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La Republique Isn't Feeling So Grand Anymore


International Business

LA REPUBLIQUE ISN'T FEELING SO GRAND ANYMORE

At the end of the day, Michel Rocard sinks into a sofa in his gilded 18th century Paris office and sums up his long-term aims as France's Prime Minister. "Europe," says the sparrow-framed Rocard, as he sips Scotch and puffs a pungent Gauloise. "That's my goal. Everything else follows."

But these days, Rocard's dream of a united Europe is dimming. German Chancellor Helmut Kohl is going it alone in economic policy and is cooling toward European monetary union, a key French goal. Europe's schizophrenia toward the gulf war--from hawkish Britain to conciliatory Italy--has shown that political union is a complex issue that may prove to be a pipe dream. And now, French hopes are hitting another sobering reality: Their economic miracle of recent years is suddenly in tatters (chart).

The economy already was slowing before gulf war jitters began last summer. But then, in the fourth quarter, gross national product shrank 0.4%. The first quarter may be even worse. Auto sales plunged 20% in January as war got under way. Clearly, France is following Britain into recession--the first Continental power to do so.

Recession is hitting France at an uncomfortable moment: a time of social malaise at home and uncertainty about France's place in Europe--concerns that have been building for months. Workers and students have been demanding the fruits of a restructured economy. Germany's reunification has aroused old fears. And the gulf war has produced uneasiness over France's world role. The French see their special relationship with Arab nations endangered and fear a backlash from the 5 million North African Moslems living in France.

POWER CHECK. But it is the new economic vulnerability that most threatens France's goals for Europe, especially if it jerks French Socialist leaders back into their old dirigiste ways. As the economy cools, latent French protectionist feelings may become more overt, touching off a hot dispute within the European Community. Although the EC's deadline for scrapping trade barriers is less than two years away, pressure is already growing for more aid to sagging French state-owned companies.

France's new discontent may have broad ramifications. France would like a Europe that is tightly knit economically, including a common monetary policy. It also favors common defense and foreign policies. The French believe such achievements will serve as a check on growing German power, and they consider their economic revitalization of the 1980s as the vehicle enabling them to reach their goals. But after a decade of industrial restructuring, costing the state tens of billions of francs and its companies thousands of jobs, France is doing little better than struggling along, while Germany steams ahead. Already, Germany leads France in autos, machinery, electronics, and chemicals. It soon may overtake the French in aerospace.

It's unlikely France will be able to make a major, permanent shift back into its old habits to get its industries going again. For one thing, it has limited resources. Recession means tax revenues are plunging, but spending is rising because of the war. In fact, government capital infusions for state-owned industrial companies peaked at $4.2 billion in 1986. This year, the government is expected to pump in $1.4 billion.

PALMS OUT. Nonetheless, pressure is building to increase equity infusions, particularly as debt builds at nationalized companies, which account for 25% of GNP, vs. 11% for Germany and 3.5% for Britain. Many state companies are seeking special research and development grants. Groupe Bull, for example, hopes the state will finance at least 20% of a $2.2 billion computer development program. And despite fiscal constraints, Socialists will have a hard time resisting the mounting aid requests if the economic crunch gets really bad--even if doling out cash in a free-market EC creates a political storm among its allies.

For free-marketers, an ominous sign of possible French intentions was February's grant of some $400 million in government equity to Air France, an ailing carrier with a war-induced traffic slump. Officially, the handout was to finance planned airplane purchases, but skeptics consider it a simple bailout.

Other state-owned French companies also have their hands out. Thomson (page 66), the struggling electronics giant, needs cash to pay down debt and develop high-definition television. And Aerospatiale wants help because the weak dollar is hurtingincome from the Airbus jetliners itassembles.

Government officials insist these are investments they would make even in good times. So far, Prime Minister Rocard is blocking pressure for even heavier aid from Industry Minister Roger Fauroux. A former left-wing militant turned pragmatist, Rocard vows to maintain his tightfisted management style during recession. He has ordered cuts of $2.5 billion in government budgets to offset gulf war costs. He says he will resist big deficits just as he resisted pressures for wage hikes that alienated him from fellow Socialists last year. "Our economy is still too fragile," says Rocard.

Recession is showing that France's corporate restructuring still has a long way to go. French acquirers that have gone global with a vengeance are now being forced to retrench. Chemical giant Rhone-Poulenc, which bought U. S. pharmaceutical maker Rorer last year, saw 1990 earnings plunge 52% and plans spending cuts. Profits also fell by half at giant steel producer Usinor Sacilor, which bought U. S. steelmaker J&L Specialty Products Corp. last year. And ailing Michelin is cutting capital spending by 60%, one result of its $715 million buyout last May of Uniroyal Goodrich Tire Co.

In sharp contrast to France's economic malaise is its newfound enthusiasm for the U. S.-led campaign against Saddam Hussein. Some of that stems from sheer self-interest. With Bonn taking only a limited role in the gulf war, "France wants to be on the right side, to show it has some of the European assets the Germans don't," says Helen Wallace of London's Royal Institute of International Affairs.

If President Francois Mitterrand had not supported Operation Desert Storm, he might have been cut out of the postwar Mideast political order. He also might have been kept from playing a central role in future security strategies for Europe and NATO. With the power of Soviet hardliners on the rise, Mitterrand wants U. S. troops kept in Europe as a deterrent.

ACUTE ANEMIA. But even as France strengthens its security role, Germany is gaining economic power. Germany's $1.8 trillion economy is suddenly 40% bigger than France's. A year ago, it was just 25% bigger. The gap will only widen as eastern Germany rebuilds.

Rocard has been trying to fortify French business against a German blitz through a curious mix of Reaganomics and state direction. As a supply sider, he cut taxes on reinvested corporate profits. Yet he has subsidized corporate research and prodded state companies to expand abroad.

Until the French economy faltered, Rocard's economic program was hard to challenge. But recession now poses a major test of France's economic orientation and of the "miracle" that suddenly seems a bit of a sham. At the same time, the growing muscle of its mighty eastern neighbor is starting to crowd France as it tries to preserve the influence it has wielded in Europe since the end of World War II.

It's a difficult time for the Continent's second power. Not even the nuclear strike force constructed by Charles De Gaulle matters anymore. With Germany united and the cold war over, "France is the big loser," says a U. S. diplomat. Michel Rocard and his Socialist colleagues will be taxing all of their Gallic ingenuity over the months ahead to prove him wrong.Stewart Toy, with Blanca Riemer, in Paris and Richard A. Melcher in London


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