Christine Lagarde joined Prime Minister François Fillon’s center-right government because she was “annoyed with the constant rhetoric about the decline of France,” she says. As Finance minister, Lagarde is determined to show that she -- and her country -- mean business.
The 51-year-old lawyer is spearheading the drive by Nicolas Sarkozy, the country’s energetic new president, to promote economic reforms and inject a more American-style work ethic in France. Already Lagarde has pushed through tax cuts to encourage workers to labor longer than the country’s 35-hour workweek. She believes such incentives are essential to jump-start an economy that is expected to grow by only 1.9 percent this year, compared with a euro-area average of 2.5 percent.
“Sarkozy has said over and over again, ‘Work harder and you’ll get more pay,’” Lagarde said over coffee and croissants at a recent breakfast with a handful of journalists at her ministry. “You need to create wealth to allocate wealth.”
Lagarde knows of what she preaches. The Paris native obtained a law degree at the University of Paris, then rose through the ranks of Baker & McKenzie to become the first female chairman of the Chicago-based law firm, in 1999. Returning to Paris in 2005 after five years in the Windy City, she says she was “flabbergasted” to hear her compatriots talk constantly about their vacation time.
The fiscal cost of Lagarde’s tax cuts earned a stiff warning last month from European Central Bank president Jean-Claude Trichet, who said high public spending left French finances in “very great difficulty.” Government spending is projected to amount to 53.2 percent of gross domestic product this year, the highest level of any EU country.
Lagarde promises to rein in spending but admits it will take longer than France’s euro-area partners would like. Last month she published a draft budget for 2008 that includes a deficit of 41.7 billion ($59 billion), or 2.3 percent of GDP. The government has pushed back its target date for balancing the budget, to 2012, from 2010 previously. “We are trying to move away from massive public spending,” Lagarde says.
Sarkozy’s reform drive faces another key test this month over the government’s proposals to curtail pension privileges -- such as retirement as early as age 50 -- enjoyed by key public sector workers, including railway and utility employees. Union militancy forced the government to back down over similar reforms in 1995 under former president Jacques Chirac, and railway and power workers have called a one-day strike to protest the latest plans. But Sarkozy has vowed to implement the changes and proceed with other reforms, including cuts in the government payroll and greater flexibility in the 35-hour workweek.
“This is the beginning of a process that could really change the French economy and restore its competitiveness,” says Eric Chaney, chief economist for Europe at Morgan Stanley in London.
Although they welcome the reforms so far, French business leaders worry that Sarkozy and his government aren’t going fast or far enough. Claude Bébéar, head of the influential think tank Institut Montaigne and chairman of insurance group AXA, wants the government to end the wealth tax, which he estimates costs France about 10 billion each year. “Sarkozy has other cards to play,” says Bébéar. “We’ll see if he will play them.”
Lagarde contends that the government’s actions are encouraging investors to do business in the country. Sarkozy “has turned people’s minds on about France,” she says.
