Presidential rivals fight over France's economy

By SARAH DiLORENZO,AP Business Writer Updated at 2012-05-04 18:27:46 +0000


PARIS (AP) — When he came to power in 2007, President Nicolas Sarkozy seemed just the man to shake up France's sclerotic economy with his promises of a break from the past. However, any optimism surrounding his victory five years ago has been replaced by cynicism and recrimination.

Socialist challenger Francois Hollande, whom polls are predicting could win the presidency by a margin of several points, hounded Sarkozy for his handling of the country's economy.

"We have fallen backward," Hollande declared, while belittling Sarkozy's claim that Socialist policies were to blame for France's poor performance in recent years. "Our unemployment has risen and our competitiveness has declined. Germany, in all areas, does better than we do."

If Hollande wins Sunday's election and embarks on a program to boost his country's economy, it will raise questions about France's commitment to reining in its spending while the rest of 17 countries that use the euro embark on a strict period of belt-tightening to convince investors that they can keep control of their debts.

It also throws into doubt the German-French partnership that has led the eurozone's response to its financial problems and was built on the personal relationship between Sarkozy and German Chancellor Angela Merkel.

There are concerns that if investors are worried the fragile eurozone solution might unravel, they could back away from Europe, sending the continent into a fresh financial crisis.

Sarkozy rode to power in 2007 on promises of sweeping economic and labor reforms that would shake France out of sluggish growth and make it competitive with the world's emerging economies. His prime minister, Francois Fillon, vowed a "shockwave of growth" and Sarkozy himself told voters to judge him on his ability to deliver on that promise.

Five years later, at the end of Sarkozy's first term, however, growth has ground to a halt, unemployment has hit 10 percent, and the national debt has ballooned to 86 percent of gross domestic product.

Some of Sarkozy's plans for reform have been affected by outside factors. First there was the global economic slowdown touched off by a financial crisis in the U.S. in 2008. But it is the debt problems of the 17-country eurozone — of which France is its second-largest economy after Germany — that have most distracted Sarkozy from his domestic agenda.

"Nicolas Sarkozy entered the Elysee (Palace) as an energetic and willing reformer," wrote the Institut Thomas More, a Paris- and Brussels-based think tank, in March.

"The crisis transformed him into a firefighter."

Europe has been dealing with a crisis of too much debt in some of its countries for nearly three years and this has raised the specter of the breakup of the single currency union. Three countries — Greece, Ireland and Portugal — have already required bailouts because of unsustainable levels of debt. There are now concerns that the much larger economies of Spain and Italy will follow them and seek a bailout — a move many fear the eurozone cannot afford.

To restore confidence and bring the borrowing costs of eurozone member countries back down to more manageable levels, 24 countries in Europe led by Sarkozy and Merkel have agreed to a "fiscal pact" designed to put a cap on government deficits. This has meant a raft of austerity measures across Europe, in the form of layoffs and pay cuts for state workers, scaled-back expenditures on welfare and social programs, and higher taxes and fees to boost government revenue.

However, there seems to be little evidence of France practicing what it has been preaching. The country has not balanced a budget in more than three decades, and, in Sarkozy's five years, its deficit increased to 5.7 percent of its gross domestic product from 2.3 percent.

In fact, in a televised presidential debate on Wednesday, Sarkozy proudly declared that he did not want austerity for France — claiming he reduced spending relatively painlessly. But some have criticized this policy as simply nibbling around the edges of France's problems.

Along with the austerity measures in Europe have come new employment measures designed to make it easier for companies to hire and fire workers. Italy and Spain, for instance, are undertaking tough reforms to modernize their labor markets, but that conversation has been largely absent from the French election campaign.

Sarkozy also pushed for a new era of industrial relations when he came to power in 2007. But unions still hold enormous sway in France. When he faced down transit unions just months after his election over the scrapping of an early retirement age, it seemed a seminal moment for a country long hemmed in by organized labor. However, by 2010, strikes again paralyzed France as he fought to raise the retirement age to 62.

Economists say the country needs the reformist zeal Sarkozy rode in on now more than ever.

"France will look frankly increasingly like the sick man of Europe," if it doesn't overhaul its labor market and reduce its spending, said economist Jacob Funk Kirkegaard of the Peterson Institute For International Economics.

Nevertheless, both candidates appear to be harking back to a bygone era when French workers could count on cushy benefits. That nostalgia reached such a fever pitch that the Economist magazine devoted an issue earlier this year to "France in Denial."

Many have worried this state of denial will continue if Socialist candidate Hollande is elected.

He has already exploited the mounting backlash against austerity to push a strong pro-growth agenda, even going so far as to say he would re-negotiate the fiscal pact to include growth measures.

"What I contest (in the fiscal pact) is that there isn't a single growth component, which means that we're imposing a generalized austerity on countries," he said at Wednesday's debate. "And so we will be forever condemned to austerity, and what's more, the deficit level will never recede."

Whereas some economists suggest measures to encourage growth should come from regulatory reform, Hollande's plans generally revolve around state-sponsored investment, like a new public investment bank and the hiring of 60,000 more teachers. He plans to reduce the deficit mostly through raising taxes and closing loopholes, though he envisions exceptions for companies that keep jobs in France and for smaller businesses.

Sarkozy is scathing in his criticism of the Socialist strategy: "Do you know that ... we have the highest taxes in Europe, along with Sweden, and you propose to finance your spending madness, your incapacity to say no ... with a continual increase in taxes?" he asked Hollande on Wednesday night. "Once again it will be budgetary laxity and spending madness."

Hollande has vowed to roll back some of Sarkozy's reforms, but he has left some room to wiggle room — notably saying he will order up a full independent assessment of the state's accounts and tailor his program accordingly.

That should free Hollande up to act pragmatically, Kirkegaard said, even if his rhetoric may be more flashy. For instance, he said that while Hollande has made waves by promising to re-negotiate the fiscal pact, what he has called for is largely what Germany's opposition Social Democrats are already demanding.

That France will eventually be forced to follow its neighbors down the difficult path of reform does not seem in question. When still is.

Marc Touati, chief economist of investment company Assya, is predicting a very rough summer for the country that could see its credit rating downgraded again and its interest rates on the international debt markets rise as much as 1 percentage point to 4 percent. That would make it significantly more expensive for France to borrow money — rendering it only more difficult to pay down its debt.

Only then, he says, might a President Hollande be shaken enough to act.

Kirkegaard said he might step up before the markets attack, but few politicians undertake such difficult reforms without having their hands forced.

And despite all his campaign bluster about leaving "no place" for the markets in his administration, Hollande's France will be at the mercy of the same forces as every other European country making painful decisions.

"Of course they bash the markets during the campaign, but the reality is they have a deficit to finance, they have debt they need to roll over," said Kirkegaard. "When the bill comes due, they will cave."