Sarkozy Bets on Supply, Royal on Demand for Economy. a contest between competitiveness and consumption
By Simon Kennedy and Sandrine Rastello
April 24 (Bloomberg) -- The French presidential election is down to a contest between competitiveness and consumption.
Chasing votes before the May 6 runoff, Nicolas Sarkozy of the governing Union for a Popular Movement and Socialist Segolene Royal are presenting starkly contrasting solutions to weak growth and high unemployment in Europe's third-largest economy.
Royal wants to spur consumer demand by increasing job security, pension spending and the minimum wage. Sarkozy proposes making companies more efficient by cutting taxes, eliminating charges on overtime and weakening labor protection.
``Whether to focus on demand or supply is the main divide between the two candidates,'' said Dominique Barbet, senior economist at BNP Paribas in Paris. ``Sarkozy is more ambitious on the labor market, while Royal wants to increase consumption.''
Whoever wins will inherit from President Jacques Chirac, 74, an economy whose share of European exports is shrinking and whose growth is likely to lag behind Germany's for a second year. The jobless rate of 8.8 percent is the highest among the 13 nations that share the euro, and France's current-account deficit is the largest in a quarter century.
``The French economy is in a bad situation,'' said Stephane Deo, chief European economist at UBS AG in London. ``Growth is mediocre and competitiveness weak.''
Sarkozy's Lead
Sarkozy, the top finisher in the April 22 first-round voting, opened the race for the runoff ahead in opinion polls. An Ipsos SA survey of 803 people, published today and conducted yesterday, showed 54 percent of those expressing a preference backed Sarkozy and 46 percent picked Royal. About 15 percent was undecided. The margin of error was three points.
Sarkozy, a former finance minister, promises to deregulate the labor market by making firings easier and scrapping taxes and charges on all hours worked beyond the statutory 35 a week. He also wants to cut inheritance taxes, cap individuals' total tax payments at 50 percent of income and replace only half of retiring civil servants.
The plan wins backing from economists who say France's economy must compete better with the cheap labor and low-cost goods of emerging markets such as China. On a scale of market friendliness devised by Laurence Boone, chief French economist at Barclays Capital, Sarkozy scores 1.8 in a range of minus 4 to plus 4 -- against Royal's minus 1.6.
`Pro-Market Reformist'
``His platform is a coherent pro-market reformist program, which should enhance potential growth,'' said Eric Chaney, chief European economist at Morgan Stanley in London and a former forecaster at the French Finance Ministry.
At the same time, Sarkozy, 52, ``is not completely liberal,'' said Mathilde Lemoine, chief economist at HSBC France. He calls unrestricted free trade the ``policy of naivete,'' supports government bailouts of companies on the brink of failure and wants the European Central Bank to take more account of growth, rather than concentrating on inflation, in setting interest rates.
France also hasn't shown itself patient with programs that, like Sarkozy's, may cause pain before they pay dividends. Chirac's proposed overhaul of pensions and health care in 1995 triggered strikes, and his government last year had to scrap a law that made it easier to fire young workers.
A Quicker Kick
Royal's program may spur the economy more quickly than Sarkozy's while doing little to improve its longer-term performance, said Gilles Moec, senior economist at Bank of America Corp. in London.
Royal, 53, would raise the minimum wage 20 percent by 2012, boost the lowest pensions and create 400,000 more government- sponsored jobs. Job protection would be enhanced by scrapping a contract that allows small companies to fire new hires without cause during their first two years of work.
``There's a stronger dose of support to demand with Royal,'' said Boone at Barclays Capital.
While she wants to extend the 35-hour work week to all parts of the economy and revoke subsidies to companies moving jobs abroad, she also speaks favorably of the Scandinavian model of blending economic security with worker flexibility.
`First-Chance Contract'
She says she would engage unions on revamping labor rules and bring down youth unemployment with a government-paid ``first-chance contract'' to cover the first-year salaries of as many as 120,000 unskilled workers.
Her proposals focus on bolstering consumer demand, which already accounts for two-thirds of the economy, and may not go far enough to address barriers to growth, economists say. ``She does nothing to boost potential growth,'' Moec said.
Forty-nine percent of respondents to a BVA poll last month said Sarkozy was more likely to bolster growth, compared with 39 percent for Royal. Fifty-seven percent backed her to pursue a more just social policy versus 33 percent for him.
Deo and others say the good news is whoever wins may be able to claim a mandate: Participation in the first round of voting was 83.8 percent, the highest since 1965. History suggests the winner's party will likely also secure a majority in the French parliament in June elections.
``It is a perfect situation for a new government,'' said Deo.
To contact the reporters on this story: Simon Kennedy in Paris at skennedy4bloomberg.net; Sandrine Rastello in Paris at srastello@bloomberg.net . |
