Francois Obama

NEW YORK (Fortune) -- In January of 1983, I arrived in France to start a dream assignment as Paris bureau chief for Fortune. The timing was magnifique: I got to the offices near the Elysées Palace just in time to witness, and report on, one of the most extraordinary, and most successful, reversals in economic policy in modern history, all masterfully orchestrated by the Elysées' adroit occupant, President François Mitterrand.

Mitterrand's policies, and their results, may sound familiar to Americans. Today, Barack Obama is following a course that's extremely similar to the one Mitterrand first championed. The question is whether Obama will also make the same kind of careening right turn that rescued France. Its amazing comeback in the 1980s provides valuable lessons, if only the American president will heed them.

The stunning upset in the Massachusetts senate race shows resoundingly that Americans want Obama to change direction. Scott Brown won by voicing the big theme behind the voters' rebellion from Boston to Las Vegas: they're terrified of looming deficits and fear that Obama's solution -- a giant new health-care entitlement -- will do just the opposite of what the president is promising, bust the budget.

If Obama moves to the center, and it's highly possible, he may merit a new nickname as the heir to a political genius who put pragmatism before ideology, François Obama.

Mitterrand won the presidential election on the Socialist ticket in mid-1981, pledging an ultra-Keynesian agenda of government expansion, and a program of sweeping nationalizations. His moderate supporters were certain that he would take a far more centrist approach once in office. But to their horror, Mitterrand kept his most radical promises. At the time, France, like the rest of Europe, was mired in recession. Mitterrand's strategy was to revive the economy by boosting consumer demand through vast increases in wages and government spending.

The Mitterrand plan was the ultimate experiment in extreme stimulus, a Gallic campaign to out-Keynes even Keynes. The new president raised pay for civil servants and employees of state-owned companies, and at the same time shortened the work week for all French workers from 40 to 39 hours (see editor's note below). He created 250,000 new government jobs, and lavishly increased payments to mostly middle-class families through a program called Allocations Familiales. The minimum wage rose sharply, and the government flooded the banks with easy money.

To pay for all the new spending, Mitterrand tripled the budget deficit. Mitterrand not only talked like a Socialist, he acted like one, nationalizing 38 banks, including Paribas, and seven big industrial giants, ranging from chemical colossus Rhone-Poulenc to container producer Pechiney.

The results were an unmitigated disaster. In 1982 and 1983, inflation stood in double digits, twice the level in the Germany and America. Unemployment soared to over 10%. Mitterrand devalued the franc no less than three times to keep France's exports of wine and insulation competitive. The French economy was growing by millimeters while its European neighbors recovered in long strides. Top talent was fleeing: Bernard Arnault, now the CEO of luxury goods marketer LVMH, departed for the U.S., declaring that his homeland was becoming a "banana republic."

Then, in early 1983, Mitterrand made an historic change in direction. Admitting that he'd been "intoxicated" by his Keynesian vision in 1981, Mitterrand, as the French say it, "put water in his wine" by shifting to far more conventional, prudent, and, frankly, capitalist policies.

He froze the budget in 1983 and held raises for public employees below the rate of inflation. Monetary policy swung from profligate to restrained. New labor rules made it far easier to pare payrolls, so companies became more willing to rehire workers in good times. Mitterrand did it all under the banner of "La Rigueur," which roughly translates as "Austerity."

By French standards, the results were spectacular. By the mid-80s, the budget was back in balance, and inflation fell to around 4%.

France shifted more markedly towards a free market mode in 1986, when the conservatives won the legislative elections and a new, pro-capitalist administration took charge under Prime Minister Jacques Chirac.

From 1986 to 1990, the economy grew at an annual rate of 3.3%, its best five-year performance in the past three decades. The most remarkable accomplishment: Government spending as a share of GDP fell from 52% in the mid-80s to 48% by 1990. For the first time in decades, France was expanding the private sector and shrinking government. What started as a Keynesian dream now looked like something of a capitalist revolution.

François Mitterrand didn't switch course because of a sudden change in ideology. He did it chiefly to ensure his political survival. But he also showed a remarkable ability to learn from his mistakes. And his flexibility prolonged his career: He overwhelmingly won a second term in 1988, and died a year after leaving office in 1996.

Today, Barack Obama faces economic woes that echo those that weighed on Mitterrand in 1983. And arguably, the same Keynesian policies are not only failing to solve them but may even make the problems worse. Obama is stuck with 10% unemployment, trillion dollar-plus deficits that won't shrink even in a strong recovery, and the looming threat of inflation because of years of easy money.

It's hard to think of two politicians more unalike than the short, wrinkly, then 64-year old, country squire from Burgundy, who relaxed by writing poetry, and the lithe, youthful, former community organizer from Chicago who unwinds shooting hoops. Their main similarity is their serene, almost aristocratic sense of self-confidence.

But Obama should think hard about the wisdom of following Mitterrand's example. The Republican win in Massachusetts provides a ringing confirmation that his ideas are out of favor with voters, just as Mitterrand's were in 1983. We are about to see if he is a rigid ideologue, who will follow Keynesian doctrine at all costs, or a brilliant politician in the Mitterrand-Bill Clinton mode, who will adapt when the economic numbers and polls turn against him.

His best course would be to severely limit increases in government spending as, in fact, he's now promising. He should also abandon or at least delay the policies that are discouraging businesses from hiring, including cap-and-trade and the "card check" rule that would spread unionization and raise labor costs. Another round of "stimulus," financed by even more spending, should also be abandoned, à la Mitterrand.

The upset in Massachusetts may force the Democrats to abandon their biggest, most radical spending initiative, the health-care "reform" bill that looked inevitable just two weeks ago.

It's also likely that big Republican gains next November will force Obama to jettison some of his current agenda, much as the conservatives' victory in 1986 pushed France further in the capitalist direction. But Obama should make the switch now, before the Democrat-controlled Congress goes even further in the direction of higher spending. That includes pursuing unpopular, serpentine strategies to salvage the health-care bill.

If he does a Mitterrand, America would enjoy a several-year window of strong growth as consumers regain confidence that spending is finally coming under control, and businesses are reassured that their costs won't explode.

So it would be great for the U.S. if Obama followed Mitterrand's lead. But it's also instructive to recount what happened to France after the success of the mid to late 1980s. The Socialists eventually regained power, and France returned to its big government tradition, under both Socialists and conservatives. Today, labor laws are once again rigid, and government spending has climbed back to 54% of GDP, the highest number in the Eurozone. Nor can it shake chronic double-digit unemployment. Every year, government spending absorbs most of GDP growth, the opposite of the scenario in the 1980s when an expanding private sector was creating millions of jobs.

Unfortunately, France never followed through on Mitterrand's right turn. His main legacy is avoiding a potential disaster of his own making. He never reformed the French economy on an enduring basis, as Margaret Thatcher did to make Britain the premier economy in Europe. Mitterrand's reforms, as it turned out, allowed the big government regime to survive, then resume growing.

Obama's choice of direction will help determine one of the biggest economic issues of the new century: whether America will be forced to follow Europe and adopt a value-added tax. The looming cost of the health-care bill made a VAT all but inevitable. Now that "reform" is endangered, America has a chance to avoid the levy that fueled the rapid growth of government in France and its neighbors.

If Obama embraces his own version of "La Rigueur," he can steer America away from a VAT, at least for several years. A Mitterrand-like shift will buy time. The rub is that even without a big health-care bill, the growth of Social Security and Medicare spending will still drive America towards a VAT -- unless America summons the political courage to make wrenching reductions in spending.

It's highly unlikely that Obama is the president to champion those painful reforms. Hence, his legacy may be highly similar to Mitterrand's -- that of a tactician who averted a crisis but did little to solve the core economic issue of our time, a gigantic budget gap that threatens America's future.

By following Mitterrand's example, Obama would halt the mad rush towards bigger spending that's scaring voters. That's a good thing. At the same time, by failing to truly reform entitlements, he'd ensure America continues heading in the European direction, albeit more slowly. The big reforms, if they come, will be left to future leaders.

Mitterrand triumphed in a defining moment. In early 1986, the conservatives won a majority in the legislature by a tiny margin. Traditionally, the French president names a prime minister from the party that holds the most seats. The Right feared that given the narrowness of the win, Mitterrand might name a centrist, or even Socialist, prime minister. Instead, he appointed the conservative figure, and implacable foe, who'd led the victory, Jacques Chirac.

I'll never forget his words. "Cette marge est faible, mais elle existe." Translation: "This margin is weak, but it exists." From the moment he uttered those words, Mitterrand assured the French people he'd heard and accepted their voice. His popularity immediately began to rebound, and he would never lose the confidence of French voters again.

Obama faces his defining moment right now. It's brought on by voter revolt, epitomized by the close race in Massachusetts. He has a choice of reacting with truculent, partisan, populist defiance. Or, he can echo Mitterrand's acceptance of the fierce, widespread opposition to his policies by admitting, "It exists."

So Americans should hope for what they can get, a president willing to put water in his wine, and recognize the virtues of a policy that revived France 27 years ago, when François Mitterrand traded fantasy for austerity.

An earlier version of this story incorrectly stated that François Mitterrand had shortened the French work week to 35 hours from 40.