France’s public finances: A chance or a trap?

Date: 17/04/04

Does France's master pragmatist have a head for figures?

THE longer Nicolas Sarkozy spends in his new job as France's finance minister, the more it looks like a trap. Last week, only days after his appointment, public-utility workers from Electricite de France (EDF) and Gaz de France (GDF) took to the streets, and caused 800 blackouts, in a protest against creeping privatisation.

This week, after meeting angry union leaders, Mr Sarkozy announced he would turn the two utilities into public companies by July - though he ruled out privatisation, and promised to protect employees' privileged civil-service status. Reassurance enough? Not likely: the unions have called for protests on April 22nd and May 27th.

Mr Sarkozy's approach to France's treasured state enterprises reflects his disrespect for national taboos. In his old job as interior minister, he broke new ground by advocating positive discrimination to help Muslims. At the finance ministry, he is, says an aide, “neither Keynesian, nor economically liberal, but pragmatic”. The state is over-indebted? Then why not sell some assets? His plan, he said last week, was to manage the public finances “like a good head of the household”.

Privatisation appeals because France has few other options to narrow its gaping budget deficit. This year it is set to be the worst offender among the six European countries recently admonished by the European Commission about the size of their shortfall. The government sees a deficit of 3.6% for 2004, and has pledged to bring it below the stability pact's 3% limit in 2005. But the promise looks empty.

Figures leaked to Le Monde suggest the finance ministry has secretly predicted a far worse gap: a 4.1% deficit this year, followed by 4% next. If events turn out this way, France will breach the limit in 2005 for the fourth straight year, confirming its busting of the pact. Though the finance ministry refuses to disclaim the figures, Mr Sarkozy still says he wants a tighter grip on the public finances. But how? Tax increases are out: he has said France is over-taxed, and President Jacques Chirac made income-tax cuts an election pledge in 2002. Moreover, since the centre-right's rout in the regional polls last month, Mr Chirac is being nicer to special interests.

The president has promised to reverse cuts to long-term unemployment benefit and to subsidies to part-time artists and stage-hands, as well as to state-employed researchers - all of whom have protested about their plight. Jean-Pierre Raffarin, the prime minister, has also just raised the minimum wage, by 3.7% from July. So, as he prepares the 2005 budget, Mr Sarkozy must pay for those pledges too. Nor will he be rescued by growth: after narrowly escaping recession in 2003, GDP this year is set to grow by only 1.7%.

Which leaves Mr Sarkozy reaching, in part, for an old fall-back, “efficiency gains”. To set an example, he has promised to trim the finance ministry's payroll by 5,000 by 2007. Other ideas include streamlining tax collection and rationalising the state property portfolio. Eliminating waste is also expected to be central to the plans to overhaul the state health-insurance system, due before the summer. The health deficit alone is set to swell from €11 billion ($13.1 billion) in 2004 to €29 billion by 2010. Reform will again be resisted on the streets.

Hence, with so little space to move, Mr Sarkozy's bet on privatisation. He has already announced the sale of 30-40% of Snecma, an aerospace group valued at about €5 billion. Other possibilities include France Telecom, worth some €27 billion, of which 50.1% is still owned by the state; Areva, which makes nuclear reactors; or parts of Autoroutes du Sud de la France, a toll-road operator, or Air France.

Politically, though, EDF is Mr Sarkozy's toughest test. With 110,000 employees in France, many unionised, it is a formidable political force. Yet its accounts are opaque. Its employees' social committee, in charge of a huge budget, has recently been put under judicial investigation. Nonetheless, enjoying the perks and pensions of civil servants, EDF's employees distrust all promises over privatisation.

They may be right. Making the utility into a public company, even a non-privatised one, does open the way, in theory, for private shareholders. So Mr Sarkozy cannot please everybody. Officially, President Chirac put him into the finance ministry to boost the economy. Unofficially, he may have wanted to deflate a potential rival.

The challenges facing Nicolas Sarkozy, Frances new Finance Minister.

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