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Wednesday, July 18, 2007

Sarko: France's Get-Up-and-Go

Sarko surrounded by students: talking about University system reform
I received Sarkozy's victory with a moderated skepticism. I am forced to realize that I was wrong. Sarko is very good at job, so far. He is pursuing a very clear program of reforms while building a very open and constructive dialog with all segments of French society: political segments, age segments, social segments.

Here is the copy of a column from today's Washington Post. The author is Steven Pearlstein.

It's hard to say what is more remarkable -- that the French National Assembly was in session in mid-July at 1:30 on a Tuesday morning or that it approved an $18 billion tax cut plan that drastically reduces taxes on the rich and offers incentives for working more.

After decades of economic drift and political paralysis, France suddenly finds itself caught up in a whirlwind of economic reform, all of it generated by its hyperactive new president, Nicolas Sarkozy.

There he is lunching with student leaders at a local bistro to win their support for reform of the nation's under-funded and under-performing university system.

Here he is on the phone with Russia's President Vladimir Putin, sealing the deal for the French oil company, Total, for a 25 percent stake in the management of the giant Shtokman gas field.

Now he is in Toulouse, with German Chancellor Angela Merkel, announcing a new governance structure for Airbus that puts a loyal French technocrat in charge.

And there's Sarko in Brussels, criticizing the European Central Bank for keeping the euro too high and demanding more leeway for France's ballooning budget deficit.

The joke going around is that while Sarkozy's arch-rival, former Prime Minister Dominique de Villepin, wrote a book on Napoleon, Sarkozy is Napoleon, reshaping the French economy according to his will and restoring it to its former glory.

Despite some similarities, Sarkozy isn't exactly France's answer to Ronald Reagan or Margaret Thatcher.

Yes, there are the big tax cuts designed to "shock" the French economy into a higher growth mode by putting more money in the pockets of French consumers, encouraging investment and luring capital and talent back into the country.

He's given labor and management six months to come up with a new employment contract that will give companies more flexibility to hire and fire.

To tame the power of labor unions, Sarkozy has demanded that transit workers be required to provide a minimal level of service during strikes.

And he proposes to cut spending on France's proud civil service by not replacing one of every two jobs that comes vacant and eliminating pensions that allow some government workers to retire at age 50.

But Sarkozy has the soul of a Gaullist, an economic nationalist, eager to intervene in the economy to protect the independence of French companies, the jobs of French workers or the interests of French consumers.

Given the long history of failed attempts to reform the French economy, it may be only natural to suspect that Sarkozy is not really a true believer in market capitalism and economic liberalization. In a sense, that's correct. His interest in markets and competition is less ideological than it is practical, viewing them as a means to achieve certain results, not ends in themselves.

At the same time, it would be wrong to assume that Sarkozy is merely a cynical politician who understands that the only way to push through economic reforms is to neutralize opponents with the occasional foray into protectionism or industrial policy. He is, at heart, an old-fashioned Gaullist who has no problem mixing his Adam Smith with his Jean-Baptiste Colbert to create a peculiarly French version of state-managed capitalism.

Certainly the cabinet and economic team Sarkozy has assembled reflect the new president's ideological eclecticism. They include members of the opposition centrists and Socialists as well as the author of best-selling book on France's economic decline. And as Finance Minister he appointed Christine Lagarde, a lawyer with no political experience whom de Villepin lured away from the American law firm of Baker & McKenzie to serve as trade minister in the last government. With perfect English learned at Bethesda's Holton-Arms School, a flair for reasoned advocacy and a wide range of business experience outside of France, the stylish Lagarde has already given instant credibility to Sarkozy's reform agenda.

Gerard de la Martiniere, the astute and well-connected chairman of the French Insurance Association, says Sarkozy fulfills the need for a uniquely French solution to its economic malaise. In the past, he said, reforms failed because they were seen as being imposed on France from the outside by the European Union or trading partners or global markets. As reform was presented to the French public, it seemed that achieving economic success required suppressing everything that was French.

But Sarkozy has turned the political equation around, says de la Martiniere, arguing that economic success is now the best way to revive the French national identity, not to suppress it.

As he taps into broad public demand for change, Sarkozy is overwhelming political opponents with the speed and volume of his initiatives. The Socialist opposition has conceded that taxes on labor and capital are stifling innovation and job creation and driving top talent out of the country. Unions are looking for a way to avoid a confrontation that might expose how little "solidarity" there is between private and public sector workers. And the leaders of the French business elite, which has cleverly stoked nationalist policies to protect themselves and their uncompetitive enterprises, now realize there is probably more money to be made by opening to the world.

Although much of the emphasis so far has been on cutting taxes and reforming labor markets, that will be only half the battle. Sarkozy will also have to take on the tangle of regulations that limit competition in dozens of product markets.

A prime target is the retail sector, where price discounting is forbidden and any new entrant needs to get approval from local chambers of commerce controlled by competitors. The result is not only consumer prices that are as much as 20 percent higher than they are elsewhere in western Europe, according to former Sarkozy economic adviser Jacques Delpla, but a retail sector that is smaller by 1 million jobs.

Also largely protected is the financial services industry, which is as profitable as it is inefficient and has watched as much of its potential business and top talent migrate to London.

It's still unclear how far Sarkozy will go with these product market reforms -- they are aimed directly at the heart of his political constituency. But my sense is that Sarkozy has finally put France on the path toward economic reform. As an outsider by birth (Hungarian parents) and education (the first modern president not to graduate from one of France's "grand ecoles," where the elite are trained), he is not so tightly bound to the past.

His political rise is a case study of knowing when to be tough and when to be flexible, when to be loyal and when not. Having been elected on the promise of getting France moving again, he has every incentive to take whatever risks are necessary to deliver.


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