Old grudges and a colourful cast of characters look set to make the French presidential elections a memorable affair, finds STEVE HEMSLEY

While France’s President Jacques Chirac has still to decide whether to run for a third term, the two battling frontrunners to replace him in May – the centre-right Nicolas Sarkozy and the socialist Ségolène Royal – are exciting the headline writers.

The French business community and shareholders are now braced for weeks of fierce debate between the pair on key issues affecting the economy. These include the strength of the euro and its effect on consumer spending, tax reform, pensions and social policy.

Chirac, who heads the Union for a Popular Movement (UMP), has never been viewed as a friend of French business, yet in January he announced plans for a bold cut in the French corporate tax rate. He wants to slash the rate from its current level of 33% to as low as 20% within five years, which would give France one of the lowest corporate tax rates in Europe.

Cynics argue this is too little, too late for a man who has been in power since 1995. They claim this is more about destabilising the prospects of Sarkozy, the UMP’s candidate since January. The two men simply do not get on, with Chirac seeing the pretender to his crown as arrogant and too pro-American.

For his part, Sarkozy has outlined a radical plan for tax and labour reform designed to please the financial markets. Meanwhile, his tough stance on immigration will appeal to the far-right sympathisers who in 2002 sided with Front National leader Jean-Marie Le Pen. His name appears on the candidate list again as he makes a fifth attempt to win the French presidency.

French economists are unsure of what to make of the left-wing Royal, who many view as too inexperienced for the role of president despite her having served as environment minister, higher education minister and family minister. Royal was selected by the French Socialist Party last November and is desperate to become France’s first female president. One sign of her political naivety, however, was her public criticism last autumn of the 35-hour working week, which did not go down well with the Socialist Party.

Royal’s comments got the attention of the business community and the employers’ confederation MEDEF. The organisation has always agreed with Sarkozy’s view that the 35-hour week puts a strain on the French economy and, rather than increasing recruitment, simply encourages companies to raise production quotas.

The official candidate list is announced on 20 March and all contenders will begin campaigning officially on 9 April, with the first round of voting on 22 April. The second ballot is on 6 May, with the result announced four days later. Chirac would then have until 17 May to hand over power. This two-round system prevents third-party candidates from distorting the outcome.

Whoever wins the election will be taking over at a time when rising interest rates throughout the eurozone, a slowing US economy and tax jumps in Germany are threatening to take some steam out of the French economy.

Voters on the left and the right tend to want to keep France’s social model, but an ageing population and relatively high unemployment is creating problems regarding pensions. There is also a feeling, as elsewhere in Europe, that the euro has reduced people’s spending power. However, Sarkozy and Royal are both regarded as big supporters of France’s determination to shield companies in sectors such as defence, telecoms and IT from buyouts by foreign companies.

While such protectionism is frowned upon by business leaders elsewhere in Europe, the candidates are sensitive to the strong feeling in France that it is the politician’s job to protect local companies from foreign investors. There is also a growing feeling that companies that outsource work to businesses based overseas should return subsidies provided by the French government.

The CEOs of many of France’s top 40 companies, such as Vivendi, PSA Peugeot Citroën and insurance company AXA, will not be losing too much sleep yet over the possible result of the French presidential election because they are multinationals and up to 75% of their profit is generated outside of France.

Jacques Cailloux, a senior economist at the Royal Bank of Scotland and a former senior euro-area economist at investment bank JPMorgan, says more needs to be known about each candidate’s proposed programme of economic reforms. “The focus in the coming weeks and months will be on the concrete proposals from the two main candidates and their performance in the polls,” he says. “The current soft patch through which the French economy seems to be going will affect the tone of the debate on economic measures. This means the contenders will focus on pro-jobs and pro-growth proposals rather than discussing deep reforms that could be seen as unpopular.”

Frédéric Piquet, a senior partner at Paris-based consulting tax and accounting firm RSM France, part of the global RSM International network, believes tax will emerge as the main election issue. He says the socialists must respond to Chirac’s call for a slash in corporation tax, while both candidates must convince voters that any cuts in tax will not hit state services and benefits.

One tax that small and medium-sized businesses in France want to see reformed is the unpopular local business levy, the so-called taxe profession-nelle. This is charged on fixed investments such as payroll, buildings and equipment. “Sarkozy has said that we should have a new tax because the taxe professionnelle is terrible for companies, as there is no incentive to increase the level of investment,” says Piquet.

Income tax will be another battleground in the election. Sarkozy believes that by 2012 no one in France should be paying more than 50% of their wages in income tax. Meanwhile, Royal has been trying to play down a row with Socialist Party chairman (and her partner) François Hollande, who publicly announced in December that her administration would raise taxes for the wealthy.

“The rate of income tax is a major issue for people running companies, and France needs to stop the highest earners leaving to live in Switzerland, Belgium and Luxembourg,” Piquet adds.

Both Sarkozy and Royal face a challenge to get the electorate to think more seriously about pensions as the population ages. The government has provided a state pension since 1945, but the debate has started over whether more should be done to encourage people to save in private pensions – or work longer.

Neither candidate has as yet committed to raising the retirement age, which currently stands at 60. Yet the employment rate among France’s 55–64-year-olds is one of the lowest in Europe at 37.8% compared with the European average of 42.5%, according to the French Orientation Council on Pensions, which says that reform is urgent.

Between now and May, the candidates from the left and right wings of French politics will attempt to convince voters that their plans are good for the French people and for business. As always, it won’t be easy.

NEW VIEW ON PARIS

Business and financial television channel CNBC Europe is gearing up for its coverage of the presidential elections and has appointed Stéphane Pedrazzi as its new Paris correspondent. Pedrazzi is an experienced broadcast journalist who has worked for specialist financial channels and for Radio Classique and Classic FM in Lyon. In the run-up to the election, CNBC Europe plans a series of special reports on the French economy and will analyse the strengths and weaknesses of the contenders for the presidency. This will include a detailed look at how in tune Sarkozy and Royal, a big admirer of the UK’s Tony Blair, are with the French people. CNBC Europe plans extensive coverage from France, including live reports during and after the first and second round of voting as the atmosphere builds. “Business rather than political issues have so far been driving the financial markets,” notes Pedrazzi, “so it will be interesting to see if that changes and also how the rest of Europe will view the result of the election.”