France: Sarko's Eclectic Economics

New French president Nicolas Sarkozy has been labeled a free-market fan, a shameless interventionist and a spendthrift opportunist. So which of the labels fit? All of them. Sarkozy's economics are nothing if not eclectic. But in spite of that, or perhaps because of it, the new president has a better chance of galvanizing growth than any leader in decades. With a 65 percent approval rating, Sarkozy neared war hero Gen. Charles de Gaulle's record Inaugural score. Consumer confidence leapt to a five-year high in May. And Sunday's impressive win in lower-house elections gives him plenty of lawmakers to back his program of economic reform.

But what, exactly, is Sarkonomics? His mix of free-enterprise friendliness and state-coddling can seem erratic. But it's a pragmatic way to get results from the globalization-leery French, who need to be reassured as much as they need to get moving. The president has won kudos from economists by promising supply-side reforms like the end of the 35-hour workweek, a curtailing of union power and more-flexible work contracts that would make firing easier. But his first steps have been muddled with some gratuitous spending, and they've tended toward demand-side change, boosting purchasing power via things like a too-generous mortgage-rate cut, instead of fixing French firms' competition problems.

A look back at his history does little to clear up the picture—as Finance minister in 2004, he privatized key state-owned businesses but bailed out others; he strong-armed supermarkets even as he tried to increase competition in the retail sector. Still, Sarkozy's brand of fair-weather laissez faire has the backing of the people (67 percent of voters say they are ready for major reform all at once), a crucial first step. Sarkozy was Finance minister for a mere 235 days, but he made them count. One of his most famous moves was the rescue of the near bankrupt engineering giant Alstom. German arch rival Siemens was circling for the spoils. But Sarkozy took up the torch of "national champions," and cut a rescue deal with Brussels' competition chief. The state took on 21 percent of the firm in a debt-equity swap, and Sarkozy got credit for saving 25,000 French jobs.

Three years on, the deal looks pretty smart—the state sold its stake in the reinvigorated firm last year for a tidy €1.26 billion profit. Predictably, this was a huge boon on the campaign trail. "In some economic sectors, the market isn't the be-all and end-all," said Sarkozy during a TV interview in March. "The market sees short term." But former Sarkozy adviser Jacques Delpla says the Alstom deal made sense, even to a free-marketer, since Alstom, saddled with debt from previous management, essentially had a cash-flow problem. "The long-run business was viable," Delpla explains. Meanwhile, experts like David Spector, of the Paris School of Economics, argue that Sarkozy's success with Alstom is less important than the message it sends, which is that French companies can still expect bailouts: "It doesn't incite great efficiency in the market."

Even more appalling to economic liberals was Sarkozy's use of state power to bully mass retailers like Carrefour and Leclerc to drop prices. Delpla defends his old boss, noting that years of bad laws regulating retail competition have artificially raised prices. Delpla contends Sarkozy tried to go the free-market route, changing the law, but was vetoed. "[Former president Jacques Chirac] is the most backward person you could imagine on this. He hates la grande distribution [volume retailers]," he says. So, with little time left at Finance to send a public message on a key issue, Sarkozy resorted to arm-twisting, says Delpla. Outsiders, like Morgan Stanley economist Eric Chaney, say he did the best he could with a bad situation: "The system before was absolutely Stalinist. So it went from Stalinist to Leninist," Chaney jokes.

For all his statist noises, Sarkozy also partially privatized plenty of key businesses, most notably the power company EDF. "What he did that I thought was clever is that he managed to get a deal with the CGT, the union that [dominates] at EDF and that could switch off the lights in the whole country," explains Delpla. "He kind of bought their approval by [promising] shares at a very low price, at a discount."

This sort of political savvy and pragmatism is crucial in France, where economic debate is still built around the state. But the toughest battles are undoubtedly ahead. France's arcane labor, tax and social systems don't lend themselves well to quick fixes. And economists are still waiting for promised supply-side reforms, particularly labor-market liberalization, which some believe could turn France into another Germany by better leveraging a strong skill base to boost growth.

Pushing them through won't be easy—already, a new draft fiscal package is being bashed by unionists. Still, Sarkozy's chief advantage over his predecessors, argues Chaney, "is the fact the strategy has been thought through in advance." No previous president has so clearly laid the groundwork with a specific reform agenda during a campaign, he says. And with a strong and stable majority, he has a clear mandate to push it through. While the agenda leaves out some crucial issues, like the liberalization of trade and services, success may beget future opportunities. "I think it will take two terms to do reforms in France," says Chaney. No doubt this consummate politician is already thinking about that.

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