French State's War on French Economy

State meddling at its worst

By Fabio Rafael Fiallo

In 2000, France's Prime Minister Lionel Jospin, leader of the Socialist Party and a Trotskyite in his youth, caused public outrage by acknowledging that, in the economic realm, "the state cannot do everything." Everywhere else under the sun, such an assertion would have been accepted as a mere statement of fact. Not in France, however, where the population has been educated to believe that the state can do more and better than the market.

That belief has been at work for quite some time. It is worth recalling the case of the Franco-British supersonic jet Concorde, sponsored and vaunted by General de Gaulle in the 1960s as a flagship of French "grandeur." The Concorde project took the form of an agreement, not between profit-seeking, autonomous firms, but between the French and British governments. The plane took off in 1969, but it was never bought by airlines other than those of the two countries concerned. It was a commercial fiasco.

In France, state-piloted economic crashes are anything but negligible. In the 1980s, French authorities decided to disburse taxpayers' money as way to help the launching of Minitel, a supposed competitor to the U.S.-created Internet, as well as the purchase of the domestically-produced computer TO7. Their fate? Well, Minitel has become a museum piece, while TO7 lived only 2 years (1982-1984) before ending up in garbage dumps.

Cue the state involvement in the rescue of the ailing Credit Lyonnais in the 1990s. That maneuver was worse than a fiasco, it was a scandal. High-risk loans and criminal embezzlements, as well as compensation payments aimed at avoiding legal suits, brought about losses that reached the equivalent of 20 billion euros.

All these failures should have led French authorities to realize that it is not for the state, but for profit-seeking firms, to decide whether, and if so, how, a commercial niche deserves to be exploited. The lesson, however, doesn't seem to have been learned yet, as new fiascos are presently in the oven.

One of these relates to state bans on research and development in Genetically Modified Organisms (GMOs), nanotechnologies and shale-gas extraction. In these cases, state involvement is not aimed at imposing a "made in France" product - as was the case with Concorde, Minitel and TO7 - but at thwarting the development of promising sectors.

France is well equipped, in terms of scientific expertise and resource endowments (shale gas), to become one of the leading countries in all these endeavors. Yet environmental groups have induced the country to prohibit activities in these areas - even though the arguments advanced are far from being conclusive. By caving in to those pressures, France is letting other countries take or keep the lead in these fields. She may regret it badly down the road.

Another upcoming fiasco has to do with the newly established Public Investment Bank, charged with granting financial assistance to French firms, notably medium and small enterprises, that are finding it difficult to secure financing from banks and capital markets. Had the French government ascertained objectively why the market is reluctant to provide funding to those enterprises, it would have discovered that the problem lies in the erosion of competitiveness of the French industrial sector - an erosion that to a very large extent is the state's own making: the smothering taxation imposed on French firms gravely impairs the latter's ability to bring about productivity increases and quality improvements. Hence the mistrust of the market.

A report commissioned by the present government to Louis Gallois, former CEO of Airbus-maker EADS, stresses the need for creating a "shock of competitiveness" - meaning sharp reductions in the taxation of industries and in severance costs. However, even before the report was made available to the public, President Francois Hollande hastened to indicate that the proposals advanced therein reflect the views of the authors but not those of his government.

The CEOs of the 98 leading industrial firms of France, as well as a group of small and medium-size entrepreneurs self-named "The Patsies," have, on their part, denounced the damage that confiscatory taxation is inflicting upon their firms' ability to thrive or even survive in a globalized economy.

President Hollande is thus facing a barely disguised revolt of entrepreneurs. But instead of taking heed of these cries of alarm, the government has increased taxes to confiscatory levels and then used public funds to provide loans - through the new bank - to firms crippled precisely by the government's clumsy taxation. This is state meddling at its worst.