The Professor's Gamble

France's economy in a race with the left

Like most European nations, France is in severe economic trouble. Price increases in 1977 are expected to average just under 10%; industry is stagnant; the number of jobless workers has jumped 23% in the past year, to a near record 1,159,000. What makes France different is that the economy is also in a race of sorts: how much it improves in the next few months--if it does at all--may determine whether a government that includes Communists comes to power as a result of the legislative elections that must be held by next March. True, the Socialist-Communist "union of the left" has been weakened by the inability of the two parties to agree last month on a revision of their joint program. But a poll published last week in the Paris newspaper Le Figaro indicates that the left is still ahead, 50% to 47%.

The race is the more nerve-racking because the government has chosen to run it slowly. President Valery Giscard d'Estaing has entrusted direction of the economy to a respected but politically inexperienced professor, Raymond Barre, 53, whom he named both Prime Minister and Finance Minister in August 1976. The jovial, rotund Barre, who likes to describe himself as "a square man living in a round body," wrote the textbook used most often in French economics classrooms. Since he moved to his offices at the Hotel Matignon, Barre has applied textbook economics to France's problems. His austere "Plan Barre," announced in September of last year, urged business to limit wage hikes to 6.5% a year, v. the 17% annual rate that was handsomely contributing to France's double-digit inflation. To reduce the country's costly oil imports, Barre has jacked up the price of "super" gasoline nearly 21%, to $1.85 per gal. He also imposed a three-month price freeze and lowered value-added (sales) taxes on a wide range of consumer goods.

A year later, Barre's approach has produced only the most modest successes. The annual rate of inflation in August dropped to 6.2%, the lowest since January, and unemployment figures for September, released last week, showed a slight decline. The nation's trade deficit will probably be reduced this year to around $3 billion, from $4 billion in 1976, and the franc has stabilized at about 4.86 to the dollar. On the other hand, output of goods and services is likely to grow only 3%, v. an original forecast from Barre of 4.8%.

Nonetheless, Barre is resisting pressure from worried politicians on the right to pump up the economy more before the elections. Last week he presented to the French National Assembly a 1978 budget that provides only a modest $1.8 billion deficit. Says Barre: "We are engaged in a long-term battle. This is not the moment to undo what we have achieved." He is getting help from a most unexpected source: the labor unions. Though many are led by the Socialists or Communists, the unions have been more docile this year than at any time in recent memory. Reason: they do not want to arouse public hostility against the left.

The unions' quiescence, however, provides no reassurance about what might happen if the left actually does win control of the government. The Socialist-Communist "common program," signed in 1972, calls for nationalization of all private banks and nine large, privately owned companies. Two of these are subsidiaries of U.S.-headquartered multinationals--Honeywell and ITT.

In addition, the program promises to raise the minimum wage by nearly 30%, increase a variety of social benefits, hike corporate taxes and start a plan that would give more say in the management of factories to workers. The program has frightened away investors, both French and foreign. Euroeconomics, a Paris-based research firm owned by a group of banks, predicts that enactment of the left's platform would erode company profits, accelerate inflation to 20% a year and cause a balance of payments crisis.

Last month's rift between Communists and Socialists occurred over the question of what to do about the hundreds of subsidiaries owned by the nine industrial groups that they hope to nationalize. The Socialists wanted to take over only those that are wholly owned, while the Communists had their eye on all those in which the parent company's stake was greater than 50%. Business reacted to news of the impasse with jubilation: the next day stock prices on the stagnant Paris Bourse climbed 4%. Today the index stands almost 24% above its level last May.

Whether Barre wins his gamble--that French voters will prefer his go-slow, common-sense policies to electorally inspired giveaways--will largely depend on external events. Will West Germany, France's largest trading partner, prime its economy sufficiently to create new jobs in France? Will Japanese exporters exercise enough restraint to prevent a trade war? Will the oil sheiks hold the line on prices at the end of the year? No one knows. But Barre, a former Common Market commissioner, has the advantage of at least understanding that France's economic destiny is not decided only in Paris and that quickie solutions may in the long run do more harm than good.

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