(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000403850001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: January 12, 2017
• Document Release Date: March 2, 2011
• Sequence Number: 1
• Publication Date: April 29, 1986
• Content Type: REPORT

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Central Intelligence Agency
29 April 1986
The Economic Policies of the New French Government:
Moving Cautiously with an Aura of Haste*
Conservative French Prime Minister Chirac, who took office in
mid-March, has moved quickly to implement the first stages of
right's economic program, the focal point of the election
campaign. Although the new measures announced so far have been
designed to convey the impression that the right is moving
forcefully, we believe that Chirac is also acting prudently to
try to avoid the potential political and economic dangers the
conservatives would face from an abrupt change in French economic
policy. In our view, Chirac's program basically extends the
pragmatic and market-oriented policies adopted by the Socialists
after their initial flirtation with a more traditional leftist
approach. Chirac has already outlined steps to lift many of the
remaining French foreign exchange and price controls, and
proposed a supplementary 1986 budget to begin reorienting
government spending and reducing the budget deficit. The right's
main break with the Socialist program is in its emphasis on
denationalization; Chirac has pledged to privatize a wide range
of French banks and industrial firms worth between $21 and $28
billion over the next five years. We do not expect that the
right's economic policies will lead to serious conflicts with US
interests, except possibly in the area of agricultural trade. In
fact, renewed French emphasis on market forces should complement
US efforts in this area and may allow Am an firms better
access to some French markets.
Cohabitation: The Political Backdrop to the Right's Pro ram
After less than two months of France's novel experiment in
powersharing between a Socialist President and a conservative
government, the French political situation remains volatile, and
*This paper was prepared by Office of European
Analysis. Questions and comments are welcome and may be
addressed to Chief, West European Division,
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this has at times overshadowed Chirac's attempts to push through
economic reforms. The first weeks of "cohabitation" have
progressed more smoothly than many predicted, however, which
suggests that both Chirac and Mitterrand are--for the time being,
at least--behaving with some deference toward each other.
Nevertheless, both Mitterrand and Chirac have their eyes fixed on
the 1988 French Presidential election. Chirac has made no secret
of his Presidential ambitions, and Mitterrand clearly wants to
pave the way for a Socialist successor with a popular mandate to
dissolve the National Assembly and call new parliamentary
elections. In the meantime, Chirac and Mitterrand will be trying
to outflank each other whenever possible, while trying not to
appear to threaten France's political stability in pursuit of
personal or partisan interests. Mitterrand and Chirac will
continually probe and test each other's wills and powers, and
much of the sparring will be over economic policy. 25X1
Cohabitation opens new political horizons for Chirac, but he
almost certainly realizes that it creates perils as well,
especially with regard to his performance on economic issues.
Chirac lacks the consistent popularity of other Presidential
aspirants on the right, notably former Prime Minister Raymond
Barre. He probably calculates that cohabitation is a
make-or-break opportunity for him, and that he must use his
tenure as Prime Minister to build popular support and pave the
way for a Presidential campaign. Chirac must do this without
seriously blundering, however, since a precipitous erosion of
public support for the government might tempt Mitterrand to
resign and dissolve the National Assembly, forcing early
elections. The Socialists would almost certainly stress economic
issues in such a campaign, pointing to their ability to turn the
French economy around in recent years, and holding Chirac
accountable for any negative economic results. For Chirac, 25X1
therefore, cohabitation will be a political tightrope, and we
believe that it will force him to act prudently on economic
policy and avoid risky experimentation as much as possible.
One indication of the importance Chirac attaches to the
political dimensions of his economic program is his decision to
name Edouard Balladur, his top political strategist, as economics
"Czar." As Minister of the Economy, Finances, and Privatization,
Balladur will oversee not only the traditional areas of monetary
and fiscal policy, but also the politically sensitive issue of
denationalization. By temperament a behind-the-scenes
technocrat, Balladur's pragmatic, cautious approach and concern
for Chirac's public image are likely to have a moderating
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influence on economic policy. We believe that under his
guidance, the government will be less likely to adopt some of the
more far-reaching--and risky--economic reforms outlined in the
right's campaign platform.
The Economic Setting: Welcome Breathing Room for the Government
If the political imperatives of cohabitation force moderation
on the government, France's brightening economic picture affords
it welcome room for maneuver. Although Chirac has lambasted the
Socialist's economic record, they in fact managed to turn the
French economy around in the past three years: French inflation
fell from 13.3 percent in 1981 to 5.8 last year and is probably
heading to below 3 percent in 1986. French GDP growth, while
still lackluster by international standards, picked up last year
to 1.3 percent, and is likely to exceed 2 percent this year. The
French current account balance, moreover, registered a surplus of
more than $300 million in 1985, and this year Paris is likely to
run a trade surplus, the first since 1978.
Apart from inheriting a relatively robust economy, the
conservatives will also reap the benefits of the decline in oil
prices and the cheaper dollar, which further cuts Paris' import
bill. France imports virtually all its oil, and an average 1986
oil price of $16 a barrel will, according to one recent
independent French forecast, boost GDP growth by an additional
0.6 percent. This bonanza, coupled with the dampening effect
lower energy and imported commodity prices will have on
inflation, probably assures the government of positive short term
economic results. Chirac will therefore have more room to
experiment, and perhaps even stumble, without having to worry
unduly about re-igniting inflation or weakening growth.
The recent favorable economic news improves Chirac's chances
of implementing the right's program and convincing the French
people that he can do better than the Socialists. Nevertheless,
the government is displaying considerable caution in formulating
and announcing its economic program. Chirac's strategy to date
appears to focus on two goals:
--Giving the impression of moving forcefully on high
visibility programs, especially denationalization;
--Focusing on unemployment--currently hovering near 10.5
percent--as the nagging problem that the Socialists
aggravated but the right can cure.
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Measures Announced Thus Far
Privatization
The government is pressing ahead with its much ballyhooed
program of denationalization, but we believe that Socialist
delaying tactics and market constraints will force the government
to move more slowly than its public posturing suggests. Chirac
initially sought to privatize by decree--a procedure whereby the
government is granted extensive powers by the National Assembly,
which ratifies the actions after the fact. But Mitterrand, whose
signature is necessary before decrees take effect, announced in
early April that that he would not permit the use of decrees to
privatize firms nationalized before 1982. The President also
said that he will oppose a cut-rate sell off of French industry
and will only sign decrees that give the state the same generous
terms the Socialists gave share holders when they nationalized
firms in 1982. Finally, Mitterrand extended his "no signature"
warning to any privatization decrees that threaten the existing
Mitterrand's groundrules by no means block the conservative's
privatization program but make it more difficult for the
government by forcing the right to push individual
denationalization measures through the National Assembly where it
has but a razor thin majority. Nevertheless, Chirac is pressing
ahead, and has adopted a conciliatory tone toward Mitterrand by
signalling his willingness to send contentious denationalization
measures to the National Assembly as regular bills. In a speech
before the National Assembly in mid-April, Chirac outlined his
plans to sell off a wide range of nationalized firms, worth from
$21 to $28 billion, over the next five years. These include:
--The 36 banks, five major industrial groups (Thomson,
Pechiney, Saint Gobain, Rhone Poulenc, CGE) and two
financial holding companies (Suez and Paribas) nationalized
by the Socialists in 1982.
--The aerospace and armaments firms Matra and Dassault, which
the state also took control of under the Socialists.
--The three large banks (Banque Nationale de Paris, Societe
Generale, Credit Lyonnais) and three large insurance firms
(UAP, GAN, AGF) nationalized after World War II.
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--The Havas advertising group and the oil giant Elf
Aquitaine, France's largest concern, also nationalized
after the war.
Notably absent from the government's privatization list are the
automaker Renault and steel manufacturers Sacilor and Usinor, the
three state-owned heavy industrial firms that perennially lose
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Although the government has yet to specify many of the
details of privatization and the timetable, Chirac is unlikely to
opt for a simple, wholesale sell-off of public holdings. The
total value of French equities is now only about $70 billion, and
massive government sales could depress and destabilize what has
otherwise been a bull market. Instead, the government is likely
to convert some of the many types of non-voting equities
outstanding into voting shares, thus transferring the control of
companies into private hands. Alternatively, it may gradually
expand stock offering to dilute public holdings. In any case,
the government is likely to retain substantial holdings in many
companies, figuring that by possessing large blocks of equity it
will maintain a strong voice in the company's affairs. The
privatization program is also likely to include incentives for
employees to purchase shares. It will probably also specify a
limit--probably on the order of 25 percent--on total foreign
holdings to blunt Socialist charges that the right is selling
control of the French economy to foreigners.
The government probably recognizes the constraints it faces
but will nevertheless move ahead as quickly as possible to
privatize some highly visible firms to demonstrate Chirac's
ability to implement the program and underscore the-dynamism of
the right's economic program. The Paribas and Suez groups and
one of the more profitable industrial firms nationalized in
1982--perhaps Rhone Poulenc--are the best candiates for early
divestiture. According to press reports, Chirac's advisers are
privately expressing confidence that the first firms could be
ready for launching by autumn, although most in the financial
markets are looking forward to early next year.
Budget Policy and Measures to Boost Employment
The conservative's full fiscal program--which promises to
include tax cuts, further spending reductions, and a
reexamination of the social security system--will be introduced
in the fall when the government announces the 1987 budget. In
mid-April, however, Chirac announced a supplementary 1986 budget
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aimed at bringing government spending into line, gradually
introducing new priorities, and correcting what the conservatives
argue are the traps in the Socialist's 1986 budget. The
supplementary budget increases the government's receipts by some
$3.2 billion, largely through about $1.4 billion in expenditure
cuts and $1.1 billion in sales of assets of state-owned firms
that are permitted under existing legislation. State-sponsored
research, the area hardest hit, is cut by over $200 million, or
nearly 4 percent of the government's total civil research budget.
The additional revenue to be raised is to be used to boost
spending by almost $3 billion on the following: about $1.1
billion is to be spent on additional subsidies for Renault,
Sacilor, and Usinor, and nearly $600 million for a youth
employment program. Finally, in a largely political gesture, the
supplementary budget legislation provides for the elimination
next year of the much-maligned wealth tax imposed by the
The government's next step in dealing with unemployment will
likely be legislation to give more flexibility to the labor
market. Chirac has already sought power to issue decrees
permitting more part-time and temporary employment, providing
further youth training schemes, and cutting companies' mandatory
social security contributions to encourage them to hire more
young employees. Mitterrand balked, however, at Chirac's attempt
to seek decrees making layoffs easier, and Chirac is likely to
try to move on this issue.
Price and Exchange Controls and other Financial Measures
In these areas the conservatives have moved cautiously to
extend the liberalization begun by the Socialists. -In mid-April,
the government fulfilled a campaign promise to ease foreign
exchange controls, but important limitations remain in effect.
French companies are now allowed to buy forward foreign exchange
contracts for up to three months, as opposed to the previous
rules allowing only a limited number of firms importing essential
products to purchase contracts for one month's forward cover. In
addition, exporters are no longer required to convert their
foreign currency earnings into francs within 15 days, as had been
the case previously, but can now hold foreign currency for 90
days. The government, however, stopped short of permitting
French nationals to hold foreign exchange indefinitely,
continuing a tradition in place in France since the 1930s. The
other financial reforms the government has adopted include
restoring anonymity to gold transactions in hopes that citizens
holding gold illegally will decide to sell it for more productive
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investments and declaring a tax amnesty to encourage Frenchmen to
repatriate capital illegally held out of the country.
The government has also sought the power to legislate by
decree in removing price controls. This process was well under
way under the Socialists, however, who claim that by early this
year over 85 percent of French industrial prices were
decontrolled. We believe that the right is likely to extend this
liberalization, but maintain price controls in several key areas,
especially services and books and pharmaceutical products, which
are politically popular.
Chirac's most dramatic move in the monetary area was his
instigation of the early April EMS realignment. Contrary to some
press reporting, the realignment did not surprise the market, but
was widely assumed to be inevitable because of price
differentials between France and West Germany. Chirac probably
also figured that by initiating an early realignment he would be
able to blame Socialist economic policies for the franc
devaluation. Balladur, who negotiated on behalf of France, was
nevertheless quick to put the best face on the realignment by
stressing the salutary effect it would have on French export
competitiveness and employment. In trying to neutralize its
inflationary impact, Balladur also announced simultaneously that
Paris will try to hold money supply growth this year to 5
percent, compared with last year's 7-8 percent figure. This
tactic of counterbalancing policies to minimize their possible
ill-effects was followed in mid-April when the Bank of
France--which is less independent than the US Federal
Reserve--cut its intervention rate, the key French money market
rate, by one half a point, to seven and three-quarters percent.
At the same time, the bank tightened another aspect-of credit
policy by increasing the amount of reserves commercial banks are
required to deposit with the central bank.
International Economic Policy and Implications for the
United States
Thus far, Mitterrand and Chirac have shown little inclination
to clash on international economic affairs. Right and left in
France share a general consensus on most international economic
issues, especially the need for more concerted international
action to stabilize exchange rates. Both the Socialists and the
right, moreover, are dogged champions of French interests in
international trade. Thus, while the conservatives generally
favor economic liberalization, we believe that the government
will continue to adopt protectionist measures when they appear
necessary for safeguarding French markets.
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The United States is likely to find the new French government
a tougher adversary in one trade area, agriculture. Chirac made
the plight of French farmers an important theme in his election
campaign. He attacked the agricultural policy of the Socialists,
charging that it had sacrificed French farm interests by
accepting reform of the European Community's Common Agricultural
Policy. One of Chirac's campaign promises was to raise farm
incomes, through increased export subsidies if necessary. Chirac
almost certainly intends to protect the EC's agricultural policy
from any outside attacks, and last year he told US diplomats that
he was opposed to entering into a new round of multilateral trade
negotiations unless the United States and the EC settled the
agricultural issue ahead of time. Chirac has apparently decided
to stick to his tough agricultural line now that he is in office
and has named Francois Guillaume, head of the largest farmers'
union and one of the most militant champions of French farmers,
Minister of Agriculture. Soon after taking office Guillaume said
that the EC must be prepared to enter into a trade war with the
US if it is necessary to protect Europe's agricultural markets.
The new government's desire to liberate the French economy by
reducing public ownership, cutting government subsidies, and
lifting administrative controls will give more play to market
forces, although the French tradition of heavy state economic
intervention will die slowly. From a US perspective, one of the
most promising aspects of the new government's economic approach
is that the right may be more amenable than past French
governments to opening some markets to US firms. This may be
evident first in telecommunications, where some US companies have
already begun probing the government to see if new opportunities
are emerging. In a mid-April meeting with US officials, Gerard
Longuet, the new PTT Minister, spoke of his "dedication" to the
liberalization of French telecommunications markets, although he
acknowledged the difficulties the government will face in this
complex area. Longuet said that the government was nevertheless
committed to finding a middle course between the traditional
French approach of central planning in telecommunications and a
reliance on free markets. He noted, however, that successive
French governments have poured immense amounts of money into the
protected French telecommunications industry, and that there is
public resistance to seeing it "go down the drain" due to an
onslaught of imports. Longuet's implication, which has been
echoed by other French officials, was that despite the right's
market-oriented convictions, progress will be slow.
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SUBJECT: The Economic Policies of the New French Government:
Moving Cautiously with an Aura of Haste
External
1 - Mr. Steven Danzansky, NSC (handcarried 4/29/86)
1 - Scott Brown, State
1 - John Malott, State
1 - Patricia Haigh, State
1 - Mr. William Woessner, State
1 - Colonel Tyrus Cobb, NSC
1 - Mr. Peter Sommer, NSC
1 - Byron L. Jackson, Commerce
1 - Allen Lenz c/o B. Jackson, Commerce
1 - Gary Teske, Commerce c/o B. Jackson
1 - Mr. James Murphy, USTR (handcarried)
1 - Mr. Marten van Heuven, State
2 - Mr. Doug Mulholland, Treasury
1 - Richard Woodworth, Treasury
1 - Robert Cornell, Treasury
1 - NSA
1 - Mr. i iam arreda, Treasury
1 - Mr. Michael E. Ely, State
1 - Mr. James R. Tarrant, State
1 - Mr. Barry Lowenkron, State
1 - Mr. Terrence E. Byrne, State
1 - Mr. Thomas Troy, State
1 - Mr. Marshall L. Casse, State
1 - Mr. Frank Vargo c/o B. Jackson, Commerce
1 - Ruth Whiteside, State
1 - John Hoste, State
Internal
1 - DDI
1 - NIO/EUROPE
1 - NIO/ECON
1 - C/PES
1 - D/ALA
1 - D/CPAS
1 - D/OCR
1 - D/OEA
1 - D/OGI
1 - D/OIA
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1 - D/NESA
1 - D/SOVA
1 - D/OSWR
1 - C/PPS/DO
1 - DDO/FR
1 - OCR/EUR/SE
1 - D/EURA
2 - EURA Production Staff
4 - IMC/CB (7G07)
1 - C/EURA/EI
1 - C/EURA/WE
1 - EURA/WE/CM Production
1 - EURA/WE/CM
EURA/WE/CMA
(29 Apr 86)
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