France: Europe's quiet success story

Here they go again. To jaundiced-or

the trees. Strikes laid buses, trains, and metros ifle across much of the country. Workers were on the strees in Caen, Calais, and Paris to protest against plan closures.

And worst of all, the center-left government of Lionel Jospin reacted to the outcry against the job losses by drafting a law to make it more expensive to lay off employees.

That will just make companies more reluctant to take on workers in France, complained Ernest-Antoine Sielliere, president of the employer's union, ouvement des Entreprises de France. His anger will find a ready echo among international critics who doubt the commitment of the French governing classes to a free-market economy.

But French policymakers argue that critics miss the shifting realities of the country's business and political life. "They only look at strikes, which are, in fact, small," argues Nina Metz, a member of finance minister Laurent Fabius's staff. "France has changed dramatically, but we are still trying to keep our own social system, which is based on social solidarity," she adds.

French economists say that since it gained power in mid-- 1997, Jospin's government has, in fact, pursued a pragmatic policy of labor market reform and deft fiscal stimuli. "Employment has been increasing by 3% year-on-year," says Philippe Arvisant, chief economist at BNP Paribas in Paris. "That is something very new-and very friendly to consumer confidence."

It's that happy link between rising job levels and increased buying of consumer goods that has allowed the French economy to put in a performance that, if not quite headline-grabbing, has certainly put the country near the top of the league tables. French GDP grew 3.2% last year, 0.2 percentage points more than that of Germany, the industrial giant with which France always compares itself. That's no freak statistic; French growth has outstripped that of Germany in each of the past three years.

But while much of this government's economic steps have been cautious-continuing a reduction in the social costs of employing low-wage workers begun in the early 1990s, for example-one move was anything but. Flying in the face of conventional economic wisdom, the government introduced a 35-hour week in 1999. "The employers said it would be a catastrophe," says BNP Paribas' Arvisant. "It wasn't." He says the law reduces hours worked in a year, not a week, and that has allowed some employers to cushion the blow by introducing more flexible work patterns.

Certainly, the busy schedule of the labor ministry under Elisabeth Guigou doesn't seem to have scared off foreign industrialists. According to a study published in early May by international financial services company Ernst & Young, France was the number two country in Europe for foreign direct investment in 2000, accounting for 15% of the total. In manufacturing it took the lead,with 75% more projects than last year. "The single most salient fact is France's ability to attract manufacturing projects," says Mark Hughes, the Ernst & Young consultant who authored the report.

Losing your wallflower status can do wonders for your self-esteem. For all the apocalyptic warnings of doom emanating from employers' spokesmen, there's a definite swing in the step of leading French industrialists these days. The face of Jean-- Marie Messier, chairman of Vivendi Universal, is everywhere in France. It's little wonder he's caught smiling so often for the camera; he's helped propel a once sleepy utility into the world's second-biggest media group,with a market capitalization of around $70 billion.

That France has sprouted a world-class company in one of the most famously freewheeling of global industries is an irony not lost on observers of the French economic scene. Since visionary French civil servant Jean Monnet elevated planning into a secular religion after the last war, successive French governments of the left and right have sought to nurture national champions-with, at best, mixed results.

National champions or not, many of France's leading companies are arguably in better shape than their European rivals. France Telecom has C62 billion of debt to wrestle with as a result of an ambitious acquisition program that included mobile-phone company Orange. But that hasn't forced the company into a break-up like BT; nor has company management stumbled in public like that of the other "big three" fixed-line operator Deutsche Telekom.

France Telecom CEO Michael le Bon isn't the only French manager who has managed to trip through a minefield. Since he forged an alliance with Nissan Motors of Japan in 1999, Renault CEO Louis Schweitzer has so far managed to avoid the cross-culture pratfalls that have poisoned the Daimler/Chrysler merger. Even Airbus, the Toulouse-based pan-European aircraft builder that long looked like a model of Europe's inability to parlay technological excellence into ringing cash registers, now has archrival Boeing on the run.

That's sweet music to the tight-knit group of highly educated technocrats that still monopolize the upper reaches of French private enterprise and public life."France has created some world leaders, and it's not without the help of the government," says the Finance Ministry's Metz.

Allied with the recent performance of the economy, that has persuaded some observers that the country will weather the global downturn better than other countries, such as Germany. Most economists are holding growth figures for 2001 at just below the 3% mark.

Fabrice Lenglart, head of short-term economic forecasting at the Institut Nationale des Etudes Statistical et Economique, cautions that France might not be as insulated from the global slowdown as some believe. He and his colleagues ran some calculations aimed at capturing all the effects of a slowdown in US trade on world GDP growth. The conclusions made sobering reading: Every 1% fall in US GDP would slice 19 basis points off French output, compared with 21 basis points in Germany

Potentially as troubling, says Lenglart, were indications trickling in early May on investment by French industrialists. Demand for the glass, plastic, and metal components that go to make consumer products such as dishwashers and cars was sharply down. If that signals a slowdown in industrial investment, it would leave France and much of Europe hanging their hopes of growth on French consumers' continuing to dig deep in their pockets."We are in a crucial period right now," says Lenglart.

But delicate calculations about the extent of the slowdown conceal some deeper truths.Veronique Riches Flores, chief economist at Societe Generate in Paris, points out that French economic outperformance at the end of the 1990s has been at least as much about abiding German structural weaknesses as about the Jospin government's astute financial balancing act.

And while French policymakers may have cause for some satisfaction over the path of the economy, that's just the start of the story if the country is to turn its potential into sustained above-par performance.

The first challenge is the early 2002 extension of the 35-- hour week to small and medium-size companies. With smaller employers having less leeway to reshape work schedules, that was always going to be a tough sell. As the economy cools, it's going to be tougher still. "Are we going to be a little more flexible with its implementation?" asks Metz. "It is probably going to be necessary."

But even the 35-hour plan's exponents don't expect to repeat the job creation trick apparently wrought among larger companies in the last couple of years. France is going to have to look elsewhere for job creation; free markets critics argue that means further liberalization and encouragement of enterprise.

"There has been progress, but it's nothing compared with the United States," says BNP Paribas' Arvisant. He points out that the OECD conducted a study that asked how many people in a variety of countries were involved in a start-up in the past year-even if only via a relative. The percentage was 2% in France-the same as in Spain-compared with 4% in Germany and 10% in the United States.

Sender, the city center garment trade district that briefly flowered as home to Paris' Internet wannabees, hardly had time to sprout a Starbucks before the boom was over. As in other countries, French venture capitalists have pared their Internet portfolios to the bone, and are now looking to more soundly based technologies for a return.

There's certainly no shortage of raw material; France has a dense network of prestigious institutions turning out some of the best-educated engineers in Europe. Take Telisma, a leader in voice recognition technology headquartered in Lannion on the northern coast of Britanny The company was spun out of the research labs of France Telecom two years ago, with company engineers at its heart. "This gives the possibility to develop businesses which FranceTelecom R&D is not in a position to do itself," explains Jean-Francois Guilbert,Telisma vice president of customer operations, and one of the co-founders. Among the company's coming products: a voice recognition telephone directory.

Frederic de Broglie, head of 3i in France and a Telisma investor, lists four ingredients for a thriving start-up scene in any country: talent, venture capital, a helpful tax code for investors and entrepreneurs, and a thriving stock market for new companies.The first three largely exist in France."What we are missing is an effective stock market for high-growth stocks," says de Brogue. "That's what's hampering the development of significant high-tech activity in France."

The Nouveau Marche has struggled to achieve a critical mass, but many of the country's high-tech firms have crossed the Atlantic to the Nasdaq. Those weaknesses aren't apparent at Euronext, the alliance of French, Dutch, and Belgian exchanges in which the Paris Bourse is the first among equals. A healthy CAC-40 stock index boosted French stock market capitalization to the equivalent of $1.45 trillion at the end of last year, compared with just $1,273 billion for its neighbor across the Rhine.

That's reflected in a growing confidence among bankers doing business in Paris. Michael Haize, head of primary markets at JT Morgan in Paris, says the bank had no one selling European cash equity from the French capital last year; now it has 15 salespeople, largely servicing institutional clients. Despite signs of growing interest in share-buying, there has been no explosion in equity culture to rival that in Germany Haize points out that tax breaks make eight-year life insurance contracts the most common form of longer-term investment.

The government has made fiscal moves to divert some of the cash generated by a savings rate of 16% into share buying. If successful, that might erode the foreign presence of French companies' shareholder registers; more than 40% of stock market capitalization is currently in overseas investors' hands.

More important it could help meet a looming pensions bill while preserving the concept of one generation paying the pension of the next."We are trying to encourage private investment in shares without putting at risk pay-as-you-go," says Metz at the Finance Ministry.According to figures from the OECD, the proportion of the population over 65 years old will rise from 21 % in 2000 to almost 39% in 2030.

Metz lists sorting out the future of pensions as one of the two biggest challenges facing French policymakers; the other, she says, is reform of the public sector. Around a fifth of the workforce is on the public payroll, and diverting some of those resources to the private sector is seen as crucial.

Few believe reform will be easy, but demographics are working in the same direction. According to Metz, 40% of civil servants are due to retire within the next five years.