RESPONSE TO QUESTIONS ON FRENCH ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R001000030047-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: February 26, 2007
• Sequence Number: 47
• Publication Date: September 7, 1982
• Content Type: MEMO

John:
The attached is in response to McFarlane's
1 September ouestion concerning whither France.
We promised to attempt delivery
to you by c.o.b. today.
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D/EURA: jes/7Sep82
Distribution:
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- DCI
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- DDI
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- ADDI
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- D/EURA
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CONFIDENTIAL
Implications of Mitterrand's Economic Policies
Francois Mitterrand took office in May 1981 committed to halting a rapid
rise in unemployment and reviving the recession-ridden economy. His gamble
that France could buck international economic trends failed, however, and the
government has been obliged to undertake an economic retrenchment that is both
severe and politically risky.
The austerity program launched this June brings French economic policy
more into line with the OECD mainstream: stricter limits on public sector
deficits, closer attention to monetary growth targets, a bold attempt to end
wage indexation, and some shifting of income to the corporate sector. If the
government's new resolve does not falter because of union wage demands or
electoral considerations, we believe the French economy has the capacity to
bounce back.
The question remains, however, how the longer-term structural changes
implemented by the Socialists, such as the nationalization program and
increased worker participation in company management, will affect the
economy's performance in the competitive international environment. The
effects of these changes are likely to be felt long after Mitterrand's -- and
perhaps the Socialists' -- term ends in 1988. The push toward state control
of the economic machinery and the increasing bureaucratization of economic
decisionmaking may have set in motion a process of secular deterioration.
On the other hand, the program could turn out to be less damaging R~n
might be assumed. Important aspects of Mitterrand's program resemble or
extend actions taken over the past several decades by conservative
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governments. They also are consistent with patterns of French political and
economic behavior.
The Short-Run: Sticking With the System
The Socialists' initial strategy was conventional: stimulate consumption
by increasing transfer payments and creating public sector jobs if
necessary. To finance this program while maintaining other priorities, such
as defense, they opted for more government borrowing and a package of tax
increases directed at the wealthy and higher-income wage earners.
The increased domestic demand generated by the recovery program
predictably resulted in an increased trade deficit. This deterioration of the
French trade balance -- in combination with stagnating receipts in the
normally-surplus services account, large capital outflows prompted by
nervousness over Socialist intentions, and pessimistic financial market
appraisals of the future -- led to two devaluations of the franc. The
devaluation of October 1981 was accompanied by half-hearted measures intended
as much to bolster financial market confidence as to begin fighting inflation
in earnest. Although responsibility for this first devaluation could be
shared with the Giscard government, the second devaluation in June 1982
demonstrated how badly the Mitterrand government had miscalculated in trying
to push ahead with its stimulus program. A world-wide recovery, which would
have spurred French exports, lagged; for a variety of reasons, including a
generalized lack of confidence and increased business costs deriving from
government measures to promote hiring, private investors showed no inclination
to step up capital spending.
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By June, when the need for remedies could no longer be avoided, the
Socialists rejected the opportunity to carry through with a total "break with
the system." Such a break probably would have meant giving up on fighting
inflation, resorting to outright protectionism and, in the process, condemning
France to a declining standard of living and lesser influence
internationally. Their acceptance, instead, of external constraints argues
strongly that they take seriously their commitment to keep France in the
European Community, participate in an open world trading system, and maintain
a mixed economy.
Even if the current policy orientation is maintained, the price paid for
the Socialists' expansionary policies will be the loss of nearly two years in
the fight to reduce inflation to the level of France's principal trading
partners. This task has been complicated by the franc's depreciation against
the dollar and EMS currencies since Mitterrand's victory and by some increased
difficulty in obtaining foreign loans and investment to balance the current
account.
These are not, however, irremediable problems. If the government
maintains its present course, the economy can probably be restored in a couple
of years to its pre-1981 condition. In effect, the experience of the first
years of the Giscard presidency would recur. Prime Minister Jacques Chirac's
1975 stimulative program, similar in magnitude to that of Mitterrand and
Mauroy, led to essentially the same results after about 18 months. It fell to
Chirac's successor, Raymond Barre, to institute an austerity program to bring
the budget and current account deficits back into line and to restore the
franc.
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The Long-Run: Has the Balance Finally Been Tipped?
Socialist economic doctrine holds that the state should use its power to
direct resources toward "broader" goals than mere profit. The nationalizaton
program is thus more than a bow to Marxist principle. It is also an attempt
to give the state control over a part of French industry large enough to serve
as the "locomotive" for the rest of the economy. Most of the banks remaining
in private hands were included in the program so that the government could
more freely allocate credit toward priority activities and sectors. The
government intends to define these areas through a planning process
reminiscent of the successful multi-year plans of the post-war years.
In the French context, much of Mitterrand's program is not especially
new. The wave of nationalizations in 1981 was the third in this century.
Government involvement in the economy -- referred to as "dirigisme" -- has
been building up steam since the Bourbons. French governments since the war
have used their extensive control of the economy to promote high technology or
prestige ventures, such as the Concorde, the nuclear energy program, and
various schemes to develop an indigenous, top-of-the-line electronics
industry. Some of these have been successful, some have not. The Mitterrand
government intends nonetheless to try again by picking international "winners"
of its own.
On the labor front, changes in labor relations tend to be spasmodic -- an
upheaval of sorts followed by a protracted period when everybody gets back to
work. Under the present government, higher labor productivity and better
labor-management relations are to be promoted by means of legislation
increasing worker participation in decisionmaking.
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 At this point, France remains an open economy. Accession to the European
Community in 1959 lowered some of the barriers that once made the French
economy something of a closed system flourishing at the expense of
competition. Thus, there is a danger that the Socialist program could lead
history to repeat itself. The increases in state control and worker
participation could produce a bureaucratized, inflexible economy that is both
inefficient and cumbersome. The effect would be a slow process of
deterioration likely to leave France less and less able to compete
internationally. It is too early, however, to draw conclusions concerning the
possibilities for such a- process getting under way -- and once under way for
stopping it.
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