by Philip Whyte

President Sarkozy is frequently portrayed in France and elsewhere as an “economic liberal”. This is a mistake. He is undoubtedly an economic reformer prepared to take on the privileges of labour market “insiders”; but he retains a French dirigiste’s belief in an active role for the state in economic development. This manifests itself in several areas, including his support for “national champions”, his mercantilist vision of international trade, and his belief that governments should have greater influence over the European Central Bank (ECB).

In a French context at least, Mr Sarkozy’s greatest claim to originality probably rests on his policy towards the labour market. From the mid-1970s until comparatively recently, successive French governments sought to stem the rise in recorded unemployment by strengthening employment protection legislation and pursuing a policy of labour market withdrawals—notably by shortening the working week, discouraging young people from joining the labour force too early, and coaxing older workers out of it by lowering the age of retirement.

In other words, for almost three decades French labour market policy was guided by the lump of labour fallacy—the idea that there is only a fixed amount of work to go around. These ill-conceived supply-side policies gave France one of the lowest employment rates in the EU. Mr Sarkozy’s economic priority is to raise France’s rate of employment by reversing, or at least mitigating, the flawed policies of the past. An early measure has been to relax the 35-hour working hour week by exempting overtime work from income tax (“making work pay”).

Inevitably, Mr Sarkozy’s reforms are facing opposition from “insiders” whose privileges they threaten. Public-sector workers such as train-drivers, who enjoy special pension rights which allow them to retire aged 50, have already been on strike to protest at the government’s proposals to raise the retirement age. In the past, such action could often count on the support of the wider population because reforms were often seen as the “thin end of the wedge”—the first salvo in a broader assault on “acquired social rights” (acquis sociaux).

Successive French governments have had a tendency to back down in the face of popular support for industrial action. This time should be different, for at least two reasons. First, Mr Sarkozy has staked his political reputation on pushing such reforms through: should he back down, his authority would be destroyed and the rest of his presidency shorn of purpose. Second, opinion polls indicate that strikes by privileged public-sector workers no longer enjoy the support of the wider population which realises that it bears the burden of supporting them.

Mr Sarkozy’s labour-market reforms are generally wining plaudits abroad, but other aspects of his economic programme are sparking conflict with France’s neighbours. Mr Sarkozy believes that macroeconomic policy needs to be relaxed while his structural reforms are pushed through. This explains why he has criticised the ECB for neglecting the strength of the euro’s exchange rate and for subordinating economic growth to low inflation. The French president’s broadsides against the ECB have been poorly received elsewhere in the EU—notably in Germany, where they have been seen as attacks on the ECB’s independence.

A similar conflict has emerged in the area of fiscal policy. France has not run a balanced budget since the 1970s and its budget deficit has consistently exceeded the Maastricht limit of 3% of GDP since 2002. Earlier in 2007, the French government (of which Mr Sarkozy was a member) committed itself to balancing its budget by 2010. But the budget for 2008 makes no effort to meet this target because it provides for tax cuts that are not offset by reduction in public expenditure. Commitments to the EU are being subordinated to domestic objectives.

As for Mr Sarkozy’s views on competition and international trade, they are anything but liberal. They spring from a mercantilist mind-set which sees a coincidence of interest between domestic firms and the French state and which believes that a country’s aim in international trade is to export more than it imports. This explains Mr Sarkozy’s support for “national champions”, his opposition to foreign takeovers of leading French firms, and his propensity for intervening to “shape” corporate mergers—witness his role in the tie-ups between Sanofi and Aventis (when he was finance minister) and between GDF and Suez (as president).

Philip Whyte is a senior research fellow at the Centre for European Reform.

by Tomas Valasek

In his first 100 days in the office, Nicolas Sarkozy turned France’s domestic political scene on its head. He trounced and marginalised the far-right National Front in the May presidential elections. In parliamentary elections a few weeks later, he wiped out Francois Bayrou’s bid to form a centrist party. And once firmly installed in the Elysée palace, he emasculated the leading opposition party, the Socialists, by poaching their best minds.

What in the world, one might wonder, will he do to France’s foreign policy when he puts his mind to it?

Well, on Monday we got our first hint. Sarkozy gave a speech to an assembly of French ambassadors from around the world. The presentation was typical Sarkozy. It oozed confidence. The speech showed him prepared. And, in a number of important ways, it showed him willing to depart from policies of Jacques Chirac.

The most interesting part of this speech was about Iran. Before even mentioning the country by name, he notes that France has an obligation to help the rise of emerging states by giving them access to nuclear technology for peaceful use. In saying so, he seems to be pre-emptively addressing Tehran’s accusations of double-standards. But then, when Sarkozy starts talking directly about Iran, he hammers. To France, a nuclear-armed Iran is simply unacceptable. France will support a new round of UN Security Council sanctions (when only last month it was said to be lobbying in New York against it because French companies may be among the most affected). And finally, the coup de grâce: unless Iran respects its obligations it will not escape “the catastrophic alternative: a nuclear-armed Iran or the bombing of Iran”. Sarkozy is effectively laying the blame for possible US intervention at Tehran’s feet. He is making Iran the issue, not the US. He does not condone bombing but suggests that he may not be entirely opposed either. And if it happens, it will be Iran’s fault. This is a significant change from Jacques Chirac’s days.

Washington’s joy at the speech will not be unqualified. Sarkozy is not warm to America. When addressing it directly, he calls for “pragmatic” relations. Sarkozy’s agenda for the French presidency of the EU in 2008 is not particularly US friendly. The emphasis on immigration, energy and environment offers little hope of rapprochement. With the exception of energy these are issues that are either intra-European (immigration) or on which the EU and France do not see eye-to-eye (environment). On NATO, Sarkozy says he wants the alliance to co-operate smoothly on military matters with the EU. But he makes no hint of how to resolve the impasse that effectively keeps the EU and NATO from talking to each other. Worse (from the US perspective) he wants to strengthen the EU’s operational planning capacity, which has been a thorn in the side of both London and Washington.

On the other hand, where Sarkozy talks of issues that matter to the US – China, Iran, the Middle East – he strikes a line similar to Washington’s. That is true not only for Iran but also for the Middle East, Russia and China. Sarkozy comes down stronger on the side of Israel than any other French leader in recent history. He proudly calls himself a friend of Israel. He says peace with Palestine is very important but it will not happen if the Palestinians cannot form a government. Sarkozy called the Hamas takeover of Gaza “the first step toward establishing Islamic radical foothold on Palestine territories” and said that the Palestinian Authority must be rebuilt under its president Mahmoud Abbas.

On Russia and China Sarkozy strikes a realist tone. He ignores their domestic affairs altogether. Their foreign policies come for criticism. Sarkozy chided China for using monetary policy as a power tool, and Russia for using energy as a “brutal” weapon. (Interestingly, nowhere does he raise issues that made his foreign minister, Bernard Kouchner famous: the slide toward authoritarian regime in Russia, or violations of freedom of speech in China. In foreign policy, as in everything else, Sarkozy seems determined to run things directly from the Elysée.)

The overall impression Sarkozy leaves is that he is neither anti-American nor pro-American. He does not take cheap shots: although he notes that France was right on Iraq, he does not gloat. He states in the preamble that “the leaders of the past twenty years failed to construct a workable post-Cold war order”. But he is both right and diplomatic in saying so, so America should not take offence. The speech effectively removes America as the defining issue of French foreign policy. France will not view foreign policy as an opportunity to score points at America’s expense; it will judge the world’s problems on their own merits. Where Sarkozy does so, he finds that he has a lot in common with the US. But he will not go out of his way to restore America’s good standing in Europe; the Americans will need to do that work themselves.

Overall this is a very strong presentation. He clearly thought about foreign policy a lot. We have come to associate Sarkozy’s France with exuberant confidence but it bears remembering that only three years ago, the world looked very different through French eyes. The then-Foreign Minister Michel Barnier, also speaking in 2004 to assembled French ambassadors, lamented the decline of France in Europe (because of enlargement of the EU to include pro-US countries). Sarkozy could not have struck a more different note.

Tomas Valasek is director of foreign policy & defence at the Centre for European Reform.