I am pleased to cross-post here below this article which appears in the August 19, 2005 edition of the Wall Street Journal (sub. only) and is posted over at the European Tribune with the permission of the WSJ editor.


Can-Do France

By JEROME GUILLET

August 19, 2005


As Martin Hirsch recently wrote in Le Monde, the problem with France is best encapsulated by the recent contest for the 2012 Olympics: For London, it was the icing on the cake, whereas for France, it would have been the cake. In striking contrast with Tony Blair’s Britain across the Channel, which is economically strong, confident and even culturally seen as more dynamic, France struggles under persistently high unemployment (10% of the work force and more than 20% of the young), a discredited political class and an aging, lame-duck president. Little wonder then that the French feel so gloomy.


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The recent political brouhaha around Danone, which the French public feared could be the possible “victim” of a takeover by America’s PepsiCo, is thus seen as a symbol of the prevailing attitude in the country: a rejection of globalization, a desire to defend whatever’s left of the country’s past successes against foreign invasions, and a general sense that France is losing control of its destiny.


And yet, look at it another way. Why would an American company, presumably motivated only by the search for profit, want to put $25 billion in a French company, which comes with a supposedly rigid work force and stagnant markets?


Only a few months ago, Danone was actually criticized in France for putting too much emphasis on shareholder value (more than 40% of its shareholders are already “Anglo-Saxons”) and closing a couple of factories. “Les Lu,” the fired workers named after the famous biscuits produced in these factories, even became a symbol for the victims of “ultra-libéral” layoffs. And now, that same company suddenly becomes a symbol of the outdated French “model”?


The French love to complain, but the contradictory discourse that we hear today hides the fact that French corporations — the Renaults, Totals, AXAs, BNP Paribas — are successfully integrated in the world economy, generate record profits and are well represented in the Fortune Global 500 Index (where France has 39 companies listed, and Germany and Britain only 37 each). In fact, Danone is a fairly typical example of how large French firms have adapted to global competition, carved out quite a bit of the international market and focused on shareholder value — all while keeping a French identity.


But what about the rest of the country? It is often said that the very high French productivity, which makes such results at all possible, is simply a mechanical result of France’s low work-participation rate. And what’s the use of high-performing companies if the rest of the country can’t keep up?


The fact is that average French GDP growth per capita over the past 10 years (2%), has been very similar to that in the U.K. (2.3%) and the U.S. (2.1%). More interestingly, as pointed out in a March article by Denis Clerc in “Alternatives Economiques,” France has actually enjoyed stronger job growth than the U.K. over that period (14% vs. 11%), and fewer of those jobs were created in the public sector — 300,000, or 15%, of the new jobs in France are government jobs, versus 860,000, or 45%, in Britain.


In that sense, the higher unemployment rate in France comes from the fact that the French working-age population during that period has increased by 12% compared to only 6% in Britain.


Thus, the French economy looks weak compared to the U.K. only when using selective data — notably by focusing on the last two years, which is the only period in the last 10 years when the U.K. economy really outperformed the French economy. One must also not neglect the fact that British Chancellor of the Exchequer Gordon Brown has been on a Keynesian spending binge in recent years, underpinned by a housing boom, which has provided a lot of fuel to general consumption.


Now, with interest rates higher than in recent years (despite the recent cut by the Bank of England), and with the oil windfall disappearing (the U.K. is becoming a net oil importer just when raw oil prices are at record highs and thus sure to bite), the U.K. economy suddenly is looking not so perky.


However, the fact remains that the U.K. jobless rate is lower and this indicator reflects a real difference in the economic, social and psychological situation of a large segment of the French society. France chose to deal with the global economic crisis during the 1970s and then later on with globalization by forcing a small portion of its working-age population (the immigrants, the young, the workers in smaller firms) to bear the full brunt of these shocks while protecting the “core group” — the middle-age, public-sector or large-enterprise workers.


Not surprisingly, these privileged workers see their children or their neighbors struggle and they cling on even more resolutely to the social benefits and advantages they have. The logical solution would be to even out the situation and share the burden among all, but everyone feels that this only means weakening the fate of those still protected without improving the condition of the most vulnerable.


Similarly, in the European Union, where France still wields a lot of power, Paris chooses to spend all its energy and political capital to defend the divisive Common Agricultural Policy, a policy of the past that in need of a real overhaul.


This reflects a failure of the political class and the political system; unemployment was the “price” chosen by France to go through the crisis in the expectation that it would be limited and temporary. Now that it has become a widespread and permanent feature of the economy, one that is obviously unbearable to society, the politicians should have changed macroeconomic policies. But the French political class has seen very little renewal and policies have been virtually identical. President Jacques Chirac, already a minister under de Gaulle 40 years ago, is the embodiment of that class whose main goal seems not to run the country but to conquer power — not as a means to an end but as an end in itself. Mr. Chirac wasted his first term and did even less during his second term, which he only won because the left rallied behind him to defeat Jean-Marie Le Pen. He has been content to surf on the mood of the day, benefiting from his anti-American position on Iraq since 2002, and not actually doing anything. The French sense this, and are certainly keen for reforms, if those are properly explained. What they do not tolerate is “more of the same,” and a lot of the vote for Mr. Le Pen and for the extreme left is a vote against the current incompetent political class that simply offers no real alternatives. Everybody is waiting for 2007 in the hope that a “real” leader will emerge, but it is hard to see who that might be. Even Nicolas Sarkozy has been around already 25 years and has strong statist control instincts, as shown during the Alstom and Sanofi-Aventis episodes when he was hostile to foreign takeover attempts of these French national champions.


France has problems, but none that makes it the sick man of Europe as one would conclude from reading both the French- and English-language press, and none that could not be solved within a few years by following policies that build on the strengths of the country — its infrastructure, a well-educated and productive work force, a dynamic population that accounts for 60-80% of Europe’s natural population growth, and efficient companies. These strengths must not be drowned by the incompetence of fear-mongering and profoundly reactionary politicians.


The only question is, when will France finally get the leaders it deserves?


Mr. Guillet is an investment banker in Paris and the editor of a political Web log, the European Tribune (www.eurotrib.com).