they would be financed. "There has been an evolution toward the right in France. The public is demanding more discipline in public spending," says Pierre Giacometti, who heads the Ipsos polling group.

But Sarkozy, even if he wins by a decisive margin, could face stiff public resistance if he takes aim at the welfare state. Though Royal and other left-wing candidates together have less than 35% support in recent polls, a majority of French voters still lean toward the left, says Jean-Daniel Lévy of the CSA polling group. In the current campaign, "they've had trouble finding someone who translates their ideas" into a credible platform, Lévy says. But a Sarkozy presidency could be paralyzed by crippling strikes and protests if Socialists take their cause to the streets.

With nearly four more weeks left before the first round of voting, there's plenty of time for the contenders to improve their standing in the polls, or to stumble and fall. But aggressive free-market reform is almost certain to remain a long shot.

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