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Curing France's Economic Malaise


Thierry Breton, France's new Finance Minister, is a whiz at healing sick companies. Over the past two years he dug phone giant France Telecom out from under a mountain of debt. Before that, he brought consumer-electronics group Thomson (TMS) back from the brink. But breathing new life into France's center-right government may be too much to expect even of Breton, who took over the Finance job on Feb. 28 after his predecessor, Hervé Gaymard, resigned over a housing scandal.

With two years to go until the next presidential and parliamentary elections, Jacques Chirac and his conservative coalition look dangerously weakened. Voters are in a foul mood, with the economy set to grow less than 2% this year and unemployment at a five-year high of 10%. Polls in late February showed Chirac with a 45% approval rating -- three percentage points lower than just a few weeks before. Prime Minister Jean-Pierre Raffarin received only 35% support. "There was already deep disappointment with this government. The Gaymard affair has only reinforced the negative images," says François Miquet-Marty, a political analyst with the Louis Harris polling group in Paris. Gaymard, a 44-year-old Chirac protégé, stepped down amid revelations that he had installed his family in an $18,000-a-month government-paid apartment while calling for painful cuts in state spending.

There's no risk that the government could be ousted, because the conservatives have a wide parliamentary majority. The real danger is that they are now too feeble to enact long-needed but politically difficult reforms. Over the past two years, Raffarin's team faced down opposition from powerful labor unions to enact incremental measures, such as relaxing the maximum 35-hour work week and rolling back state pension benefits. But it has done little to slash public spending, especially on health care and other social programs. These costs have pushed the budget deficit above the euro zone limit of 3% of gross domestic product for the past three years, while burdening French employers with some of the world's heaviest payroll taxes. Now the unions are mobilizing to head off budget cuts and other reforms, and the government's appetite for confrontation is waning. Already this year, bowing to union pressure, it has watered down plans to make it easier for companies to lay off workers.

INCREMENTAL REFORM

The government's unpopularity also poses risks outside France's borders. Chirac is a strong backer of the proposed European Constitution and is expected to call for a French referendum on it in late May. But supporters fear the referendum could turn into a protest vote against the President and his allies, as happened last year when the conservatives were clobbered in regional and European parliamentary elections. Polls show about 60% of voters back the proposed constitution, down from about 70% last fall.

Can Breton restore public confidence? Certainly he'll push for budget cuts, while pressing ahead with the privatizations of national utilities Gaz de France and Electricité de France and nuclear energy group Areva. But it's less clear that he'll tackle more explosive issues such as relaxing regulations on business or curbing the nearly unlimited access to state-financed health care. At a Feb. 28 press conference, he promised "continuity" at the Finance Ministry. Laments economist Marc Touati of Natexis Banques Populaires: "'Continuity' means failure to tackle problems head-on."

At least one person is benefiting from the malaise: Nicolas Sarkozy, the ambitious 50-year-old former Finance Minister who now heads the majority Union for a Popular Movement party but is a bitter rival of Chirac. Last fall, Chirac forced Sarkozy to step down from the Finance Ministry in what was widely seen as an effort to derail his expected race for President in 2007 -- when Chirac, now 72, could run for reelection. But Sarkozy has turned the outsider's role to his advantage. He's keeping a schedule of high-profile public appearances while distancing himself from controversial government positions. If Chirac's woes continue, Sarkozy may end up with the dubious privilege of tackling France's ills.

By Carol Matlack in Paris


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