International Business: FRANCE
NOW, THE WHIRLWIND
As they sat side by side at a Paris parade marking the end of World War II, the two men evoked distinctly different eras. Ailing, gray-skinned Franois Mitterrand, 78, who has run France longer than any elected leader in its history, looked like a wizened war veteran applauding the Foreign Legion as it marched down the Champs Elysees. Beside him, Jacques Chirac, tall and trim at 62, seemed the vigorous image of the "deep change" he promises after succeeding Mitterrand as France's President in mid-May.
It's a historic moment for France--the first time a conservative has occupied the Elysee Palace since 1981. Chirac inherits a France torn by record unemployment and a sense of disorientation about its place in global politics. An astute politician who has never articulated a clear philosophy, the new President will move fast to jolt his country out of its despondency. Most likely he will resort to a range of measures. Those include tax breaks, privatization, and pension reforms, as well as more statist tactics such as employment programs and bullying the central bank into lowering interest rates. Says Chirac: "France needs oxygen."
Chirac's first months in office will see a barrage of action, and his choice of top ministers is crucial. For Prime Minister, Chirac's likely pick is Alain Juppe, the outgoing Foreign Minister. A respected technocrat, Juppe is a centrist who would reassure French and foreigners alike. "Juppe is the anchor this administration needs," says Peter Ludlow, director of the Centre for European Policy Studies in Brussels. The likely choice of free-marketer Alain Madelin as Finance Minister would assure the markets that Chirac favors budget reform and further deregulation. More disturbing to outsiders would be a top post for National Assembly President Philippe Seguin, an economic nationalist who led France's fight against the Maastricht Treaty.
STRIKE THREAT. Creating jobs is all-important for Chirac and his advisers. By mid-July, a bill to encourage hiring should reach parliament, which is 80% controlled by Chirac's allies. Among other proposals, it should pay companies cash subsidies for new hires, cut their social security contributions, and possibly launch public-works programs.
Chirac claims he also wants to lighten the government's heavy hand. "We have too many bureaucrats," says the new President, who promises to cut the number of Cabinet ministers to a bare minimum. Many experts think bureaucratic meddling limits French competitiveness in global markets. Some French executives are skeptical of his resolve to shrink government, however. The CEO of a large French consumer-products company notes that conservatives have traditionally been more partial to state direction of the economy than the French left. Although Chirac plans to continue privatizing industry, his stated goal is to offset budget deficits rather than boost industrial efficiency.
To win over those who have jobs, Chirac has hinted he'll raise the minimum wage beyond the inflation-pegged annual hike due on July 1. He has been jawboning business to share the wealth of rising profits, arguing this will boost consumer spending. Jacques Calvet, chairman of carmaker Peugeot, wishes the new President would stop such talk. "Wages should be discussed in each company, not forced by government," he complains. "This centralist tradition must be destroyed."
It's the centralist tradition that the unions want to uphold. Long docile, French organized labor mounted a gaggle of preelection strikes--including five walkouts in two months at Air Inter, the domestic airline. Unions promise more actions unless pay packets get fatter. Many observers warn that France's two rounds of presidential balloting may be followed by a "third round"--of workers voting with their feet in the streets.
As he faces pressure to create jobs, Chirac may push the Bank of France to lower short-term interest rates. A cut in rates would surely force the franc down against the German mark, and a weaker currency would boost exports and create some 50,000 jobs, says Paris-based economist Eric Chaney of Morgan Stanley & Co. However, Chirac might have a fight on his hands with the central bank, which won independence only last year and has yet to test its mandate.
LOOSE CANNON? More important, any move by Chirac to weaken the franc will resurrect fears that he is willing to imperil its status as a hard currency whose value moves in lockstep with the mark. "That would be very, very risky," says one senior German official, who warns that higher French interest rates would result. In turn, a crack in the franc would call into question Chirac's commitment to the Franco-German "special relationship" that lies at the heart of the European Union.
Chirac insists he wants to strengthen that relationship, yet he opposes many of Germany's favorite Euro-ideas, including a European Parliament with expanded powers. He would prefer that national governments have a greater say in EU matters. Chirac's personal ambiguity on Europe combined with far-right pressures in his party seem likely to push France closer to British views on maintaining national sovereignty, and away from German federalism.
Many outsiders fear France's new leader may prove a loose cannon on Europe's decks. Mayor of Paris and twice France's Prime Minister, Chirac has a history of changing tack according to the era and the audience. Last fall, he proposed a second French referendum on European monetary union--narrowly approved by voters in 1993. He recanted during the campaign but then seemed to change his mind once more in the final days before the presidential election, again proposing a referendum on European institutions. The shift apparently occurred in the wake of the far right's success in the first-round balloting on Apr. 23, when it won 20% of the vote.
As a Gaullist, Chirac is also heir to a strong nationalistic tradition. A British diplomat in Brussels predicts the new President will have "a harder edge" than Mitterrand in defending France's interests. Not to worry, says Yves-Thibault de Silguy, one of France's two European Commission members and a former aide to conservative Prime Minister Edouard Balladur, whom Chirac trounced in the elections. "Chirac is fundamentally a European" who wants to continue the drive for unity, de Silguy insists.
For now, Europe will have to take that on faith--just as French voters must hope that Chirac's program will produce genuine change. The markets have already given one sign of confidence: The French franc has not cracked since the presidential election. Now, Chirac must sustain this confidence by proving he can manage a troubled country.
JOB CREATION Look for a two-year suspension of corporate social security taxes plus cash subsidies to hire the long-term unemployed.
LOOSE MONEY Pressure on Bank of France to lower interest rates is now likely. A slightly weaker franc probable.
NEW TAX RATES The 56% marginal rate on individual incomes will be cut. But the value-added tax will probably rise from 18.6% to 20%--"temporarily."
RETREAT FROM EUROPE Job creation gets priority over the single currency. A bid to recoup some powers given to the European Commission should occur.
...AND HIS ADVISERS
ALAIN JUPPE Age 49. Currently Foreign Minister, but the likely Prime Minister for Chirac. A master of tact, he'll favor pro-Europe policies in the Cabinet.
PHILIPPE SEGUIN Age 52. Right-wing president of National Assembly. A Gaullist who favors state intervention in the economy and opposes monetary union.
ALAIN MADELIN Age 49. Minister for small industry. A free-marketer, if made Finance Minister, he would speed privatization and pension reform.
PIERRE LELLOUCHE Age 44. Chirac's city-hall cohort. A possible Foreign Minister, he is pragmatic and outspoken.
DATA: BUSINESS WEEKBy Stewart Toy in Paris, with Linda Bernier in Brussels and Bill Javetski in Frankfurt