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Playing For All The Marbles In Paris(Int'l Edition)


International -- Intl' Business: FRANCE

PLAYING FOR ALL THE MARBLES IN PARIS(int'l edition)

As grumbling Parisians hiked and biked to work past padlocked Metro stations in the early-December chill, a fortnight of public-service strikes was pushing the government of Prime Minister Alain Juppe into a painful dilemma. If Juppe sticks with his plans to cut workers' benefits and raise taxes, the strikes could widen, pushing France--and maybe even all of Europe--into recession. But if Juppe caves, France will never make the budget cuts needed to qualify for monetary union with Germany and other European countries by 1999.

Thus this French crisis is a moment of truth for all of Europe. Without the participation of France, monetary union will collapse. So will hopes for wider European integration, leaving years of work by Franco-German policymakers in tatters. Analysts, long afraid that an explosion of French unrest would block any serious effort at reform, now see Europe's future being decided in the troubled streets of Paris. "This is it--the moment we've waited for," exclaims Daniel Gros, senior research fellow at the Center for European Policy Studies in Brussels.

It's clearly a moment that Juppe and President Jacques Chirac have long sought to avoid. Deteriorating public finances finally forced Juppe to get tough with France's 5-million-strong army of state employees, who total nearly 25% of the workforce (table). Juppe wants to align their retirement plan with that of the private sector, requiring them to work 40 years instead of 37.5. Some rail workers now retire as young as age 50 and are strongly resisting change. Juppe also plans to freeze state workers' pay next year and to cut health benefits for all French workers.

But it's even money whether Juppe will resist strikers and force through his deficit cuts. His predecessors, notably Edouard Balladur, had a history of yielding to pressure from the streets. Juppe insists he won't do so--even if he has to resign. In an angry speech to parliament on Dec. 5, he announced he'll consult--but not negotiate--with workers who are resisting his planned reforms. Investors like his toughness. After French stock prices plunged 2.5% on Dec. 4, they quickly recouped.

BLUSTERY. Meanwhile, union leaders are digging in. So far they've offered no alternatives to cutting state deficits--an issue that's obviously low on their agendas. They promise a lengthy, militant action. "The longer the strike lasts, the greater the demands will become," warns Marc Blondel, the blustery chief of one big union, Force Ouvriere.

Unlike the upheaval of 1968, when radical students and workers tried to topple the system, the current strikes spring from a more modest urge to maintain privileges. But new groups are taking advantage of the chaos to air other gripes. Students have marched for higher education budgets. Hospital employees want higher wages, while postal and electricity workers have stayed home to warn against possible privatization. "This crystallizes discontent," says Gerard Muteau, a union leader who is a director of auto maker Renault. Muteau hopes to capitalize on it by whipping up a strike at Renault to promote early retirement and more hiring.

Speculation is now rising that Chirac might defuse the crisis by replacing Juppe. Possible successors include Philippe Seguin, a nationalist who is cool on monetary union and would scare financial markets, and Raymond Barre, a fatherly centrist who might sell fiscal prudence better than Juppe can. If the strikes toughen, new legislative elections are an outside possibility.

The strikes are already hurting business in France--and beyond. A lack of trains to carry its cars has forced Peugeot to lay off 1,700 workers at one French plant. Paris department stores say Christmas shoppers are 50% fewer than normal because of transit strikes. Industry elsewhere is also suffering from the mess in France. General Motors Corp.'s German unit, Adam Opel, had to eliminate a work shift recently because parts from Spain couldn't cross France.

Economists are slashing their French forecasts: The economy is likely to shrink this quarter and grow by little more than 1% for 1996 vs. 2.4% this year. The jobless rate, now 11.5%, stopped falling three months ago and should rise to 12% in the new year. The strike is only one villain. Another is misguided policy: For two years, France has borrowed from future growth by such artificial stimulants as state-funded rebates on car purchases.

"IN ITS HANDS." Although wracked by problems, France still looms large as Europe's second-largest economy and as a prime mover of European unity. Unlike more profligate states such as Italy, France has a shot at meeting the deficit-cutting criteria set for monetary union. But Paris must muscle through its budget cuts fast. In March, Europe will launch an inter-governmental conference to consider where unity goes from here. If Juppe backs down, the answer will be: nowhere. "France has the keys to monetary union in its hands," says Jurgen Pfister, economist at Germany's Commerzbank.

With the possible exception of Britain's Conservatives--who bear little love for monetary union--most European governments hope Juppe sticks to his deficit-cutting guns. For Germany especially, a Juppe cave-in would be "a disaster in the making," says Paris-based economist J. Paul Horne of Smith Barney Inc. It would lead to devaluation by France, which is Germany's biggest export customer and a major rival in other markets.

For these reasons, as well as from a philosophical commitment to European union, German Chancellor Helmut Kohl is undoubtedly pressuring Chirac to support Juppe. Market rumors suggest the two leaders may propose a deal at the European Union's Dec. 15 summit to fix currency parities leading into monetary union and pledge their central banks to defend them. This would free France to cut interest rates to prop up its economy without devaluing.

Such a pact would be tough to enforce, however, unless the French reassure the markets by seriously cutting social spending. That's what really counts, for French economic competitiveness as well as for Europe's dreams. "France has reached the limits on the problems of 50 years," says French economist Elie Cohen. Europe will learn soon whether Alain Juppe is the man to fix them.

Eight Months to a French Crisis

MAY: Alain Juppe is appointed Prime Minister by President Jacques Chirac, who promises to put job creation ahead

of deficit-cutting.

JUNE: To subsidize new job programs, Juppe slaps a 10% surcharge on corporate income tax and raises value-added tax from 18.6% to 20.6%.

AUGUST: With a weakening economy hurting tax revenues, Juppe orders

state ministries to cut budgets. But he also fires Alain Madelin, free-market

Economics Minister, for boldly suggesting that civil servants' "privileges" be reduced to save money.

SEPTEMBER: Juppe declares a freeze on civil servants' pay for 1996.

OCTOBER: State employees protest the pay freeze with a one-day national strike. Later that month, Chirac announces that deficit-cutting has replaced job creation as top priority.

NOVEMBER: Juppe announces stiff tax hikes and benefit cuts to halve $12 billion in social security deficits. Public employees launch bitter strikes.

DECEMBER: Statistics show French economic growth weakening dramatically.

DATA: BUSINESS WEEKBy Stewart Toy in Paris, with John Templeman in Bonn and William Glasgall in New York


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