Reforming France

Pointing the way

Nicolas Sarkozy says that France must change—but not too much

PRESIDENT Nicolas Sarkozy made French constitutional history on Monday June 22nd by addressing a joint session of the lower and upper houses of parliament, known as Congress. He becomes the first French president to do so since the 19th century. Many opposition deputies boycotted the event, held at the palace of Versailles, once Louis XIV’s royal seat, on the grounds that it breached the principle of the separation of powers. A change to France's constitution passed last year introduced this new presidential privilege. Mr Sarkozy’s appearance, and the wide-ranging speech, carried echoes of the American president’s state-of-the-union address to his Congress—and it contained some surprises.

The first was Mr Sarkozy’s firm line on the wearing of the burqa, the Islamic head-to-toe covering, in France. The garment, he declared, was “a sign of subjugation” and as such was “not welcome on French territory”. Underlining the French principle of laïcité, or strict separation of the state and religion, he argued that this protected religious freedom and belief.

The question of the burqa was “not a religious problem”, he said, but a question of “the dignity of women”. In 2004, France banned the wearing of “conspicuous” religious symbols, including the Muslim headscarf, in state schools, hospitals and administrative buildings. A cross-party group of parliamentarians will shortly begin a consultation on whether to ban the burqa, which is by definition already outlawed in public institutions, altogether.

The matter is delicate, not only because some of France’s Muslim groups consider that such a move would further stigmatise Islam. It also touches a principle that Barack Obama laid out in a recent speech in Cairo aimed at the Muslim world. America’s president said that “it is important for Western countries to avoid impeding Muslim citizens from practising religion as they see fit—for instance, by dictating what clothes a Muslim woman should wear.” Muslim women in the French government, however, back the idea of a ban on the burqa. Fadela Amara, the cities minister, has called it “a coffin that kills fundamental liberties”. With his hard line, Mr Sarkozy seems to be behind a ban, although he will now await the outcome of the parliamentary mission.

On economic policy, Mr Sarkozy had two underlying messages for the French—one reassuring, the other more menacing. He offered soothing words about the value of the French model in the recession and its ability to protect the most vulnerable from poverty. “The recession has brought the French model back into fashion,” he declared, with a hint of self-satisfaction, stressing not only the shock-absorbing value of its welfare state but also the system of regulation and investment in infrastructure.

Mr Sarkozy added, however, that the recession also “powerfully exposes our shortcomings and our weaknesses”. France needed to spend less on its bureaucracy and on running expenses and more on investing in the future, research and the green economy. To change that balance, he said, he promised to continue with reforms, such as trimming the civil service and raising the retirement age, while borrowing more for long-term investment. Taxes, he promised, would not rise. “Let’s have the courage to change” he urged.

As always with Mr Sarkozy, there was something for everyone: more protection as well as more competitiveness, a defence of the French way as well as a plea for its overhaul. Whether he can square this circle remains to be seen. The French president is certainly in a stronger position politically than he has been for months, freshly triumphant at European elections and with poll ratings beginning to climb. Street protests and union-led strikes have fizzled out. And the opposition is divided and weak. Politically, this is the best opportunity to press ahead with reforms to improve French competitiveness that he has had for a long time—if he decides to seize it.

The state and the economy: France

The state and the economy: France

Back in the driving seat

The return of dirigisme

IN ONE respect, at least, the global downturn is welcome in France: it has legitimised economic interventionism in the land where Louis XIV’s finance minister, Jean-Baptise Colbert, invented it under the term dirigisme. “The main feature of this crisis”, declared President Nicolas Sarkozy recently, with more than a hint of satisfaction, “is the return of the state, the end of the ideology of public powerlessness.”

The government’s recent €6 billion ($7.6 billion) rescue of Renault and PSA Peugeot Citroën, two carmakers, captures the French political mood. It prompted little debate over whether the state should bail out car manufacturers with public money, or even whether such state aid would distort competition. Such arguments were left to the European Commission, as well as to central and eastern Europeans livid at protectionist comments made by Mr Sarkozy, who suggested last month that it was “not justified” for a French carmaker to build a factory in the Czech Republic in order to sell cars in France. At home, though, barely a voice was raised to recall that the freedom for companies to do this is enshrined in Europe’s single-market laws.

Instead French politicians, from the left and the right, have urged Mr Sarkozy to do even more to protect French jobs, keep factories open and curb bosses’ pay. The car industry directly employs 700,000 people in France, and 2.5m indirectly. With unemployment already at 8.3%, and global car sales collapsing, the French are particularly worried about job losses and stagnant pay. Unions have called for another day of strikes and protests on March 19th; the latest day of action in January drew 1m-2.5m people onto the streets across France.

This is why Mr Sarkozy tried so hard to tie state aid for the car industry to a promise to keep production at home. “We could not have explained to the French that we were spending money on companies but not saving jobs in France,” says one minister. After meetings with car bosses, Mr Sarkozy announced triumphantly in February that he had got his way. Both Renault and PSA, he claimed, had given “a commitment” not to close any factories for the duration of the state loans, and to “do everything” to avoid layoffs. But Neelie Kroes, the EU competition commissioner, demanded a written promise that the aid would not be linked to any measures limiting carmakers’ freedom in the single market, now or in the future. With that guarantee in her pocket, she gave the go-ahead.

French politicians consider as given a strong role for the state. If anything, the policies regarded in Brussels as protectionist are in France considered too liberal. Voices on the left charge that Mr Sarkozy has ceded too much to Brussels over the car industry. Even before the slump, economic liberals were a discrete species in the French political ecosystem, dominated by the traditional big beasts of the Gaullist right and the Socialist left. The anti-capitalist hard-left is enjoying fresh popularity. A recent Paris Match poll suggested that the three far-left political parties, a mix of communists and Trotskyites, would together grab 16% of the vote at the upcoming elections to the European Parliament—more than the centrist party of François Bayrou.

Indeed, many in France have found renewed pride in their statist system. Le Monde noted in a recent article that, “In the crisis, the French model, formerly knocked, is finding favour once more,” and argued that “France is better equipped than the United States or some of its European partners to deal with the recession, because its model limits social damage.” François Fillon, the centre-right prime minister, has praised the virtues of dirigisme in building high-speed trains and developing nuclear energy. The new creed has notably raised the stock of Henri Guaino, Mr Sarkozy’s speechwriter and a long-standing advocate of state intervention.

Even Christine Lagarde, the free-market finance minister, points out that the heavy state now has its advantages. In 2007 public spending accounted for 52% of GDP in France compared with 45% in Britain and 44% in Germany. This may have held back the economy in boom times; but, with its welfare cushion, it helps to keep it afloat in recession. Once denounced for running a high budget deficit, France now has one which, at 5.5% of GDP forecast by the IMF for 2009, is well below that of Britain (7.2%) and the United States (12%).

During his election campaign, ironically, Mr Sarkozy had called for reforms to the French model which, he said, produced less growth and more unemployment than elsewhere in Europe. The recession took hold just as he launched measures to trim the civil service, stiffen competition, cut red tape and loosen the labour market. Now he is under pressure to ease off.

Yet in the long run, many of those policies are needed. “The French economy and, above all, the French consumer appear to be relatively resilient in the presence of shocks,” wrote Carlos Caceres, an economist at Morgan Stanley, in a research paper this week. “However, this resilience stems mostly from structural rigidities—in particular labour-market rigidities—which prevent the economy from adjusting rapidly, and therefore can come at the cost of a more protracted downturn.”

How California Became France

Unable to afford a welfare state and unable to reform it.

MATTHEW KAMINSKI

Sacramento, Calif.

As California goes, says an old cliché, so goes the nation. Oh my.

These days, the Golden State leads the nation on economic and fiscal dysfunction, from the empty homes spread across the Central Valley to the highest state budget shortfall in the nation's history. Meanwhile, its political class pioneers denial in the face of catastrophe.

AP

The spark for the immediate political crisis was a familiar Californian discovery, a fiscal hole of $41 billion. Gov. Arnold Schwarzenegger declared an "emergency" in November and took legislative leaders behind closed doors to hammer out a compromise. The budget adopted in a marathon session this week splits the baby, closing the deficit with spending cuts (hated by the left) and tax hikes (ditto the right), all the while largely failing to tackle the state's built-in structural defects.

Some parts of the deal, such as borrowing from future lottery receipts, may yet collapse at the ballot in May, and California could soon be back in line to mark another first -- state bankruptcy. In anticipation, Standard & Poor's this month downgraded its bond rating a notch below Louisiana's.

Even discounting for the impact of global recession, the most populous state's ills are unique and self-inflicted -- and avoidable. In the last three decades, California expanded the public sector and regulation to Europe-like dimensions. Schools, state employees, health care, even dog kennels, benefited from largesse in flush times. Government workers got 16 official holidays, everyone else six. The state dabbled with universal health care and adopted strict environmental standards. In short, California went where our new president and Nancy Pelosi of San Francisco want America to go.

Now there's much to recommend the Old World. California brings to mind my last home, France -- God's country blessed with fertile soil for wines, sun-blanched beaches, and a well-educated populace. Amusingly, both states are led by bling-bling immigrants married to glamorous women and elected to shake up the status quo. In both departments, the governator got a head start on Nicolas Sarkozy in Paris.

The parallels are also disquieting. The French have long experienced the unintended consequences of a large public sector. Ask them about it. As the number of people who get money from government grows, so does the power of constituencies dedicated to keep this honey dripping. Even when voters recognize the model carries drawbacks, such as subpar growth, high taxes, an uncompetitive business climate and above-average unemployment, their elected leaders find it near impossible to tweak the system. This has been the story of France for decades, and lately of California.

Six years ago, Mr. Schwarzenegger arrived in Sacramento to "cut up the credit card" and give the girlie men at the State Capitol a testosterone shot. California languished then in a fiscal crisis whose causes were pretty much the same as today. The hapless Gray Davis had been recalled, and the Austrian-born actor made a promising start to break the pattern.

In 2005, banking on his popularity, the governor pushed an ambitious ballot initiative to impose a hard state spending cap, limit the unions' political buying power, tighten requirements for teacher tenure, and overhaul a gerrymandered state political map. Arnold lost.

After that setback, Mr. Schwarzenegger shifted his attention to green jobs and energy, winning fans in Europe and among Democrats. "He's recognized that California's a pretty moderate place," says Darrell Steinberg, the Democratic president pro tem of the Senate. "You've got to govern from the middle."

People closer to the governor offer a different take. "Once he got beat, he reverted back to, 'I want to be liked,'" says a former Schwarzenegger aide. "It's classic narcissism." (The governor declined requests for an interview, but I did walk away with three custom-made Daniel Marshall cigars from his office.)

In the Arnold era, the overall cost base has stayed the same as in the Davis era. That isn't entirely his fault. California's constitution locks in higher spending in good years, paving the way for huge deficits in the down. A dependence on a highly progressive tax code leaves it particularly vulnerable to boom and bust cycles. Democrats run the legislature. Across the street from the Capitol, the offices of unions and lobbyists are arguably the real locus of power in Sacramento.

In this budget debacle, Mr. Schwarzenegger found himself back where his remarkable political journey began in 2003. Only now with him in the Davis role. The pill is bitterer still since the budget he signed yesterday will raise the vehicle tax -- the same Davis tax increase he campaigned against and terminated in his first act in office.

Neither side won with this deal, to which the one good alternative would be a time machine to take Sacramento's political class back five years and do it right then. In the event, Republicans split, and signed off on $14.5 billion in new taxes and a less than airtight spending cap. State personnel reductions are minimal, as well, further infuriating their base. The Democrats swallowed $15 billion in spending cuts, which unions vow to fight.

California is in a French-like bind: unable to afford a welfare-type state, and unable to overhaul it. "The people say they want all these programs, then there's nothing they want to pay for," says Hector De La Torre, a Democratic assemblyman. "The schizophrenia in the legislature reflects the peoples'."

This week's deal likely won't keep the state in balance beyond 18 months, perhaps even fewer. "This budget will take us through 2010," says Karen Bass, the Assembly speaker, a Democrat from Los Angeles. "I don't know if it will hold."

Some Democrats and Republicans privately say the best option may be failure. The rough scenario is fiscal insolvency, followed perhaps by federal receivership. No precedent or legal avenue exists for a state to reorganize its affairs under a form of Chapter 11 protection, but that striking suggestion sounds better by the day.

The expectations for Mr. Schwarzenegger's two remaining years in office are low, leaving many of his supporters to ponder the might-have-been. "No one has the political incentives to cut government," says a Republican strategist. "It takes tremendous political capital, which Arnold had. It's a tragedy to have this rare moment when you can try to change and waste it."

For the nation, California is the what-might-be.

Mr. Kaminski is a member of the Journal's editorial board.