By Anne-Sylvaine Chassany and Francois de Beaupuy
Dec. 5 (Bloomberg) -- At 4 a.m. on Sept. 30, as the collapse of Lehman Brothers Holdings Inc. was shaking up investors on six continents, President Nicolas Sarkozy convened an emergency meeting at the Elysee Palace in Paris to broker the bailout of French-Belgian bank Dexia SA. For an hour, he grilled Finance Minister Christine Lagarde and Bank of France Governor Christian Noyer on the terms of the 6.4 billion euro rescue plan, says François Perol, Sarkozy’s economic adviser.
One of his top requirements: Dexia Chief Executive Officer Axel Miller must leave and forfeit his 3.7 million euro severance paycheck.
With that gesture, Sarkozy, who took office pledging to instill a work-hard, get-rich ethos in a country known for its disdain for money, turned into something more familiar to the French: a politician who intervenes in private companies, subsidizes jobs and bashes the bosses.
“By conveying the message that the state can do better than free markets, Nicolas Sarkozy is appealing to the French’s old instinct for protection,” says Philippe Waechter, chief economist at Natixis Asset Management in Paris. “He seems to be turning his back on his reformist agenda meant to give the French economy more inner resilience.”
Sarkozy, 53, began his presidency in May 2007 as an outspoken admirer of billionaire industrialists. He celebrated his election with his wife, former fashion model Cecilia Ciganer- Albeniz, on the 60-meter-long (197-foot-long) yacht of Vincent Bollore, who built a transportation empire that operates ports in Africa and distributes oil products in Europe.
Charles de Gaulle
By August, the president had cut taxes by 8 billion euros ($10 billion) for workers and small business investors, in a bid to encourage more of the French to become entrepreneurs like Bernard Arnault, chairman of LVMH Moet Hennessy Louis Vuitton SA.
Seventeen months later, with the financial crisis having pushed Europe into its first recession in almost a decade, Sarkozy is backing away from his flirtation with laissez faire and rediscovering another French concept -- dirigisme, or state intervention.
Every president since Charles de Gaulle in the 1960s has protected France’s so-called national champions -- companies in areas such as banking, aircraft building and pharmaceuticals. Sarkozy himself, when he was finance minister, led a state bailout in 2004 of industrial giant Alstom SA. This time around, the president has authorized the expenditure of 200 million euros to create 100,000 government-subsidized jobs, and he has warned that he’ll be “implacable” with businesses that unjustifiably fire employees.
Sovereign Fund
In October, he also set up a sovereign fund to take stakes in large manufacturers to make them less vulnerable to what he called “foreign predators.”
With the fund, France is threatening to go farther than the U.S., U.K. and other European nations, which have pledged about $3 trillion to support banks and thaw credit markets. As president of the European Union, a rotating position he held until the end of 2008, Sarkozy urged all EU nations to also set up sovereign funds. They declined.
“Sarkozy, you are getting closer to socialism,” Venezuelan President Hugo Chavez announced in October. “Welcome to the club.”
The French president took some credit for an agreement on Nov. 15 by leaders of the biggest developed and emerging nations to do more to curb the financial crisis. After meeting in Washington, the Group of 20 urged nations to deploy more fiscal stimulus and will take recommendations on actions such as increasing oversight of hedge funds and debt rating firms.
Sarkozy’s Approval Rating
“I’m a friend of the U.S., but it wasn’t always easy,” Sarkozy said to reporters after the meeting. “We had to convince. It was a long night, there were misunderstandings to overcome, but that’s what dialogue is about.”
What’s good for the president’s approval rating -- it rose 8 percentage points from October to a 10-month high of 49 percent in November -- may not be so good for the economy. Sarkozy’s moves to bolster struggling companies will only delay a recovery, says Natacha Valla, an economist at Goldman Sachs Group Inc. in Paris.
The economy, which has lagged behind the average of the 15 nations sharing the euro since 2006, will contract 0.5 percent in 2009, the International Monetary Fund predicts.
“I hope we’re not going back to basic protectionism,” Valla says. “I’m not sure that Sarkozy’s latest measures are efficient. And the subsidized jobs are just a teardrop compared to what’s needed while we wait for structural labor market reforms.”
President Bling Bling
Until recently, the president made no secret of his affection for money. The French began calling him “President Bling Bling” after he flew on Bollore’s private jet in 2007 for a Christmas holiday in the ancient Egyptian city of Luxor, where he stayed in the 19th-century Old Winter Palace Hotel with his soon-to-be new wife, Italian pop singer Carla Bruni.
The president, a member of the Union for a Popular Movement party, often says that he wants to get rich after he leaves office, says Stephane Richard, the Finance Ministry’s chief of staff. Sarkozy sold his 222-square-meter (2,390-square-foot) duplex apartment in the Paris suburb of Neuilly-sur-Seine in 2006 and makes about 232,000 euros a year as president. His assets consist of about 2 million euros mainly invested in life insurance contracts and a 34 percent stake in a law firm, according to the 2007 disclosure form required of all presidential candidates.
“Financial success is the only thing that’s missing in his life,” says Richard, who made a fortune in real estate. “He alluded to the fact he wished he was in my shoes.” Sarkozy declined through a spokesman to be interviewed for this article.
Hungarian Immigrant Father
Sarkozy, the son of a Hungarian immigrant father and French mother, grew up in a middle-class family in a rented apartment on the quiet rue Fortuny in Paris’s 17th arrondissement. In the upscale neighborhood of six-story apartment buildings from the 19th century, he could play in nearby Parc Monceau, with Roman-style columns, a grotto, a waterfall and ponies for children to ride. He was raised by his mother, who became a lawyer to help support her three boys after divorcing her husband when Nicolas was 4 years old.
He went to Lycee Chaptal, a public middle and high school in Paris, where he failed sixth grade. Sarkozy switched to the private Saint-Louis de Monceau to repeat the grade and finished high school in 1973. At Paris X Nanterre, a public university, he received a master’s degree in corporate and property law and joined the Paris bar in 1981. Two years later, he ran for mayor of Neuilly and won.
Joining the Club
In Neuilly, home to some of France’s richest families, Sarkozy entered the world of money and power.
“He’s always wanted to join the club of the corporate and financial elite,” says Jacques Seguela, executive vice president of advertising company Havas SA and one of Sarkozy’s longtime friends.
Seguela, a former adviser to French President Francois Mitterrand, would invite the young mayor to dinner and, at his request, introduce him to businessmen.
“He got to know these grands bourgeois,” Seguela, 74, says. “He married them, decorated them, became friends with them. He understood early that politics and business needed to get along.”
In his office in Neuilly, Sarkozy spent hours eating chocolates and talking with Martin Bouygues, who controls the world’s second-largest construction company, Bouygues SA. On weekends, he bicycled with Jean-Claude Decaux, the founder of JCDecaux SA, the world’s second-biggest seller of outdoor advertising.
Mitterrand’s Nationalizations
He met Antoine Bernheim, chairman of Assicurazioni Generali SpA, Italy’s largest insurance company, at a Neuilly bridge tournament and went horseback riding with Jean-Luc Lagardere, founder of media and aerospace group Lagardere SCA. He also befriended Bollore, 56, and Arnault.
Sarkozy made good use of his rich friends as he rose to national prominence. He was elected to the National Assembly in 1988 as a local leader of the Rally for the Republic Party, whose initials in French are RPR.
The RPR pledged to reverse the economic policies of Socialist Party President Mitterrand, who carried out a spate of nationalizations in the first years of his tenure from 1981 to ‘95, including building materials supplier Cie. de Saint-Gobain SA, drugmaker Rhône-Poulenc SA, steelmakers Usinor and Sacilor and banks Paribas SA and Banque Rothschild.
Sarkozy’s Blunder
In 1993, with France’s economy in a recession, Mitterrand lost his parliamentary majority in an election and was forced to share power with the opposition party. He appointed the RPR’s Edouard Balladur as his prime minister, who picked Sarkozy as minister in charge of France’s budget.
During the next two years, the Balladur-led government, arguing that many state-run companies were poorly managed, with some facing bankruptcy, sold shares in groups including Rhone- Poulenc, oil company Elf Aquitaine SA and Banque Nationale de Paris.
Just as the RPR was poised to also win the presidency from the socialists in 1995, Sarkozy made his biggest political blunder. He backed his friend Balladur over Jacques Chirac, the mayor of Paris and a former prime minister, in the campaign to succeed Mitterrand. The move backfired after Chirac won, leaving Sarkozy ostracized from French politics for almost three years.
After returning to his law practice and private life, Sarkozy found support from his powerful friends. In 1996, both Arnault and Bouygues were his best men at his wedding to Ciganer- Albeniz, and the following year, Sarkozy asked Bouygues to be the godfather of his youngest son, Louis.
Protectionist Leanings
Sarkozy’s law firm worked on deals for Bernheim’s company in the late 1990s, and Bouygues hired the attorney for a battle -- against Bollore -- over control of his construction company.
“He confided he wanted to abandon politics and create an investment bank,” Bernheim, 84, says. “I told him, ‘You live for politics; your only love is politics; you’ll succeed.’”
After Chirac won his second term as president in 2002, he returned Sarkozy to office as interior minister because of his support for law-and-order measures to combat rising crime in France. Sarkozy became finance minister in 2004, and that’s when his protectionist leanings began to show.
He directed a state-led rescue of train and power plant maker Alstom, which was nearing bankruptcy after buying faulty gas turbines, to avoid the company’s purchase by German rival Siemens AG.
France sold its 21 percent stake in Alstom two years later to Sarkozy’s pal Bouygues, netting a 1.3 billion euro gain. The deal won praise across the political spectrum because of the benefit to taxpayers. Bouygues also profited. Alstom’s shares are up 19 percent from when he bought the stake in 2006 through Dec. 4 compared with a 40 percent decline in France’s CAC 40 Index.
8,000 Euro Suite
Sarkozy had been plotting a run for the presidency since his days as mayor, Bouygues says, and made his move in 2006. As rising energy and housing prices squeezed consumers, his “work more to earn more” slogan propelled him to victory, with 53 percent of the vote over Socialist Segolene Royal, who won 47 percent.
He celebrated his election with 55 guests, including Arnault and Bouygues, at Fouquet’s on the Champs-Elysees. He spent the night in the 8,000 euro presidential suite at the 100-year-old hotel and brasserie owned by his friend Dominique Desseigne’s hotel and casinos group, Lucien Barriere.
“Nicolas Sarkozy has been willing to break the old codes from the first day he was elected,” says Seguela, the president’s friend. “We, the French, still think money is dirty and success can only be corrupt. Sarkozy is shaking things up.”
Flurry of Measures
After opposition leaders attacked Sarkozy for also taking the trip on Bollore’s yacht -- Royal’s spokesman called it “insulting” -- Sarkozy refused to apologize.
“Vincent Bollore is a great French industrialist,” he said to reporters, interrupting his morning jog on the island of Malta. “I wish the French economy many Vincent Bollores, Martin Bouygues, Bernard Arnaults -- that is, men who are able to invest to create jobs.”
In his first months as president, Sarkozy began pushing through Parliament a flurry of measures to lower taxes and encourage employees to work more than 35 hours a week. He gave tax rebates to employees who worked overtime, reduced home loan interest payments and decreased a wealth tax for households investing in small businesses.
He made it easier for employees to swap holidays for extra pay and harder for job seekers getting government aid to turn down employment offers. The president also lifted rules that prevented retailers from giving discounts to shoppers.
French Work Harder
The moves spurred the French to work harder. In companies with more than 10 workers, employees logged 40 percent more overtime hours in the first quarter of 2008 from a year earlier, and small and medium-sized businesses got a capital injection of 1 billion euros over 12 months, the government says.
Maryse Pogodzinski, an economist at JPMorgan Chase & Co. in Paris, says that while Sarkozy’s intentions were good, he pushed too many initiatives at once.
“There have been plenty of measures, which were too small as they aimed at dealing with everything at once and badly understood by companies and households,” Pogodzinski says.
Even as Sarkozy was easing rules on companies to promote competition in 2007, he was also moving in the opposite direction -- expanding the state’s control over France’s biggest utilities.
One of Sarkozy’s first economic challenges was dealing with a pending transaction left to him by Chirac’s prime minister, Dominique de Villepin. In 2006, de Villepin began merger talks between France’s gas monopoly, Gaz de France SA, and French- Belgian utility Suez SA to repel a possible bid for Suez from Italian utility Enel SpA.
Albert Frere
The deal to create a de Gaulle-style national champion was in jeopardy after Suez shareholders complained that the government’s offer of one GDF share and a 1 euro special dividend for every Suez share was unfair.
Sarkozy turned to one of his billionaire friends, Belgian financier Albert Frere, Suez’s largest shareholder, to break the impasse. Since it was politically difficult for the state to pay more for Suez, the president pushed the idea that it should make itself smaller -- and thus more affordable -- by spinning off its water and waste unit.
To overcome opposition from Suez’s CEO, the president met with Frere at the Elysee Palace and struck a deal in August 2007 for a spinoff that all sides agreed to. The state retained a 36 percent stake in what is now the world’s third-largest utility.
“Sarkozy played a key role to make the merger happen,” says Chicuong Dang, an analyst at Paris-based KBL Richelieu Gestion, which has about $6.2 billion under management, including shares of GDF Suez. “Financial terms seemed fair to the companies’ shareholders.”
Benefiting Bouygues
Socialist leader Royal says another Sarkozy proposal involving his friend Bouygues smacks of favoritism. Last January, the president said he wanted to eliminate advertising on four public television channels to make more air time for cultural programming.
The plan would push advertising revenue to private channels, leading to an estimated 98 million euro boost in annual revenue for Societe Television Francaise 1, France’s largest channel, according to Exane BNP Paribas analyst Charles Bedrouelle.
Bouygues, 56, controls TF1 with a 43 percent stake. The proposal also calls for higher taxes on broadcasters and mobile phone operators -- including Bouygues Telecom -- to offset public TV’s lost revenue.
The day the president revealed his plan, TF1 shares jumped 10 percent to 18.40 euros in Paris trading.
Favoritism
“Through Sarkozy’s explicit friendships, he’s enshrining the idea there’s penetration between the state and big business,” says Jean Peyrelevade, a mergers and acquisitions banker at Gruppo Banca Leonardo in Paris and a former chief of staff for Pierre Mauroy, Mitterrand’s prime minister. “Never have so many important businessmen been seen around a president -- hence the suspicion of favoritism.”
Bouygues says he wasn’t involved in Sarkozy’s proposal and was stunned when he heard the news on television.
“People think I write notes to the president to tell him what I want,” Bouygues says. “But I would never do that.”
The government said Parliament was expected to approve the measure by the end of 2008.
By September, with the global credit crunch pushing France’s unemployment rate up to 7.9 percent, Sarkozy moved to protect jobs. Irked by Renault SA’s plan to cut 4,000 positions in France, the president summoned Chief Executive Officer Carlos Ghosn to the Elysee Palace.
Human Suffering
After the meeting, Sarkozy said Renault, which is 15 percent owned by the government, wouldn’t shut down plants in France. The following month, he approved money and tax breaks to subsidize an extra 100,000 jobs in associations and local governments in 2009 after earlier extending the funding for 230,000 positions.
The European Commission on Nov. 3 forecast that the French public deficit in 2009 would jump to 3.5 percent of GDP, the second-highest rate among the countries using the euro.
“Don’t come and tell me that I’m switching economic strategy,” Sarkozy said after his announcement on jobs. “I’m trying to be pragmatic and to tackle human disarray and suffering.”
Sarkozy’s most controversial initiative is the creation of a sovereign fund that will get 6 billion euros in cash and 14 billion euros in stocks from the government and state-owned lender Caisse des Depots et Consignations.
Speaking Like a Socialist
“Did I speak like a Socialist? Maybe,” the president said to European lawmakers in Strasbourg, France, regarding the move.
In response, the German government issued a statement, demanding that France not use the fund to give its companies an unfair advantage in the region. Under EU law, companies that get government injections usually have to sell some assets. CDC will manage the fund.
The sovereign fund made its first investment in November partly to shield about 2,800 shipyard jobs from a possible relocation to South Korea. The fund spent 110 million euros to buy 33 percent of cruise ship builder Chantiers de l’Atlantique -- and gain a say in management decisions -- after South Korea’s STX Group had agreed to buy the company from a Norwegian owner.
Sarkozy came into office as an admirer of U.S. capitalism and even took his first vacation as president in New Hampshire, going bare chested and wearing Ray-Ban sunglasses for the television cameras. After his approval rating fell to 32 percent last April, the financial crisis gave the EU head the opportunity to call several emergency meetings of world leaders and pitch proposals to rein in everything from executive pay to risk taking by banks.
Economic Peril
In France, though a dose of government spending may be needed to curb rising unemployment, Sarkozy shouldn’t abandon his earlier efforts to ease labor rules and spur investment in companies, says Nicolas Baverez, an economist who informally advises the president.
“The crisis is making reforms more difficult to implement, but it has also reinforced the urgency to carry them on,” says Baverez, who’s also a lawyer in Paris at Gibson, Dunn & Crutcher.
If Sarkozy uses the financial meltdown as an excuse for more state meddling and takeovers of companies, the adviser warns, it may mean decades of economic peril and sluggishness for France.
To contact the reporter on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net. Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net.
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