Nicolas Sarkozy Is in a Hurry

The French President is moving fast, but can he act quickly enough to prevent France's ailing economy from getting any worse?

Nicolas Sarkozy hit the ground running, and he hasn't stopped. In the past week alone, France's new President has met with the Pope at the Vatican, launched negotiations to overhaul labor laws, led an environmental-protection delegation to the endangered Camargue region—and still found time for a stroll through Disneyland Paris with his new girlfriend, ex-supermodel and singer Carla Bruni.

But can Sarkozy, 52, move fast enough to keep France's sick economy from getting even sicker? Elected on a pledge to break with the policies of past governments, he can already point to some key accomplishments. Within weeks of taking office last May, he pushed through a law allowing people to work overtime for extra pay, a practice that was largely forbidden under a Socialist-inspired maximum 35-hour workweek law.

And, in an important symbolic victory, he stood his ground during strikes this fall by railroad and transit workers over his plans to scale back their generous, taxpayer-subsidized pension schemes. His firmness—in contrast to previous governments that caved in to the unions—should strengthen Sarkozy's hand as he pushes for more reforms.

Government Deficits Are Getting Worse

Yet he has barely scratched the surface of other problems that are growing more acute by the day. France's economy is set to grow an anemic 1.9% this year, compared with a European Union average of 2.9%. The national debt is rising rapidly, and the EU has warned that by 2009 France's public finances will be the shakiest of any of its 27 member countries.

Voters are increasingly concerned about inflation, which hit 2.4% in November, still below the eurozone average of 3.1%, but worrisome nevertheless. And in a sluggish economy many businesses don't need employees to work overtime, which undercuts Sarkozy's promise that people will be able to "work more to earn more."

In addition, a $22 billion tax-cut package enacted last summer has only worsened government deficits while producing little of the economic stimulus that Sarkozy had hoped to spark. A new mortgage-interest deduction, for example, failed to stimulate real estate sales, which have slowed because of rising interest rates.

The Public Likes Government Subsidies

For now, Sarkozy still gets the benefit of the doubt. While his popularity ratings have slipped from a high of 65% last summer, most recent polls still show him in the 50%-to-55% range. A survey published Dec. 19 by the BVA polling group showed that voters were equally divided on whether his economic policies were good or bad.

But the goodwill could dwindle fast as Sarkozy turns his attention to other problems. Just one example: downsizing the bloated public sector, which consumes about half of the national economy. The problem, says Marc Touati of the Paris-based ACDE economic consultancy, is that most French people remain attached to their big-spending government, which generously subsidizes everything from medical care to museums. "Conceptually, the French public doesn't understand that change is necessary," Touati says.

Indeed, Sarkozy already has backed away from a campaign promise to replace no more than half of government employees when they retire. He now says at least two-thirds will be replaced.

Trying to Overhaul Labor Laws

Still, there are some things Sarkozy could do to give the economy a quick boost. For example, he could loosen restrictions on retailers, allowing them to stay open later in the evenings and on Sundays. That move alone could create more than 500,000 jobs, though it would be staunchly resisted by small retailers who fear losing business to larger competitors who could more easily extend their hours.

Relaxing France's famously tough anti-layoff laws should be another priority, says Eric Chaney, chief European economist for Morgan Stanley (MS) in London. Sarkozy has convened talks between employers and unions aimed at a revamp of labor laws. But if the two sides can't reach agreement soon, as seems likely, the government could step in with its own proposals. "This will be the big test, and if they act soon it could be in place by May or June," Chaney says.

Clearly, Sarkozy's early sprint is set to become a marathon.

For more on Sarkozy's first seven months as France's President, see BusinessWeek's slide show.

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