Sarkozy Applies Stick and Carrot to Rouse France

France's new finance minister, Nicolas Sarkozy, yesterday revealed an ambitious programme designed to revitalise the country's economy and repair its flagging finances.

The centrepieces are a fresh round of privatisations, massive gold sales, tax breaks for consumers, a clampdown on state spending and an interventionist industrial policy to support French companies.

French observers compared Mr Sarkozy's presentation to "the inaugural policy speech of a new prime minister", underlining the charismatic former interior minister's political threat to both prime minister Jean-Pierre Raffarin and ultimately to the president, Jacques Chirac.

Promising to fight "on all fronts at the same time" to get the French economy moving, Mr Sarkozy said the government was determined to bring next year's budget deficit below the 3% level imposed by the European Union's stability and growth pact.

As well as a €7bn (£4.7bn) reduction in public spending, including reform of France's healthcare system and the previously sacrosanct defence budget, Mr Sarkozy said the government would sell 35% of aero-engine manufacturer Snecma and shares in two state-owned motorway operators, with the proceeds being used to help reduce the country's debt burden.

The government would also sell up to 600 tonnes of gold, worth about £4.2bn, over the next five years. Though the direct proceeds of the gold sales will not be used to cut debt, the interest on the cash raised will help the public finances.

"There is no reason why public debt has to keep growing. There is no reason to accept weak economic growth," he said.

What France needed to do was "sort out the public fi nances to bring back confidence, support economic activity despite all the budgetary constraints, and face world competition head-on with a proactive industrial policy".

To boost consumer spending, Mr Sarkozy promised tax breaks on loans to buy cars or for home improvements but warned more generous tax cuts promised by Mr Chirac would have to be paid for. "Tax cuts mean nothing if they are not covered by savings in public expenditure or by extra revenues from growth."

Officially, neither Mr Raffarin nor Mr Chirac - whose personal approval ratings this week sank to near-record lows of 32% and 42% respectively - can say they are threatened by the ambitious finance minister's policy broadside, which is in accord with all of their stated objectives.

But after the centre-right's humiliating recent defeat in regional elections, Mr Sarkozy's renewed and successful attempt to grab centre stage is a powerful reminder that his ambitions go far beyond the finance ministry; he is aiming for the leadership of the president's UMP party, and ultimately, in 2007, for the Elysée palace.

Having removed his rival from the high-profile post of interior minister last month, Mr Chirac must now be realising,with some regret, that Mr Sarkozy is capable of deploying his talent for plain speaking and incessant back to basics action in his new position which, moreover, controls the government's purse-strings.

Mr Sarkozy's problem is how to deliver on the mixture of stick and carrot which puts popular tax breaks alongside unpopular reforms.

Economists were divided about Mr Sarkozy's cascade of measures. Stephane Déo, an economist at UBS in Paris, said the speech marked a change in direction over the public finances - an issue on which France has clashed bitterly with the European commission during recent months. "There is more political will to control the public finances," he said.

Others were more sceptical about Mr Sarkozy's ability to deliver on his promises.

"A lot of the speech is soundbite. We'll remain negative on the prospect that they'll get anywhere near the 3% [deficit] they need," said Harvinder Sian, a bond strategist at ABN Amro.