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Jacques Chirac and the Economy: A Troubled Relationship and Mixed Results

Jacques Chirac and the Economy: A Troubled Relationship and Mixed Results
 Eric Chaney
Senior Fellow - Economy

Jacques Chirac was an outstanding political animal, gifted with a tireless energy, able to take his opponents by surprise, armed with an astute sense of ruse as well as the strength to swallow his defeats to always bounce back. A humanist and a great lover of "primitive" and Asian art; he was hardly passionate about economics. Yet his long political career, from Secretary of State for Employment in 1967 to twice President of the French Republic, has left its mark on France's economy and the way the French grasp it. The picture is mixed, marked by salutary reactions in 1986 after President Mitterrand’s excesses of 1981 but also many missed opportunities and mistakes with consequences still felt today.

How should a country’s budget be managed?

Shortly after his victory in the 1995 election, I had the opportunity to meet the new President with a small group to discuss economic and fiscal policy. We were emerging from the severe 1993 recession, with a budget deficit of 5.4% of GDP, GDP growth of 2.4% in 1994 – considered, at the time, as sluggish growth – and a record level of government spending, almost 55% of GDP. After the currency crisis of September 1992, during which France had secured Germany’s grudging support for the franc, financial markets were closely monitoring France’s fiscal policy. How can you reconcile a reduction in budget deficit, the stimulation of the economy and electoral promises of a generous wage policy? The equation seemed unsolvable. Reducing public spending and taxes while convincing taxpayers that this fiscal adjustment would be sustainable to avoid excessive savings – a "Ricardian" behaviour, – was one possible path. The President listened politely and concluded: "Basically, what you're saying is, one must manage the country's budget as a good father would."
This was the close of our conversation. I understood then that Jacques Chirac's approach to economics was intuitive, fuelled by his connections with leading industrialists, but that the macroeconomic dimension, such as the link between economy and financial markets, deeply bored him.

A liberal policy "by reaction" rather than from conviction

Appointed Prime Minister by François Mitterrand in 1986, Chirac has had his liberal - in the economic sense - moment. After a series of devaluations that had raised inflation to more than 15%, the country's economy was stuck due to the wave of nationalizations, increases in the minimum wage and tighter labour regulations, in accordance with the common government platform that had led the Left to victory in 1981. The Chirac "bulldozer", as Georges Pompidou had nicknamed him, was able to act quickly, privatize a series of large industrial companies and banks, liberalize the labour market by removing the need for administrative approval before layoffs, and stop capital flight by eliminating the wealth tax.

What will remain from Jacques Chirac's economic policies? Courageous decisions when the economy was on the brink of disaster...

Economic winds were favourable, with a sharp drop in oil prices in 1986 leading to a strong recovery in the world economy in the following years, due to a strategic shift by Saudi Arabia. This was a blessing for France, where inflation fell without wage restraint and purchasing power rose, while the budget deficit fell to 1.8% of GDP in 1989. But the economic upturn hid weak structural reforms. The Prime Minister's energy and political capital had been hampered from day one by the President’s hostility and delaying tactics. As soon as the next recession hit in 1993, the budget deficit was soaring to almost 7% of GDP and public spending rising back to 55%.

1995: good political intuition but economic misunderstanding

Finally reaching the top job in May 1995, Jacques Chirac was immediately confronted with a dilemma. His social and political intuition had led him to campaign on the themes of social divide and purchasing power, with the now famous formula "Pay slips are not the enemy of employment" ("la feuille de paye n’est pas l’ennemi de l’emploi"). If the political diagnosis was correct – his electoral victory being the supreme judge of that – France's economic issues were superbly ignored by the new President. Having accepted the monetary union with Germany in the 1992 referendum on the Maastricht Treaty, which Chirac had courageously supported, France’s economic policy should have focused on competitiveness, since devaluations were no longer an option. But whether it was wage policy, for which the French expected an increase, or competition policy, a breeding ground for private innovation but still frowned upon in a country with a strong Colbertist tradition, both teams at the Elysée and Matignon (Prime Minister’s office) went in the opposite direction. On the contrary across the border, Germany, whose competitiveness had collapsed after reunification, had begun to recover, through wage moderation, the unwinding of companies’ cross-shareholdings boosting investment and innovation, and the launch of structural reforms of the labour market.
Faced with the 3% of GDP deficit rule to qualify for monetary union, Chirac entrusted Alain Juppé with the task of restoring public finances. Besides a reasonable reform of health insurance, an attempt was made to tackle pensions’ special regimes, which the unions seized upon to blow up the whole thing. Analysts such as Stéphane Rozès explained that strikes at the end of 1995, despite literally bringing the country to a standstill, enjoyed popular support as "strikes by proxy". The contradiction between electoral promises on social divide and wages, going back to an era of a closed economy and fuelled by the illusionary return of the "Glorious Thirties" and the reality of France's economic environment bears a heavy responsibility from my point of view.

The 1997 political maneuver and its impact on competitiveness

Without the global economic upturn that had favoured him in 1986-87, President Chirac concluded that the Juppé government, in spite of its competencies, would not succeed in qualifying his country for the euro.

This was, I believe, the fundamental reason that led him to dissolve the National Assembly in 1997: if his presidential majority was confirmed, he would have gained the legitimacy to continue with budgetary adjustment; and if he lost, well, the Left would bear the responsibility for the euro’s failure. That was a miscalculation: the Left won the election and managed to narrowly qualify France for the euro, thanks to an early economic upturn and an ad hoc accounting trick with France Telecom awarding the State of a balancing payment to finance the future pensions of its employees.

...alongside a failure to enact structural reforms, due to his lacking a clear perception of modern economic realities.

But, if the euro was successfully launched, the consequences of this political maneuver would prove to be disastrous, leading to a reduction in working hours and an increase in labour costs, thus a loss of competitiveness, partly offset by exemptions to employer contributions, which in turn increased public expenditure. This time around, the economic upturn – it always eventually comes – did not favour the President, but instead his Prime Minister: strong global growth between 1998 and 2000 created the perception that unemployment could be tackled by imposing reduced working hours. Benefiting from large tax revenues, the Jospin government inferred from it an urgency to stall reforms to the pension system, in spite of an ambitious proposal detailed in Jean-Michel Charpin's report that could have given rise to a wide French-style large scale pension fund. So many lost opportunities during this seven-year mandate!

The failure of incremental reform

Having been re-elected with a crushing score against Jean-Marie Le Pen in 2002, Jacques Chirac seemed to have learned from his political successes and economic failures: to only enact incremental reforms, in a country convinced that, in any case, "liberalism does not work" to reproduce another one of his formulas. It became a motto for the Raffarin government, resulting in concrete but slim outcomes. The final reform attempt, to introduce a more flexible employment contract for young people for future recruitment, stemmed from good intentions but was doomed to fail. Such was also the case with an earlier attempt by Edouard Balladur to establish a "Youth Minimum Wage” due to the widespread and immediate perception of this reform as stigmatizing a group of the population. Rather than a fundamental reform of the labour market, Chirac’s strategy of incremental reform was a failure, contributing to a strengthened idea among the population that reforms are synonymous with social regression.
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What will remain from Jacques Chirac's economic policies? Courageous decisions when the economy was on the brink of disaster alongside a failure to enact structural reforms, due to his lacking a clear perception of modern economic realities. Outside from the strict economic frame, we shall also remember that the man of the nationalist "Call from Cochin" (the hospital where he was treated after a car accident in 1978), condemning the "party from abroad", became a strong supporter of the European idea, against several of his allies and despite his knowledge that Europe was not a winning electoral theme. For that, we should be grateful to him.



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