US embassy cable - 05PARIS3864

UNCLAS SECTION 01 OF 02 PARIS 003864 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, EU/ERA, EUR/WE 
COMMERCE FOR ITA 
STATE PASS TO USTR (SANFORD) 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, EIND, EFIN, FR, EUN 
SUBJECT: FRANCE'S NEW GOVERNMENT AND THE ECONOMY: MOVING 
FORWARD? 
 
REF: PARIS 3813 
 
1. (SBU) SUMMARY. French voters may have cited the poor state 
of the economy as a key reason to reject the European 
constitution in last week's referendum, but neither incoming 
Prime Minister de Villepin nor President Chirac have signaled 
that economics will be the focus of the new government's 
action.  Both, however have clearly identified unemployment 
as the new government's top priority, and have promised 
quick, effective action.  Little has been heard about reform 
initiatives in other economic areas. Villepin's economic 
views are unclear, but he is known to harbor Gaullist views, 
supporting a traditionally strong role for the state in the 
economy.  With markets generally calm, and Economy Minister 
Thierry Breton and Nicolas Sarkozy in the new cabinet, most 
observers expect an activist approach to issues like 
employment and industrial policy, but a lower profile in 
Brussels and few bold business-friendly or market-oriented 
economic initiatives of the "Anglo-Saxon" type.  End summary. 
 
2. (SBU) Little is known about Villepin's economic views. He 
describes himself generally as an activist, with clear views 
on the important role the state plays in the economy.  In his 
first remarks as Prime Minister, Villepin has focused on 
fighting unemployment, though without mentioning any 
specifics.  Echoing Chirac, he blithely told the press "not 
everything has been tried".    A number of bills are being 
discussed in Parliament, which could attract government 
support.  These include some fine-tuning of labor laws, 
lightening of social charges for small companies, and job 
training programs for labor market entrants. 
 
3.  (U) More broadly, Villepin has talked about the need to 
build "confidence", but clearly rejects the "Anglo-Saxon" 
free market model.  Taking his cue from his hero, Napoleon, 
Villepin has set himself a goal of a hundred days to bring 
back confidence to the French.  The self-described Gaullist 
also cited the need for "more opportunity" and "education, 
research and an ambitious industrial policy" as goals 
 
4.  (SBU) Like his mentor Jacques Chirac, Villepin has often 
derided the "Anglo-Saxon model" of free markets in favor of 
the "French social model".  This notion, touted by many 
French politicians in the recent debate over the 
constitution, combines a substantial social safety net, 
strict labor protections and a strong presence of the state 
in the economy.  The French model has recently come under 
increased criticism as France's economic outlook stagnates, 
but opponents of the victorious "no" vote as well as 
supporters of the "yes" vote have paid homage to this 
concept. 
 
Tension with Sarkozy? 
--------------------- 
 
5. (SBU) Not all are believers in the French "social model", 
least of all in the new cabinet.  Newly appointed Interior 
Minister and Presidential hopeful Nicolas Sarkozy critically 
pointed to the high unemployment and low growth as the only 
real result of this "French model". Sarkozy, dubbed "the 
American" in the press, has historically supported a greater 
measure of economic freedom and market-oriented policies than 
most French politicians.  While he sees the political 
usefulness of some industrial policies, a clash over the 
economy with Villepin is almost inevitable. 
 
New team, markets calm 
---------------------- 
 
6. (U) Villepin's economic team will regain former France 
Telecom CEO Thierry Breton, an Economy Minister with 
significant private sector experience.  Other members 
including a new Minister Delegate for Foreign Trade, top 
Chicago anti-trust lawyer Christine Lagarde, the head of 
Baker & McKenzie's office in France.   Francois Loos, 
formerly in charge of foreign trade moves to Industry, 
dislodging Sarkozy stalwart Patrick Devedjian.  Breton had 
been wooed by Jacques Chirac to give up a multimillion-dollar 
compensation package at France Telecom to take over at the 
Economy Ministry.  He has kept a relatively low profile, 
despite a well-regarded effort in negotiating more flexible 
rules for the EU's Stability and Growth Pact. His other 
important goal includes continued progress in France's 
privatization programs. During the past weeks, and following 
the May 29th referendum on the European constitution, markets 
have remained calm, appearing to have factored in the "no" 
vote.  Financial markets, including the CAC40, actually 
remained steady or went up slightly.  In the currency 
markets, the Euro has dipped about 1 percent. 
 
Legislators cool on Villepin 
------------------------------- 
7. (SBU) Parliamentarians from the right of center majority 
who met with Villepin June 2 had mixed responses to the new 
Prime Minister, who has never held elective office. Senate 
Majority leader Christian Poncelet asked Villepin for "a few 
symbolic gestures", while the majority whip in the National 
Assembly Jean-Louis Debre told him that the Stability Pact 
needed to be relaxed to permit jobs programs and large 
infrastructure projects. Others called for job programs. 
Some parliamentarians were pleased with the political impact 
of the appointment of the Villepin-Sarkozy "duo", but others 
told the press they viewed Villepin's responses to their 
questions as "vague" and "unconvincing". (Note: A new poll 
published by Le Monde June 2 shows only 36 percent of the 
French public approving of Villepin's appointment.) 
 
8. (SBU) On EU economic matters, most observers believe 
France will keep a lower profile in the short to medium term, 
although France will need to be assertive in defending French 
interests in the post-referendum political climate.  The 
French rejection of the constitution will likely isolate them 
further in Brussels, though the Dutch "no" may alleviate that 
isolation somewhat.  With the June 17 European Council 
meeting in Brussels coming up, the government's first task 
will be to assess how to evaluate the future of the European 
constitutional treaty.  The left-of-center daily Liberation's 
political editor is somewhat more cynical about the prospects 
for the new government's continued strong engagement on 
Europe, writing June 1 that Villepin's pro-European 
sentiments were never as intense as his "flamboyant 
anti-Americanism". 
 
9. (SBU) Nevertheless, on the table in Brussels are a number 
of dossiers that France could promote more energetically.  As 
Economy Minister in 2004, Sarkozy had strongly supported 
realigning European corporate tax rates or even VAT rates to 
avoid what is called "fiscal dumping" by countries with low 
rates, such as Ireland and Slovakia.  Parliamentarians have 
begun to push to relax the Stability Pact.  National Assembly 
majority leader's Jean-Louis Debre's recent comments 
promoting more public spending and public jobs programs would 
upset one of Economy Minister Thierry Breton's few successes 
to date, the compromise over the Stability Pact. Debre is 
close to Chirac. 
 
10. (SBU) COMMENT. Jacques Chirac, leader of the "yes" vote, 
firmly maintained throughout the referendum campaign his 
support for the "French social model" and insisted on its 
incompatibility with free-market, "Anglo-Saxon forms of 
economic organization.  Villepin is therefore likely to avoid 
measures that smack of "Anglo-Saxon" economic policies. 
Despite Prime Minister de Villepin's stated predilection for 
state action and grand gestures, most observers hope Nicolas 
Sarkozy and Economy Minister Thierry Breton's presence in the 
government will balance any bold (or misguided) economic 
initiatives in the near term. 
 
 
WOLFF