Is Eric Woerth It?

France has had its fair share of political scandals throughout its history, and so maybe we should not be surprised. Yet the scale of the Bettencourt affair, and the extent to which it reaches the highest echelons of government, has the potential to deal one of the most severe blows to a serving president in recent times.

Details remain thin on the ground, and of course we are talking about accusations here rather than proven facts. The ins and outs of the case appear to be this:

• First, on June 16 secret recordings of a conversation between L’Oreal heiress Liliane Bettencourt and her wealth manager are passed to the police. Media reports claim that the transcripts include information about donations made to the UMP’s treasurer Eric Woerth.
• Then, on June 25 Woerth is forced to deny allegations that he blocked a tax investigation into possible fraud by Bettencourt.
• Finally, on July 6 President Nicolas Sarkozy’s 2007 presidential campaign – of which Woerth was the treasurer – is accused by a former Bettencourt bookkeeper of receiving illegal campaign donations from the heiress. The amount is alleged to have been EUR150,000, far more than the EUR7,500 maximum limit on individual campaign donations.
• Most worryingly for the president, the bookkeeper accuses Sarkozy himself of receiving envelopes filled with money from the Bettencourts during his time as mayor of Neuilly-sur-Seine, a suburb of Paris.

I don’t think that this is going to go away quickly, particularly given the recent surge in online investigative journalism in France by organisations such as Mediapart, which are more willing to go against the Elysee Palace than the major print media outlets. Going forward I can see three things happening.

First, it is hard to see how the French government can survive in its current form. Public outrage is likely to build as long as Woerth remains in his post, and even senior figures from the UMP are rumoured to be pushing for a cabinet reshuffle. The UMP’s defeat in a by-election on Sunday will only add to the clamour for change within the party.

Second, this will impede President Sarkozy’s reform agenda at a critical juncture. The president is seeking to slash government spending to get the fiscal deficit below 3% of GDP by 2013. A major part of this is pension reform, fronted by Woerth. Hundreds of thousands protested against the measures in June, indicating the scale of opposition. If (or when) Woerth goes, a new minister will have to take on the task, which could mean further delays.

Finally, with other major European countries such as Germany and the UK having already announced major spending cuts, France might just find itself attracting some unwanted attention from the bond markets. My colleagues at BMI have an unfavourable view on French debt and I think the spread of German over French debt could easily head significantly higher this year. Major delays to fiscal reform, or a suspicion that the president’s political capital has fallen so low that he cannot force these measures through, certainly suggest this.