France’s Economic Model Showing Signs of Stress

PARIS —  After taking office this summer, French Prime Minister Dominique de Villepin promised that “economic patriotism” would drive his effort to revive a battered government and slumping economy.

Because the smooth, silver-haired De Villepin tends to be verbose even by the lofty standards of French political discourse, foreign corporate executives may not have paid him much attention.

Then last month, Hewlett-Packard Co. announced plans to cut 1,240 jobs in France by 2008 as part of a worldwide restructuring. And the new government responded with a double-barreled blast of economic patriotism a la De Villepin.

The mayor of Grenoble, site of the company’s research facility in France, led a delegation to Hewlett-Packard headquarters in Palo Alto to lobby against the job cuts. De Villepin warned that the company should “respect its obligations” and might have to reimburse the state for any “specific public aid from which it might have benefited.”

President Jacques Chirac, in a news conference, criticized Hewlett-Packard as well as leaders of the European Union for not intervening.

“A big international business established in Europe with a not-negligible part of its market here, earning a lot of money, [makes] decisions with strong social consequences, and the European Union does not see itself as involved, concerned or have something to say,” complained Chirac, who appointed De Villepin and appears to be grooming him for a presidential run in 2007.

The implications go beyond Hewlett-Packard, which has 4,800 employees in France. The government’s aggressive campaign to protect French workers and companies contributes to questions about the inherent contradictions of the “French model”: a robust private sector full of multinational corporate giants coexisting with a vast welfare state and a political class that often sounds hostile to economic globalization or, as Chirac calls it, “Anglo-Saxon liberalism.”

When does legitimate defense of French interests cross the line into populist protectionism? And does the government’s interventionist bent hurt or help foreign investment and national prosperity?

By most measures, France is in crisis. The unemployment rate has been stuck at around 10% during Chirac’s 10 years in office, and annual growth has been sluggish. The French spend less time on the job than most Europeans because of a 35-hour workweek, high youth joblessness and increasingly early retirement ages.

As a result, the budget deficit has ballooned. A massive national bureaucracy strains to preserve costly health and welfare programs, entrenched labor protections and generous perks: A motorman for the state railway can earn about $90,000 for a 25-hour workweek with free healthcare and retire at 50.

Moreover, voters are disgusted with the political establishment. As extremists gain ground right and left, internal conflict tears at mainstream parties. And the ruling center-right coalition is trying to recover from the defeat in May of a referendum of the proposed constitution for the European Union, a stunning repudiation of a government that saw itself as the architect of a united Europe.

“France is schizophrenic,” said Nicholas Baverez, a noted commentator and the author of “France Is Falling,” a book published in 2003. “It has on one hand a political and social system that is collapsing and that is completely detached from the reality of the modern world of the 21st century. On the other hand, there are individuals, public or private organizations, companies that are at the top global level. There is no positive cooperation between the two. Just a big gap that is growing.”

Until recently, many voters apparently agreed. The nation’s most popular politician has been Interior Minister Nicolas Sarkozy, who is the ruling party’s chief and a strong presidential contender. Sarkozy’s admiration for the free-market-oriented policies of Britain and the United States makes him a maverick. He says France must break with the past -- and implicitly, his archrivals Chirac and De Villepin -- and chop spending, bureaucracy and regulations in order to create jobs, businesses and growth.

But De Villepin stepped into the breach four months ago, promising that his top priority would be employment. His deft message has defined him as an alternative to Sarkozy’s daring promise to break with the French model.

De Villepin acknowledges the depths of the decline and has pursued modest reforms, such as making hiring and firing easier for small businesses. At the same time, he remains a proud champion of the state-driven French approach and talks a patriotic line whenever he can. During a recent television appearance, De Villepin said he would not want to be treated at a British hospital, describing the French health system as superior because of a commitment to first-rate public services.

Moreover, the Chirac-De Villepin team sees outspoken advocacy of French interests against foreign competition as a centerpiece of economic policy. Officials recently identified companies in 10 sectors that should remain under French control because they are “strategic” industries. Critics note that the long list includes casinos.

When rumors surfaced this summer of a takeover bid of Groupe Danone, a giant French dairy company, by U.S.-based PepsiCo Inc., Chirac vowed to resist the move. Last year, French leaders flexed muscles to help drug company Aventis fend off acquisition by Novartis of Switzerland.

De Villepin makes no apologies about defending “France and things French.” Regardless of ideology or style, all governments fight for their private sectors in the global arena, he told Les Echos newspaper in an interview last month.

“In the United States or Japan, many chief executives have their national flag in their office,” the prime minister said. “I don’t see why the very idea of economic patriotism should be modern in the United States and outmoded in France.... We are in a competition. Everyone has his role. I want my country to score points. I don’t prevent others from doing the same. It’s the rule of the global game.”

But critics accuse De Villepin of worsening an ingrained protectionism that, combined with the high costs of labor and rigid regulations, discourages investment.

“Behind this is a new demonstration of France’s incapacity to adapt to the rules of an open economy,” commentator Baverez said. “That’s why in the French case it’s economic nationalism. Nationalism is the idea of defending the national territory with protectionist measures. It’s a closed and defensive notion. Economic patriotism is an open idea that is about how to promote a nation in an open economy. That’s something that the British do very well, for example, or the Spanish.”

Baverez called Chirac’s attack on the European Union in the Hewlett-Packard case a classic example of “political gesticulation” that seeks to manipulate anti-EU sentiment but will not save jobs. Some leftist opposition leaders in France also accuse Chirac of making the EU a scapegoat.

It sometimes seems that the realities of the global economy limit a government’s response to corporate decisions to little more than talk. In the case of Hewlett-Packard, for example, company executives declared that they had not received any direct subsidies for locating in France and therefore would not have to reimburse the state.

Whether self-destructive or visionary in the long run, the spirited government response may have had a positive short-term effect. Hewlett-Packard executives now say negotiations with unions could result in a reduction in the number of lost jobs, particularly if workers agree to increase hours on the job.