Economy looms large in French election

PARIS --An unexpected third-quarter slump has thrown French economic anxieties into sharper relief as the main opposition Socialist Party decides whether to go with the flow of public opinion by electing Segolene Royal as its presidential candidate.

But for party members weighing Royal's economic proposals against those of her more experienced Socialist challengers -- both former finance ministers -- formal election pledges offer little help ahead of the party's primary on Thursday.

The choice on offer is simple: the manifesto, the manifesto, the manifesto.

Dominique Strauss-Kahn, Laurent Fabius and pollsters' favorite Royal have all signed up to a party program that promises to raise the minimum wage, punish companies that shift jobs abroad, extend the 35-hour workweek and renationalize Electricite de France SA if a Socialist wins the presidency next spring.

But that doesn't mean each candidate would have the same priorities if they win the party nomination. "We're already beginning to see some different inclinations appear," said BNP Paribas economist Dominique Barbet.

Royal and Strauss-Kahn -- who served as finance minister in Prime Minister Lionel Jospin's government from 1997-1999 -- have sounded lukewarm about the party's pledge to reverse the partial privatization of EDF.

But Fabius has been vocal about his determination to see it through, in theory without public expense, by forcing the company to buy back the 15 percent of its shares that are in private hands -- a move that could weaken the finances of France's main power company at a crucial moment in the industry's international consolidation.

Fabius, a former tax-cutting prime minister from 1984-1986 and privatizing finance minister under Jospin from 2000-2002, has since repositioned himself on the Socialists' left and promises swifter increases to the minimum wage than the party manifesto suggests.

Although he appears to be trailing a distant third, Fabius' support within the party may be underrepresented by published polls, which are based on the opinions of Socialist supporters rather than the card-carrying members who actually vote.

Increasing the minimum wage too fast could backfire, economists warn, by pushing more jobs out of the country. "By making unqualified labor more expensive, you discourage hiring and increase outsourcing," Barbet said.

BNP Paribas has yet to put a figure on the estimated costs -- either to the economy or to the national budget -- of the main prospectuses on offer from the Socialists and the governing right.

The Enterprise Institute, a leading French business organization, estimates that the Socialist program would swell the budget by euro52 billion-euro54 billion (US$67 billion-US$70 billion) annually.

Based on promises so far by Nicolas Sarkozy, France's interior minister and the expected candidate for the Union for a Popular Movement, which he leads, the institute calculates that a victory for the mainstream right would cause a smaller budgetary dent of euro39 billion (US$50 billion).

The bigger difference may be in the detail. Socialist manifesto pledges logged by the Institute's Web site add euro1.20 in social, welfare and health spending for every euro allocated to new policies that could be expected to boost economic growth -- like education, research and back-to-work measures.

Sarkozy, by contrast, promises to spend more than euro4 on education, research and work incentives for every euro added to social, welfare and health budgets, according to a comparison of the same estimates. Unlike the Socialists, he is also proposing tough new budgetary rules compelling future governments to balance the books.

But the Institute's figures do not take account of additional pledges in a new conservative electoral program. Drafted by Sarkozy loyalists for presentation to party officials this week, it adds a sprinkling of new spending commitments, including longer maternity leave and guaranteed child care, that are designed to appeal to wavering voters in the center.

"I don't get the impression that Sarkozy is moving in the direction of budgetary rigor," said David Thesmar, associate professor of finance at French business school HEC.

With five months to go before the presidential election's first round, Thesmar said, there are signs that restraint is already giving way to "an auction of ever-increasing electoral promises" that the country can ill-afford.

France, the world's seventh-richest nation a quarter of a century ago, has since slipped 10 places down the global ranking of per-capita output. But public spending has stayed high, driving the national debt to euro1.14 trillion (US$1.46 trillion) as of July 31, or about 65 percent of gross domestic product -- compared with 58 percent at the end of 2002.

Last week's surprise announcement that the economy ground to a halt in the third quarter, after growing 1.2 percent in the second, added to the gloom and -- some would say -- the case for urgent reforms.

But the worse things get between now and April, observers agree, the more likely voters are to turn to the higher-spending Socialist program.

"We know that voters tend to pass on economic shocks in their electoral choices," Thesmar said. "If the recovery really loses steam it's the conservatives who will pay the price."

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