Who's the comeback kid? France, Germany, and Italy are struggling to recover. Who'll come out on top?

• Author: Boyer, Rober
• Position: Cover Story

FRANCE

Quiz: In 2002, what country nearly received as much foreign direct investment as China ($52 billion versus $53 billion), displays a higher hourly labor manufacturing productivity than the United States, and has foreign investors controlling 40 percent of the largest companies quoted on the stock market?

The country is France. These facts should mitigate some of the long-lasting cliches that still prevail on both sides of the Atlantic: that the United States is the emblematic figure of a free-market economy mad the promoter of globalization; that France, by contrast, clearly is still Colbertist and protectionist. American public opinion and experts misunderstood the origins of French statism, and misunderstand still more the drastic transformation of the 1990s, as well as several major recent achievements of the French economy. Perhaps these tend to be hidden by some cyclical failures, for instance, temporary rises in unemployment (8.9 percent in 2002) and drops in growth (the French economy is currently in recession).

Actually, in the history of French industrialization. the French state has rarely been the hindrance to capitalism it is perceived to be on the U.S. side of the Atlantic. On the contrary, it has been the promoter of modernity and technological advances. This was true during the 19th century and still more so after the Second World War. France has been a very good pupil of American mass production methods, successfully if seemingly strangely implemented via a massive role of the state in production, financing, and organization of markets, and of course accompanied by social regulation.

But it is precisely that institutionalization of Fordism by a complete architecture of state interventions and legislation that made it quite difficult to directly tackle the needed reforms of the 1980s and 1990s. During this period, the challenge was to find an alternative to the post-World War II regime of statism plus Fordism. The quasi-continuous rise in unemployment during this period, with only short intermissions, is also evidence of the challenge addressed to governments, not only in France but throughout continental Europe as well.

These shadows, however, should not obscure the transformations that have taken place in the French economy since the mid-1980s. The French state is less and less the producer of private goods, and at present prefers to stimulate innovation, given that competition is now enforced at the European level. The fact that the euro has replaced the franc, and is managed by the European Central Bank, also limits the focus of the French state. Similarly, one of the major tasks for the planning agencies has been to decentralize in order to stimulate growth, and get more popular support for economic reform and policy.

Rightist or leftist, successive French governments have shifted from a pro-labor to a pro-business stance and redesigned the tax system accordingly, for instance by adopting a code quite beneficial to stock options. Last but not least, French and (both as cause and result) European macroeconomic policy is now governed not so much by Keynesian principles, but inspired by a neo-Schumpeter-Jan vision of the role of entrepreneurs in the process of innovation and growth. The promotion of the competitiveness of private firms is at the core of the economic strategy of all French governments since the mid-1980s.

Consequently, even seemingly interventionist economic policy measures undertaken since then must be reinterpreted. To accompany the general strategy of massive privatization in France, from time to time the government has to correct the outcome of freer markets that would challenge social stability. With this limited mission, why then do social expenditures continue to grow overall? Not at all for ideological reasons, but simply to socialize the costs of the drastic restructuring of major French manufacturing firms.

Policies instituting incentives to earlier retirement had been conceived with such an objective in mind, but they have been so successful that nowadays many large French corporations are competitive only at the public cost of booming social expenditures and a very low employment rate. From this view, the recent subsidy granted to Alstom, a leading engineering firm, does not mean the return to the heavy hand of the French government on industry. It is mainly a defensive measure to smooth job reductions and possible loss of expertise and competitiveness.

The adoption of the euro is a good counter-example against the culturist interpretation according to which the French elite are nationalist and backward-looking. Quite to the contrary, along with the constant but slow deepening of competition on the single European market, the common currency has played a major role in making necessary (and thus politically acceptable) a redefinition of much of previous legislation.

The law on the reduction of the work week to thirty-five hours has generally been misunderstood, particularly in the Anglo-Saxon economies. Of course, the previous socialist government wanted to fulfill a traditional demand from workers and unions, but that was not the ultimate goal or impact. In fact, the law has been the starting point of a series of negotiations between the business association and workers' unions in order to make working time more flexible according to the needs of the firms. Actually, the thirty-five hour work week has triggered an impressive reorganization delivering more productivity (and as befits greater efficiency, also more stress in the workplace).

It is no surprise, then, to observe that while productivity per hour worked is higher in France than in United States, the rather Malthusian employment policy to curb the activity rates of older workers means that product per capita is higher in the United States than in France. Yet this should not be taken as embodying completely different economic systems in the United States and France. Just like in the United States, French firms have been investing abroad ($92.5 billion in 2001), and as in the United States, this is not evidence of a poor domestic economic environment, but demonstrates the French adoption of the strategy of globalization. Why has Toyota, for example, decided...