France Telecom - a bullet to be bitten

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International equity markets will probably breath a sigh of relief at the French government's decision to postpone the partial privatisation of France Telecom. Several big telecoms issues will soon come to market, the giant Deutsche Telekom among them. The French issue would have added to the sense of an investment foie gras in the making. Even so, the privatisation's indefinite delay is a worrying sign. French protestations notwithstanding, it underlines France's less-than-enthusiastic support for telecoms deregulation and liberalisation.

It also displays quite startling government weakness in the face of the strong public-sector unions that represent France Telecom's employees. In part the delay is a response to their demands. A privatised utility is bound to cut jobs: indeed, the freedom to do so is a prime reason for seeking privatised status.

All the same, Jacques Chirac and his Prime Minister, Alain Juppe, had better be sure they are delaying, rather than shelving, the sale. In order to narrow the French budget deficit, now at 4.7 per cent of GDP, big spending cuts, large privatisation proceeds and higher taxes are all likely to be necessary.

Big tax rises are already in view, thanks to the sharply higher corporate profit levy and higher VAT rates announced in the recent mini-budget. Ultimately, the privatisation programme will need to be accelerated if the budget deficit targets are to be met, and France Telecom is too big to ignore as a source of much-needed funds. That leaves the politically sensitive area of cuts in public services and entitlements - an approach that is bound to set off serious unrest, French style. If the government is serious about its deficit targets, it will have to stand up to the demonstrators sooner or later. Putting off the France Telecom sale may be understandable, but the bullet will have to be bitten sooner or later.

In the meantime, Mssrs Chirac and Juppe ought to make loud and convincing noises about their commitment to telecoms liberalisation, whatever the immediate status of France Telecom. They may be right that privatisation and liberalisation are not necessarily linked; but it is up to them to prove the point.