A NEW FRENCH TWIST

By THOMAS SANCTON/PARIS

Seven weeks ago, French President Jacques Chirac impetuously decided to call a snap election, hoping that unhappy voters would give him a new mandate to push ahead on the tough economic reforms aimed at making his country ready to join the European common currency in 1999. But the French instead took the opportunity to slap Chirac and his austerity program, demolishing the right-wing majority in the National Assembly and installing rival Socialist Lionel Jospin as Prime Minister. Now the white-haired, square-jawed Jospin will share power with Chirac in an arrangement the French charmingly call "cohabitation."

Rarely has any political leader inflicted such a devastating wound on himself and his party. And Jospin, who barely lost to Chirac in the last presidential election, has promised big changes. He and his allies said they would fight France's stubborn 12.8% unemployment rate by creating 700,000 government-backed jobs, reduce the workweek from 39 to 35 hours with no loss in pay, suspend planned privatizations, cut the sales tax and raise the minimum wage. The leftist platform, if implemented, threatens to send the deficits soaring and derail French chances of meeting the tough criteria for joining Europe's single currency, the euro. With Germany racked by increasing doubts about its own ability to make the grade, the French election touched off a new though probably exaggerated round of Euro-pessimism.

Chirac campaigned in 1995 on promises of jobs, tax cuts and pay hikes, but he abruptly reversed himself six months later. Result: record low popularity ratings for Chirac and his Prime Minister, Alain Juppe. Last week's result was thus more a rejection of Chirac than a full embrace of the left. The cohabitation may not be easy to manage. Jospin, 59, is an austere former diplomat and economics professor who has promised to change much of the President's economic policy. Chirac, 64, is an instinctive political operator who is determined to trim France's huge welfare state. But they are likely to try to get along. "Neither man seeks a fight," says political analyst Pascal Perrineau. "Chirac doesn't have the means. He's a naked king now."

The most important issue for the two-headed government will be France's attitude toward further Europe integration. Citing the late Socialist President Francois Mitterrand's leading role in negotiating the Maastricht Treaty, which sets the rules for combining Europe's currencies, the Socialists claim to be staunch supporters of the monetary union. But there is an obvious contradiction between Jospin's economic policies and the Maastricht requirements. "Their economic recipes are diametrically opposed to what is needed to join the euro," says Pierre Lellouche, a foreign policy adviser to Chirac. Seeking to calm such fears, Jospin said last week that his promised economic measures would be introduced only gradually. Quicker action is urged by the Communists, who hold three Cabinet posts and whose 39 votes Jospin needs to muster a majority in the Assembly.

The Socialists are also calling for changes or additions to the Maastricht Treaty, a document that most experts say cannot be renegotiated. Among the Socialists' conditions for joining the euro are an insistence that Spain and Italy be included (which Germany bitterly resists), the adoption of a pact endorsing measures to boost jobs and growth, and the creation of an "economic government" as a political counterweight to the future European Central Bank.

For German Chancellor Helmut Kohl, though, all talk of tinkering with the Maastricht rules is anathema--and a potential threat to his re-election chances next year. "Kohl's already having trouble selling the German public on the idea of exchanging their hard D-marks for soft euros," says Paul Horne, a Paris-based international economist with Smith Barney. "If Jospin puts conditions to the Germans that they can't accept, it's goodbye euro." No wonder Kohl made a long phone call to Chirac the day after the election to seek assurances on France's future European policy.

A crucial test will come next week, when Jospin and Chirac head to Amsterdam for the European Summit. There the ministers are due to approve the controversial, German-inspired "stability pact," intended to impose continued budgetary rigor once the euro is launched. But Jospin has denounced the pact as a "super-Maastricht." If he sticks to that position in Amsterdam, the launching of the euro could be delayed or even scuttled.

Despite the potential crisis, France's economy is on target to satisfy the Maastricht criteria, including the key requirement that budget deficits not exceed 3% of the gross domestic product by the end of this year. That accomplishment would be due to the spadework of Chirac and Juppe, who have already done much of the hard work of belt tightening, downsizing and preparing to privatize unprofitable state industries. But their efforts to tackle more structural reforms like deregulation, labor- market flexibility and trimming back the welfare state have met with stubborn public resistance.

The voters' rejection of Chirac suggests that the French may have some congenital inability to face the competitive realities of the modern world. Most French analysts, however, put the blame on a failure of leadership. "Yes, the French have clung to an old social model, but by default," says economist Albert Bressand. "No other policy was articulated to them. The French are slow to modernize because of inappropriate leadership left and right."

Paradoxically, the Socialists just might be in a better position to carry out free-market reforms than the right. And if Jospin can sell the French on modernization with a human face--not unlike Britain's Tony Blair, who is pushing Thatcherism with a softer edge--he will have done his country a historic service and boosted his presidential chances in 2002.