Sarkozy's Free-Market Muscle

Finance Minister Lagarde could help him cut spending and reduce red tape

By Carol Matlack

Even France's most committed capitalists have long turned their noses up at the "Anglo-Saxon" model of economic development, which many French say stresses corporate profits at the expense of jobs and community. So how to explain Christine Lagarde, the new Finance Minister in Paris? A longtime partner at a Chicago-based law firm, she's the most unabashed market advocate ever put in charge of French economic policy. And her background as a transatlantic legal star and trade negotiator could prove crucial in helping President Nicolas Sarkozy carry out his ambitious reform program.

Since the early 1970s, Lagarde has shuttled between France and the U.S. She honed her flawless English as an exchange student at the exclusive Holton-Arms girls' school near Washington, D.C., and even worked briefly as a congressional intern. After finishing law school in France, she spent more than two decades practicing corporate law with Baker & McKenzie, including five years as global chairman based at the firm's U.S. headquarters. Then in 2005, Prime Minister Dominique de Villepin recruited her as France's Trade Minister.

Lagarde's regal bearing and easygoing manner stand in stark contrast to the hyperkinetic, sharp-edged Sarkozy. "Even in contentious negotiations, she always kept her cool," says Denise Broussal, a partner in the Paris office of Baker & McKenzie who has known Lagarde for more than a decade. That calm, methodical style could help Sarkozy with two big challenges: trimming public spending and unraveling the tangle of rules that hinder business in France. Lagarde likely will move swiftly to downsize the Finance Ministry—the biggest government bureaucracy, with more than 175,000 employees—while using her budgetary powers to curb spending and regulation across the sprawling government. "She understands the idea of efficiency as few French people do, and having worked outside France, she thinks differently about the role of the state," says Marc Touati, who heads the ACDE economic consultancy in Paris.

Lagarde is already gearing up to present $15 billion in tax cuts to Parliament in early July. The package includes a Sarkozy proposal that would encourage the French to work longer hours by exempting overtime from taxes and social charges, as well as a new mortgage interest tax deduction and lower income tax rates for the highest earners. Lagarde could use her international reputation and contacts to help Sarkozy ease fears that such rollbacks will push France's budget deficit—2.5% of gross domestic product last year—above the maximum 3% set by the euro zone Growth & Stability Pact. Indeed, in her first meeting with journalists after taking office on June 20, she emphasized the need for fiscal discipline, saying: "We will strive to respect it."

There's no mistaking Lagarde's support of free markets. Although she defended French agricultural interests as Trade Minister, she also used the post as a bully pulpit, traveling around France urging her countrymen not to fear a more open economy. She printed colorful brochures about globalization to spread the message to schoolchildren, and on trips to the U.S. she spoke frankly about how France discouraged foreign investment by forcing employers to foot the bill for costly social programs.

BRUISING CONTESTS

In her new job, Lagarde may be on a somewhat shorter leash. During his campaign, Sarkozy himself warned about the "perils" of globalization. After only two years as Trade Minister, she is still a relative political novice, and the new President has made clear that gaffes won't be tolerated. Lagarde got the Finance Ministry post when her predecessor, Jean-Louis Borloo, was shuffled to another position after embarrassing Sarkozy by speaking forcefully in support of an increase in the value-added tax. "In this new political regime, the President runs the government. There is no room for any rebellion," says Ernest-Antoine Seillière, a French industrialist who heads an advocacy group called BusinessEurope.

But Lagarde, who ran a law firm with more than 3,400 attorneys, is a skilled manager and team player who knows how to get what she wants. And despite her long association with the U.S., she's not seen as reflexively pro-American, which should win over many potential opponents. Indeed, insiders at the office of the U.S. Trade Representative say she was a savvy negotiator and defender of French interests. If she can manage the risks in her new position, Lagarde will be able to add "economic reformer" to her already impressive résumé.

With Rick Dunham in Washington

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