A healthy economy but sick society: Andrew Marshall reports that French economic fundamentals are sound, at great cost to employment

AS THEY dragged themselves unwillingly back from holiday last week, France's top policymakers must have hankered after a few more days away.

With a referendum on the Maastricht treaty looming on 20 September, and a 'no' result a distinct possibility, the grim state of the economy can have done little to lighten their mood. For the French who are unemployed - more than 10 per cent of the population - the rentree must have been even more joyless; but then most of them probably could not afford to go away in the first place.

Growth in the second quarter was all but invisible at 0.1 per cent over the previous 'Olympic' quarter when the Winter Games at Albertville helped expansion. The only saving grace was trade, with the first-half surplus at Fr16.64bn ( pounds 1.8bn), compared with a deficit of Fr23.17bn in the same period last year. But even this resulted partly from a drastic cut in imports, which shrank by 6 per cent in July from the previous month.

For the coming year, the Maastricht referendum clouds everything. Investment confidence, which had shown signs of recovery, has sunk in the past three months.

Yet France's economy is basically very sound. 'The economic fundamentals are in good shape,' the Organisation for Economic Co-operation and Development said in its annual review of the economy. In sharp contrast to Britain, French households are not highly indebted and corporate balance sheets are healthy.

The Socialist government's tough policies, largely inherited from its conservative predecessor, have brought inflation under control, at about 3 per cent a year. Wage settlements this year average 4 per cent, and the unions are quiescent. The budget deficit has fallen from just over 3 per cent of gross national product in 1983 to below 2 per cent.

France's competitiveness has been honed over the past decade to the point where it should be able to do very well - when there is growth in its trading partners. Shearson Lehman, the investment house, is forecasting a 1992 trade surplus of Fr20bn. This has been achieved through cutting back the old industries - steel, coal, and the rustier parts of the manufacturing sector. Privatisation, started under a conservative government but now revived, along with cost-paring and industrial reorganisation, has produced an economy that is well prepared for the single European market.

Peugeot-Citroen is a prime example of the new competitiveness. It has just jumped from fifth to second in the European car sales table, taking a 12.5 per cent market share in the year to 31 July, just behind Volkswagen and ahead of Fiat.

Growth for 1992 is probably set to attain the government's 2.2 per cent target; despite second-quarter gloom, few pundits lowered forecasts and they will not do so until the referendum results are known, Bernard Godement of Nomura Research Institute said.

But it is a valid question to ask where any recovery will come from. Business investment has fallen 6.2 per cent since the beginning of 1991 and is still falling; consumers are not buying, especially those unemployed or in fear of losing their jobs; Germany is sliding towards recession while other important markets such as Britain, Italy and the US look grim. Some of the confidence built up over a decade has been dissipated by the fear that France might vote against Maastricht. Despite the recent shift in opinion polls towards a 'yes', markets will not revise their views until voting day.

There are other uncertainties. The cost of France's monetary and financial rigour is rising. High unemployment is partly the result of a decade of tight policies. Amongst the 10.3 per cent of the population who are unemployed, nearly a million have been out of work for more than six months.

There is no sign that the government will crack under the pressure and release its fiscal grip. Pierre Beregovoy, the Prime Minister, has been tough with ministers, permitting spending increases in only a handful of areas for next year's budget; education, justice, police and employment. Overall spending increases will be kept to 3.5 per cent, barely above inflation, implying deep cuts in some departments.

Education remains the chief priority, a view endorsed by the OECD, which devoted a special section in its annual report to the area, saying the system manifested 'certain obvious weaknesses.' Biased towards academic performance rather than skills, French education is not well integrated with training at work.

The government has launched an ambitious agenda of education reform, but has seen much of it reversed after student demonstrations. It has also begun to target the long-term unemployed, but critics say this simply removes them from the jobless lists while not addressing the real problems.

Instead, the focus of attention has been to confirm the tough macro-economic policies of the past decade. Mr Beregovoy is closely associated with the policy of franc fort, which is the basis of the economy's stability; but while Frankfurt remains so hung up on containing inflation, this limits the possibilities for expansion.

In the longer term, the outlook for the economy is good, especially if the referendum delivers a resounding 'yes' that could kick- start a recovery. But this will be of little comfort to the long-term unemployed. The political anger building up in France, partly expressed in the protest vote against Maastricht, has little outlet. All of the main political parties are committed to similar policies.

The impact on France, with so many people consigned to the scrap heap, is not going to be easy over the next decade. In the words of one economist: 'The economy is fine, but the society is sick.'

(Photograph omitted)