FRANCE FACES TOUGH CHOICES TO KEEP ITS EDGE

FRANCE FACES TOUGH CHOICES TO KEEP ITS EDGE

The strong-franc policy, which involved linking the French currency to the German mark over recent pre-euro single- currency years, imposed painful sacrifices on France, most notably a high level of unemployment.

But it also applied downward pressure on labor costs and prices, giving French business a competitive edge over main European rivals such as Germany, Italy and Great Britain. A regular balance-of-payments surplus over the past six years gave added stability.Helped by the cyclical upswing, France's lean years have now been followed by impressive growth rates of 2.8 percent in 1999, with 3 percent slated for this year. Some 350,000 net jobs have been created in the private sector over the past two years.

But it is now clear that to preserve the advantage and encourage investment, Prime Minister Lionel Jospin's socialist government has to make some politically unpalatable major tax cuts and rein in public spending.

In a policy speech in late December, Jean-Claude Trichet, governor of the independent French central bank and main author of the successful ''competitive disinflation'' policy applied by French governments of left and right over the past decade, was in no doubt. The strategy needs to be pursued more than ever in the new era of the euro.

''The economic authorities must be more vigilant than hitherto in watching the competitivity indicators,'' he said, citing ''unit labor costs, the regulatory and tax framework and, more generally, the environment that affects the creation and dynamism of enterprises.''

In recent months, huge windfall tax revenues have flowed into the state's coffers from the improved economy, increasing pressure on the government to ease the tax burden, giving consumers a boost in an economy that has long been one of the world's most highly taxed.

France's total tax revenue in 1998 was estimated at 45.2 percent of its gross domestic product by the Organization for Economic Cooperation and Development.

Only Sweden, 53 percent, Denmark, 49.3 percent, Finland, 46.9 percent, and Belgium, 46.3 percent, were given higher estimates by the experts in the 29-nation organization.

Germany's percentage was 37.1, while Britain was credited with 37.6 percent and the United States only 20.8 percent. (The U.S. number excluded state and local taxes, however, which would probably add around 9 points.)

But storm clouds hang over France's apparently sunny setting.

The expansionary vigor of French business abroad - witness the current rash of takeovers of British companies, for instance - is probably at least partly explained by corporate concerns over footing the bill for the problem-wracked public sector back home.

Bureaucratic working methods, low productivity and overmanned workforces - low-paid but virtually unsackable, and all too ready to hit the strike button - these are the widely perceived views of many in the long-suffering private sector.

The French private sector must also now digest and adapt to the government imposed 35-hour workweek, which becomes obligatory for all firms with more than 20 employees by the end of this year. What appears to many as a complicated smoke-and-mirrors system involving market-distorting incentive funding from public coffers is not yet in place and has led to some strikes and much discontent.

At the same time, the complex process to overhaul the costly, money-losing social-security system has barely begun.

As if this were not enough, a public-pensions crisis is seen as inevitable in a very few years' time, yet the government has so far ducked the issue, which is seen as political suicide by the socialist-communist coalition.

Aware that only half of French households currently pay income tax and that an array of other taxes hits wide swaths of the population, Jospin must find ways of spreading the tax burden more fairly and at the same time contain unpopular high levels of public spending. He also needs to maintain current growth, bolster employment and encourage investment.

Last, and by no means least, he has his eye on a quite different timetable: the election of 2002, when he undoubtedly would like to oust Jacques Chirac as president of France.

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