The anatomy of Sarkozy

A majority of the French say that they want Finance Minister Nicholas Sarkozy to play an important role in shaping the country's future. No Frenchman wants that more than the ambitious "Sarko" himself. So Sarkozy will step down as finance minister next month to take the reins of the ruling conservative party (UMP), washing his hands of Chirac's muddled government and hoping to use the party machine to bulldoze his way into the Elysée Palace in two years.

But is Sarkozy much different from Chirac? Will he really try to end France's misguided belief in its own economic "exceptionalism?"

The challenge is massive: a 10% unemployment rate that has lasted for 20 years, with more than 20% of people under 25 unemployed, and five million people - nearly a quarter of the working population - employed by the state. The salaries and pensions of these fonctionnaires represent about 40% of the national budget.

This "French exception" also includes vested interests like the railways and agriculture, sectors so powerful that any attempt at reform is immediately frozen by street demonstrations. Indeed, instead of being turned off by such tactics, ordinary Frenchmen and women often turn violent activists like Jose Bové, who destroyed a McDonald's restaurant, into heroes. Can "Supersarko" (the satirical Canard Enchaîné newspaper's nickname) tackle "la France des privilèges"?

Possibly. Sarkozy does not identify with the privileged elite. Although born into comfort, he did not pass through the elite training grounds, the Grandes Écoles, but instead went to university like millions of other French. He cultivates the image of a "regular guy" who doesn't read poetry or philosophy at breakfast. Hence the sneering elite suspicion - evident, among other places, in the pages of Le Monde - that he is a mere populist.

But these are appearances. What does Sarkozy's record as finance and economy minister say about his instincts? As finance minister, Sarkozy presided over improving economic indicators that are due more to luck than skill.

For example, the French statistical agency now expects annual real GDP growth to accelerate to 2.5% this year, compared to the 1.7% on which the budget was based.

This recovery - almost entirely based on domestic demand - gave Sarkozy an extra five billion euros in tax revenues. Without having to resort to big spending cuts, he could announce that France will reduce its budget deficit in 2005 from 3.6% to 2.9% - below the 3% ceiling for eurozone countries for the first time since 2001.

To keep consumer spending high, Sarkozy has moved forward with tax reform and reduction - including inheritance tax breaks encouraging the drawdown of savings, worker tax credits, and incentives to prevent outsourcing of jobs abroad.

Unsurprisingly, consumer spending rose by 6% year on year in the second quarter of this year, while the household savings rate is set to fall to 14% this year, from 17% in 2002. Sarkozy is also planning to cut corporate taxation, which, at 35.4%, remains 20% higher than the European average.

At the same time, Sarkozy has shown some inclination towards structural reform. He recently blamed France's budgetary problems on the country's 35-hour workweek. Besides the adverse effect such tight restrictions have on companies' flexibility and effectiveness, these rules also cost €16 billion per year - more than is spent on higher education. Sarkozy has also spoken of forcing France's eager healthcare consumers to pay a flat fee covering part of the costs of treatment.

But this economic moderniser has a populist side, leading the charge for standardised tax rates in the EU and "encouraging" retailers to cut the price of brand-name products like Coca Cola and Danone yogurt.

Moreover, Sarkozy displays plenty of the interventionist and nationalist instincts of the establishment that he appears to challenge, including the recent announcement of an "economic growth package" - code for demand-boosting public expenditure.

To be sure, Sarkozy seems free of the most powerful negative impulse of French nationalism, anti-Americanism. He likes to point out that most French young people want to go to the US, and has even been nicknamed "Sarkozy the American."

But Sarkozy's bailout of Alstom - a company regarded as a "national champion" - had all the hallmarks of the old dirigisme, calling for the government to take a bigger stake while ruling out a strategic partnership with Germany's Siemens. For good measure, Sarkozy said that France had become too exclusively friendly with Germany.

Corporatist France is hard to govern. The trap for politicians like Sarkozy lies in adding new layers of state bureaucracy instead of trying to dismantle and deregulate. On the one hand, the government heavily taxes enterprises, impeding job creation; on the other, France is to spend €12.8 billion on "social cohesion" to tackle unemployment, disaffection, and increasing religious extremism. In other words, the state spends in order to clean up the mess it created.

Can Sarkozy break this vicious circle? Can he reform a state that undermines output by taxing producers and encourages idleness by increasing unemployment benefits?

Chirac's future is behind him, so he dreads Sarkozy. The battle that will now take place between them seems certain to paralyse government and any hope of reform in the short run. But Sarkozy has powerful friends in the press, as well as most of the battalions of the Gaullist UMP behind him. He has many enemies, but also a reputation for prodigious energy and efficiency.

Sarkozy's maverick ways could save France. But first he must overcome his own residual tendency to expect too much from an overburdened state.

Brigitte Granville, an economist who has advised Russia's Ministry of Finance, is Professor of International Economics and Economic Policy at the University of London, Queen Mary Centre for Business Management.

Copyright: Project Syndicate, October 2004.