Even as other nations begin to recover; French austerity plan staggers industry
Paris — In a country where unemployment has not risen to American or British levels, the news last week came as a shock: Peugeot, France's second largest automaker, was laying off 12,500 people, almost a tenth of its work force.
Peugeot has been plagued by managerial mistakes, high labor costs, and sinking demand - problems that trouble the entire French economy, analysts say. The last part of this equation - sinking demand - shows how the Socialist government's tough austerity program, enacted in March, has begun to bite.
Increased taxes and slashed government spending have begun to cut consumer demand, bringing down inflation and the trade deficit. But analysts say neither figure is falling fast enough to prevent the government from devaluing the franc and tightening the austerity vise once again.
Already the austerity measures have thrown the country into a recession just as much of the industrial West seems to be recovering.
Government projections are for zero to minus 0.5 percent growth this year, and private analysts, such as economist Jean-Marie Chevalier of the University of Paris Nord, say the economy could actually shrink by as much as a full percentage point.
''Peugeot had no choice but to be tough,'' Mr. Chevalier said. ''We are in a deteriorating economic situation.''
The French economy's problems stem from the misguided attempt at expansion in 1981 by the French Socialist government, Mr. Chevalier and other analysts say. Heavy government spending created economic growth - in 1982 the French economy expanded by 1.5 percent, the highest rate in the West - but at the cost of both high inflation and a ballooning trade deficit.
The present squeeze is designed to bring inflation down from about 10 percent in 1982 to 8 percent this year and to lower the trade gap from about 100 billion francs ($12.98 billion) last year to 50 billion francs this year.
Since March, though, two problems have put these goals in doubt. First, the dollar has continued to rise against the franc. It now stands at around 7.7 francs to the dollar, compared to around 6.7 last December.
''Because France pays for its oil and raw-material imports in dollar prices, the increased value of the dollar will add about 20 billion francs to the country's import bill this year,'' explained J. Paul Horne, European economist for Smith Barney, Harris Upham & Co. here. ''So this year's trade deficit should be about 70 billion francs, not the 50 (billion francs) the government hoped for.''
The second major problem is the high level of French salary settlements. Mr. Chevalier of the University of Paris pointed out that while unions at West Germany's Volkswagen accepted a 3.2 percent pay increase in 1983, Renault workers recently won a 10 percent pay hike.
Along with increased import costs due to the high dollar, such high wage agreements mean that the entire hoped-for effects of austerity on France's inflation rate will not be realized this year. Inflation ran at almost 12 percent in the second quarter, and analysts expect it to average out at about 9. 5 percent for the year. This would keep French inflation considerably higher than West German inflation.
''In such situations, French industry cannot stay competitive,'' Mr. Chevalier said. ''And until we are competitive with Germany, the franc will be weak against the mark.''
As a result, even if the dollar's pressure against the franc lessens, the German currency will continue to be too strong against the French currency. This situation makes another devaluation of the franc, the fourth since the Socialists assumed power, almost inevitable, analysts say.
''It could come as early as the fall,'' Mr. Horne said.
To cover a sizable budget deficit, the government has two solutions, both unpleasant: It can cut social spending, or it can raise taxes. Most observers here expect the Socialist government to raise the sales tax.
A key series of salary negotiations are coming in October. The government hopes to keep wage hikes to a maximum of 8 percent, but the unions are so far demanding that their members' purchasing power not be decreased. Strikes are expected.
''The negotiations are going to be very tense,'' said Bernard Giroux, spokesman for the employers' association, the Patronat.
The unions are also worried by the prospects of increased unemployment stemming from the austerity program. ''If nothing is done, unemployment is going to be very, very bad by the end of 1984,'' complained labor confederation economist Jean-Pierre Huban.
The government admits that unemployment will probably rise from about 2 million today to about 2.2 million by the end of the year.
The resolution of Peugeot's layoffs may give a good clue as to how unions may react to expected increases in unemployment.The unions have loudly protested the firings and have held a 24-hour strike in some Peugeot factories. But no full strike has been called. Instead, the unions want the government to save the threatened jobs with a bailout.
So far, the government has said no. But just how great a rise in unemployment is the Socialist govenment prepared to accept so that it can reduce the trade deficit and inflation?.
A large segment of the party holds that the government should spur demand and investments at any cost, and the Socialist Party Congress in October is expected to be the scene of a fierce debate between this group and those wanting to continue with austerity.
''The government is serious about deflating,'' Mr. Chevalier said. ''But it will probably only do this until its policies produce too much social unrest.'' Where that point lies is not yet clear.