French government resolute, but not confrontational, says Moody’s

Although the new French President, Nicolas Sarkozy, advocated a top-down and deliberately non-consensual line in his election campaign — in contrast to the more bottom-up consensual approach adopted by his Socialist opponent Segolene Royal — he has already taken considerable strides towards softening this approach, Moody’s Investors Service says in a new “International Policy Commentary”.

According to Pierre Cailleteau, Chief International Policy Analyst at Moody’s and author of the report, the new government is unlikely to be unnecessarily confrontational and reforms will, as much as possible, be the product of negotiations — although “strategic” commitments are unlikely to be altered by any negotiation process.

As explained in greater detail in Moody’s new report entitled “A Credit Perspective on the New French Political Environment”, from a credit risk perspective one critical issue will be whether France will be able to raise its growth potential to face the challenges of an ageing population while keeping public debt under control.

“Progress here is likely to be uneven — the new approach should help improve labour market participation and inject some vitality in terms of encouraging risk-taking and innovation, but the task of reforming the labour contract laws will prove challenging. Overall, France‘s disappointing growth performance should ultimately improve.” However, at this stage, it is unclear whether such a potentially positive outcome will result in significant improvements in public finances, with the new President appearing to be more convinced of the need to curb public spending rather than cutting debt levels — given his belief that tax pressure is too high.

“In sum, although the announced reforms will probably help raise France‘s growth prospects, public finances will most likely remain an adjustment variable rather than a yardstick of reform progress,” says Cailleteau.
Furthermore, while Sarkozy is more convinced of the virtues of free market economics than his predecessor was, he is unlikely to risk any substantial political capital in taking a “liberal” position and therefore the political consensus behind an interventionist line on EADS — for example — is unlikely to be disrupted.

From a credit risk standpoint, there are two issues of relevance on which the new French President is set to clash with many of his partners and the EU Commission: Turkey and some EU economic and financial policy rules.

According to Cailleteau: “Mr Sarkozy’s pledge to block the accession of Turkey has been too solemn to be disregarded and he will certainly not backtrack. The question is whether the new French position requires nothing short of abandoning negotiations with Turkey on the grounds that France will never accept this country in the EU — which may result in some turmoil — or whether negotiations can continue on the understanding that they have no chance of leading to accession in the foreseeable future.”

Another source of tension will be France‘s stance on interventionism and fiscal policy — which again may or may not comply with the Stability and Growth Pact requirements. “Although Mr Sarkozy is modern in many aspects, his new government is likely to be similar to previous French administrations in that it will not unnecessarily provoke the EU Commission, but neither will it give in if there is any significant domestic political capital at stake,” Cailleteau concludes.
Pierre Cailleteau is the author of Moody’s new series of “International Policy Perspectives” reports and commentaries, a new initiative that is intended to offer timely comments as well as regular special reports on key international economic, financial and political issues and their implications for credit risk.