Lagarde confronts French economic woes

The Telegraph ^ | 9/26/2007 | Ambrose Evans-Pritchard

[bruinbirdman]

The news reaching the desk of Christine Lagarde at the French ministry of economy, finance, and employment is dreadful, and getting worse by the month. The budget deficit is ballooning to €42bn (£29bn). The trade deficit is smashing records. Business confidence has fallen to the lowest in five years.

The euro is now hugely overvalued for France, though not for Germany. It is hammering French luxury exports and forcing Airbus to mull yet another €1bn of cuts.

Her own prime minister blurted out on Friday that France was now "bankrupt", with no chance of halting its relentless slide down the global growth league unless there is a drastic change of course.

"I am at the head of a state that for 15 years has been in chronic deficit. I am at the head of a state that has not once passed a balanced budget in 25 years. This can't go on," he said.

If that was not enough, Jean-Claude Trichet, the president of the European Central Bank, more or less said over the weekend that the country had become a basket case.

"French public finances are in very great difficulty: it's a fact," he said, warning that France had been left behind with the biggest and least reformed state sector in Europe, still consuming 53pc of GDP. "We're nine points above Germany and 15 above Spain. Even the Swedes, Finns, and Danes have cut below us," he said.

Mrs Lagarde can only laugh. "I'm not doing this job for pleasure; or for a good balance of life and work: That's gone out the window," she said over breakfast at Bercy, the vast 1970s bureaucratic Bastille on the Seine, famed as Europe's last surviving temple to state planning.

She is an incongruous figure in the Batiment Colbert, sipping milky tea like the British, and chattering in perfect English with a posh Chelsea accent, laced with Australian argot, and Ivy League-isms from her days – until recently – as chair of the New York firm Baker & Mckenzie. She is an anti-trust lawyer.

Nobody quite like this deracinated free marketeer – and ex-member of the French synchronised swimming team – has ever held court before at Bercy. But then she was brought in as a Gallic Thatcherite by President Nicolas Sarkozy to foment revolution, or "La Rupture" as he calls it. Top priority is to sabotage the 35-hour working week, by exempting overtime from tax. It has corrupted the soul of France.

"I was flabbergasted when I came back from the US to see how much time people spent adding up their holidays. They weren't talking any more about actually doing anything. That was gone," she said.

Mrs Lagarde does not mince her words, even when speaking of fellow finance ministers. Alistair Darling's handling of Northern Rock left her open-mouthed. "With all due respect to him – and they were going through a tough situation – it was extraordinary that two days before he had said there would be no bail-out and they would stay the course," she said.

French banks, she believed, would have closed ranks earlier to save one of their own and to prevent such a calamitous spectacle. "The image of people queuing in front of the banks was quite staggering."

Nor for that matter, does she mince her words about British treatment of women. "When I was running my firm it was always more complicated to get women partners elected and promoted by my London partners. English society seems tolerant and eccentric: I think it's very stratified and has its prejudices. Do they still have those clubs that refuse women or expect them to wear skirts? It has its charms," she said through gritted teeth.

Mrs Lagarde must know that there is now little hope of delivering the Sarkozy promise of 3pc growth next year, which is why she – with prodding – is now waging a near daily battle with the ECB over the euro's exchange rate, a proxy fight for what is really a tussle over interest rate policy.

"The ECB is an independent body and it would not come into anybody's mind in France to question that independence," she said, before going for the jugular.

"Should there be more management of the value of the euro? It is something we are arguing about. It is certainly worth having the argument," she said.

She was coy when asked whether France intended to invoke Maastricht Treaty powers giving EU finance ministers the power to control the exchange rate, and whether it had enough allies to form a majority bloc under the EU's voting rules.

"I'm not going to answer. One question will lead to another, but not yet," she said.

The key clause is Article 109 of the Maastricht Treaty, the so-called "nuclear option", which allows politicians to manage or set the exchange rate.

It is arguable that French pressure has already forced the ECB to yield on monetary policy, but the big test will come in October. "It's up to them to decide, I would hope they do so the basis of macro-economic circumstances. The way the yuan, the yen, and the dollar are going would lead me to believe that at least stability, if not [rate] reduction, would be appropriate," she said.

Mrs Lagarde's economic credo is "rigeur", belt-tightening, and supply-side revolution. The risk is that she finds herself defending dirigisme instead. It was Mr Sarkozy after all who excised the words "free and undistorted competition" from the EU's draft constitution. His €12bn "fiscal shock" looks all too like a burst of Keynsian pump-priming. It also breaches the EU's deficit ceiling of 3pc of GDP, not that he cares. The tax cuts come now: the spending cuts much later. None of the five million people working for the Leviathan state are going to be sacked. Attrition comes at a glacial pace. One out of two retirees will not be replaced. "It's minute compared to the overall size of the public sectors," she admits.

Her boss is an enigma, a prophet of hard work with an armoury of anti-capitalist rhetoric. Yet Claude Bébéar, former AXA chief and now head of France's Montaigne Institute, says we should ignore Sarkozy's populist outbursts.

"Sometimes he does little things to make people happy while he is really doing something else. I'm convinced he will go to the end with these reforms. He is choosing his enemies, and choosing his timing," he said. There is a close parallel with Margaret Thatcher's first 18 months in power: the deceptive calm before the storm.

Laurence Parisot, head of the employers group MEDEF and another free-market feminist rising to the top of the new France, said she was deeply shocked by Sarkozy's assault on EU competition law, but she forgave him.

What he has achieved is to shake up the whole way people think about business, she said. "Under Chirac, companies were seen as evil. Sarkozy has changed how people talk. He is the most pro-business president since the second world war."

As long as Mrs Lagarde and Mrs Parisot are still willing to vouch for Sarkonomics, one can perhaps allow it the benefit of the doubt.

[businessprofessor]

The current situation in France is the model that the Dims want to emulate. While Sarkozy tries to change the entitlement and socialist mindset (if only mildly), the Dims want to take a hard left turn. France has some advantages (less litigation and nuclear power) that we do not. So the hard left envisioned by the Dims will likely have worse results. Please wakeup Dims and smell the cheese!