Posted on 09/26/2007 11:25:42 PM PDT by bruinbirdman
Nicolas Sarkozy was at the Paris air show on a hot summer’s day in June when, in a speech laying out his vision for French industry, he threw out this simple phrase: “In economics, my only ideology is pragmatism.” Few outside France took note. But perhaps they should have done.
In recent weeks the French president’s pragmatism has led to the planned creation of a €70bn ($98.8bn, £49bn) power giant through the merger of state-owned Gaz de France and private utility Suez that will present a strong challenge to foreign competition in the French energy market.
His government is now turning its attention to Areva, the state-owned nuclear group, where it is mulling how to ensure French dominance of this growing market through a combination with home-grown companies such as Bouygues, Alstom, Total and EDF.
Finally, the industrial architects working away in the president’s Elysée palace are examining the potential for a third merger to create a French champion – this time in the defence sector – by bringing together Thales and Safran, two companies where the state has minority stakes.
All this national champion-building, added to the French president’s campaigns against the European Central Bank and European Union competition policy, has some of Mr Sarkozy’s European partners deeply worried.
Before he was elected in May many had believed that the man regarded as the most free market of French politicians would revolutionise the country’s deeply embedded tradition of state intervention. Now they fear that in practice, Mr Sarkozy’s pragmatism translates not into an endorsement of competition, but an assault on the free market philosophy of the EU in favour of creating national champions and boosting exports.
“We do have major worries about competition,” said one senior UK official. “We worry that some of Sarkozy’s recent actions could be undermining the development of a free market and fuelling a return to protectionism.”
Mr Sarkozy is certainly not the first occupant of the Elysée palace to favour a leading role for the state in the economy. Indeed, such a tradition goes back at least as far as the 17th century. Ever since Jean-Baptiste Colbert, King Louis XIV’s financial controller, first set out to make France economically self-sufficient with a state-orchestrated industrial policy, successive French leaders have seen it as their duty to intervene in commercial affairs in the general interest.
“When competition is useful, I am for it,” Sarkozy said in his June speech, one of those frank confessions that have left a cloud of suspicion over the motives for his industrial activism.
To be fair to Mr Sarkozy he is not the only EU leader who can be accused of merely paying lip service to free market principles. Apart from France, where the Suez/GdF merger was a blatant attempt by the previous government to fend off a foreign bid for a French company, the Spanish, Germans, Italians and even the British have had their moments of economic nationalism.
But Mr Sarkozy appears to have taken it a step further than his EU counterparts. He is the first publicly to attack the independence of the European Central Bank, arguing that it should set interest rates with an eye on boosting European exports rather than controlling inflation. Moreover while he speaks of the need for European, rather than purely French champions, his actions seem to indicate otherwise.
He appears to have all but ruled out, for example, any likelihood of Germany’s Siemens industrial group joining in any future restructuring of Areva, its joint venture partner in the nuclear sphere; at least, as long as Germany maintains its ban on nuclear power.
Along with Britain, the Spanish, Germans and Italians are watching developments closely. Madrid has already voiced concerns about the Suez/GdF deal, seeing it as a government-backed precursor to an offensive on its own energy market while French players are protected at home by state-set tariffs.
Berlin, however, is likely to be less critical in public – even if the Siemens affair may have raised hackles. There is certainly irritation in German political and corporate circles at Mr Sarkozy’s style. There is also concern at the competitive distortions in sectors such as postal services, rail transport and energy, where France has been slow to open up to competition.
But German officials see the necessity of continued political co-operation between the two countries as overriding whatever industry-related concern they may have.
“Franco-German co-operation is hugely important for Europe. For us it is completely existential,” says one official. Germany must “make sure that we keep talking and we make ourselves heard when we feel our vital interests are threatened, which is not the case now”.
German chancellery officials say Mr Sarkozy, like most of his French compatriots, is simply firmly anchored in the tradition of the state as grand architect of a country’s economic and industrial strategy.
Yet unlike his distant predecessor Mr Colbert, Mr Sarkozy’s freedom to intervene remains limited by EU competition and state aid rules, they say. This means Berlin can afford to let Brussels act as the watchdog that will keep the French in check if they overstep the mark. “Sarkozy is not Putin,” says one Berlin official, referring to the Russian leader’s apparent habit of regarding companies such as Gazprom as arms of the state.
Indeed, though Mr Sarkozy’s strategy can be criticised as nationalistic, it does not appear to be aimed at reinforcing state control. For the end result of what seems to be a burst of government intervention in France is a significant reduction in the state’s hold on industrial companies that traditionally have been seen as vital public assets.
Take GdF for example. Today the government owns some 80 per cent of the gas group and Mr Sarkozy himself pledged during his stint as finance minister that the state would never go below 70 per cent. Yet after the deal struck between Mr Sarkozy and the board of Suez, the government’s stake will drop to 35.6 per cent.
The outcome of any Areva restructuring is also likely to be a sharp drop in the state’s investment in the nuclear group, at least in the non-strategic engineering business. “It could be privatisation by the back door,” admits one senior banker who has advised French companies for many years.
Mr Sarkozy’s most liberal advisers are convinced that his longer-term strategy is to take the state out of the corporate sector, even if, paradoxically, it means that a few private companies get semi-nationalised along the way. At least that is how some Suez investors see the merger with GdF, where the state will have a blocking minority. But for France’s liberals, this may be a price worth paying.
“Sarkozy is an extremely practical person,” says one who is often consulted by the president on industrial matters. “He has a certainty that the market economy is the most efficient and one in which France must have confidence. He is not Colbertist. But if circumstances oblige him, he will look for a workable solution.”
Mr Sarkozy’s champion building may also be a clever way to persuade the French public to accept some otherwise unpalatable decisions. “Suez/GdF shows that the nuclear industry can be run by a private company in France. That is important,” says Gérard Longuet, the French senator and former industry minister who is close to Mr Sarkozy.
The implication for EDF, government-controlled operator of France’s 58 nuclear reactors and a powerful symbol of the state’s commitment to public service, seems clear. “That means Sarkozy is very seriously thinking of significantly reducing the government’s holding in EDF,” said one of the company’s executives.
It may be far too early after just four months in office to say what really motivates Mr Sarkozy. No one doubts that the man who led the state rescue of Alstom, the turbine maker that came close to collapse three years ago, believes in the need for strong French champions that can compete in global markets. Free market credentials or not, this is the primary aim. “We are not privatising simply to privatise,” one government official says.
Mr Sarkozy himself cites the example of France’s lead in nuclear power, the result of decisions taken by General de Gaulle decades ago. Would the market have created a nuclear industry, given that the technology was still largely untried, he sometimes asks.
Today the revival of interest in nuclear power offers France one of its best opportunities for a truly global champion. But, perhaps understandably in the current climate, the government is reluctant to see uranium enrichment and fuel recycling move into private hands.
And it is in the best tradition of French politics that Areva’s restructuring will not happen simply because of market forces, whether it is state-owned or not.
“The state always has a role in encouraging companies to do these types of operations that others elsewhere might do on their own,” says one well-connected mergers and acquisitions lawyer who is called on to advise foreign groups on how to navigate French sensibilities. “The government’s preoccupation is strategic, how it can help favour industry. It is a very cultural fact. Even very international groups are always in a subtle dialogue with the state.”
For France’s more free market European partners, such as Britain, this philosophical gap may be too wide to bridge. It certainly does not help that Mr Sarkozy appears to be challenging some dearly held principles of the EU, such as when he managed to delete the reference to undistorted competition from the preamble to the new EU reform treaty in June.
The question now is whether his rhetoric is aimed merely at playing to the europhobic gallery at home, or more heartfelt. Interestingly, many “Sarko watchers” note his almost uncompromising free market approach on domestic issues such as taxation and the labour market, while areas where he must bow to Brussels – such as competition – attract the most protectionist outbursts.
For Alex Singleton, head of the Globalisation Institute, the free market think-tank, the jury is still out despite some worrying signs. “It is very frustrating for consistency, but it is perhaps what the French public needs. It may simply be that he is a very shrewd operator.”
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