FRANCE'S NEW GOVERNMENT AND THE ECONOMY: MOVING

UNCLAS SECTION 01 OF 02 PARIS 003864

SIPDIS

SENSITIVE

STATE FOR EB, EU/ERA, EUR/WE
COMMERCE FOR ITA
STATE PASS TO USTR (SANFORD)

E.O. 12958: N/A
TAGS: ECON PGOV EIND EFIN FR EUN
SUBJECT: FRANCE'S NEW GOVERNMENT AND THE ECONOMY: MOVING
FORWARD?

REF: PARIS 3813


1. (SBU) SUMMARY. French voters may have cited the poor state
of the economy as a key reason to reject the European
constitution in last week's referendum, but neither incoming
Prime Minister de Villepin nor President Chirac have signaled
that economics will be the focus of the new government's
action. Both, however have clearly identified unemployment
as the new government's top priority, and have promised
quick, effective action. Little has been heard about reform
initiatives in other economic areas. Villepin's economic
views are unclear, but he is known to harbor Gaullist views,
supporting a traditionally strong role for the state in the
economy. With markets generally calm, and Economy Minister
Thierry Breton and Nicolas Sarkozy in the new cabinet, most
observers expect an activist approach to issues like
employment and industrial policy, but a lower profile in
Brussels and few bold business-friendly or market-oriented
economic initiatives of the "Anglo-Saxon" type. End summary.


2. (SBU) Little is known about Villepin's economic views. He
describes himself generally as an activist, with clear views
on the important role the state plays in the economy. In his
first remarks as Prime Minister, Villepin has focused on
fighting unemployment, though without mentioning any
specifics. Echoing Chirac, he blithely told the press "not
everything has been tried". A number of bills are being
discussed in Parliament, which could attract government
support. These include some fine-tuning of labor laws,
lightening of social charges for small companies, and job
training programs for labor market entrants.


3. (U) More broadly, Villepin has talked about the need to
build "confidence", but clearly rejects the "Anglo-Saxon"
free market model. Taking his cue from his hero, Napoleon,
Villepin has set himself a goal of a hundred days to bring
back confidence to the French. The self-described Gaullist
also cited the need for "more opportunity" and "education,
research and an ambitious industrial policy" as goals


4. (SBU) Like his mentor Jacques Chirac, Villepin has often
derided the "Anglo-Saxon model" of free markets in favor of
the "French social model". This notion, touted by many
French politicians in the recent debate over the
constitution, combines a substantial social safety net,
strict labor protections and a strong presence of the state
in the economy. The French model has recently come under
increased criticism as France's economic outlook stagnates,
but opponents of the victorious "no" vote as well as
supporters of the "yes" vote have paid homage to this
concept.

Tension with Sarkozy?
--------------


5. (SBU) Not all are believers in the French "social model",
least of all in the new cabinet. Newly appointed Interior
Minister and Presidential hopeful Nicolas Sarkozy critically
pointed to the high unemployment and low growth as the only
real result of this "French model". Sarkozy, dubbed "the
American" in the press, has historically supported a greater
measure of economic freedom and market-oriented policies than
most French politicians. While he sees the political
usefulness of some industrial policies, a clash over the
economy with Villepin is almost inevitable.

New team, markets calm
--------------


6. (U) Villepin's economic team will regain former France
Telecom CEO Thierry Breton, an Economy Minister with
significant private sector experience. Other members
including a new Minister Delegate for Foreign Trade, top
Chicago anti-trust lawyer Christine Lagarde, the head of
Baker & McKenzie's office in France. Francois Loos,
formerly in charge of foreign trade moves to Industry,
dislodging Sarkozy stalwart Patrick Devedjian. Breton had
been wooed by Jacques Chirac to give up a multimillion-dollar
compensation package at France Telecom to take over at the
Economy Ministry. He has kept a relatively low profile,
despite a well-regarded effort in negotiating more flexible
rules for the EU's Stability and Growth Pact. His other
important goal includes continued progress in France's
privatization programs. During the past weeks, and following
the May 29th referendum on the European constitution, markets
have remained calm, appearing to have factored in the "no"
vote. Financial markets, including the CAC40, actually
remained steady or went up slightly. In the currency
markets, the Euro has dipped about 1 percent.

Legislators cool on Villepin
--------------

7. (SBU) Parliamentarians from the right of center majority
who met with Villepin June 2 had mixed responses to the new
Prime Minister, who has never held elective office. Senate
Majority leader Christian Poncelet asked Villepin for "a few
symbolic gestures", while the majority whip in the National
Assembly Jean-Louis Debre told him that the Stability Pact
needed to be relaxed to permit jobs programs and large
infrastructure projects. Others called for job programs.
Some parliamentarians were pleased with the political impact
of the appointment of the Villepin-Sarkozy "duo", but others
told the press they viewed Villepin's responses to their
questions as "vague" and "unconvincing". (Note: A new poll
published by Le Monde June 2 shows only 36 percent of the
French public approving of Villepin's appointment.)


8. (SBU) On EU economic matters, most observers believe
France will keep a lower profile in the short to medium term,
although France will need to be assertive in defending French
interests in the post-referendum political climate. The
French rejection of the constitution will likely isolate them
further in Brussels, though the Dutch "no" may alleviate that
isolation somewhat. With the June 17 European Council
meeting in Brussels coming up, the government's first task
will be to assess how to evaluate the future of the European
constitutional treaty. The left-of-center daily Liberation's
political editor is somewhat more cynical about the prospects
for the new government's continued strong engagement on
Europe, writing June 1 that Villepin's pro-European
sentiments were never as intense as his "flamboyant
anti-Americanism".


9. (SBU) Nevertheless, on the table in Brussels are a number
of dossiers that France could promote more energetically. As
Economy Minister in 2004, Sarkozy had strongly supported
realigning European corporate tax rates or even VAT rates to
avoid what is called "fiscal dumping" by countries with low
rates, such as Ireland and Slovakia. Parliamentarians have
begun to push to relax the Stability Pact. National Assembly
majority leader's Jean-Louis Debre's recent comments
promoting more public spending and public jobs programs would
upset one of Economy Minister Thierry Breton's few successes
to date, the compromise over the Stability Pact. Debre is
close to Chirac.


10. (SBU) COMMENT. Jacques Chirac, leader of the "yes" vote,
firmly maintained throughout the referendum campaign his
support for the "French social model" and insisted on its
incompatibility with free-market, "Anglo-Saxon forms of
economic organization. Villepin is therefore likely to avoid
measures that smack of "Anglo-Saxon" economic policies.
Despite Prime Minister de Villepin's stated predilection for
state action and grand gestures, most observers hope Nicolas
Sarkozy and Economy Minister Thierry Breton's presence in the
government will balance any bold (or misguided) economic
initiatives in the near term.


WOLFF