France can look smug, but must put celebrations on hold

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The Independent Online

This is the boom that ought not to have happened.

This is the boom that ought not to have happened.

The French economy is now the fastest growing of the big European countries. It is expected to rise by between 3.4 and 3.8 per cent this year. Consumer confidence this month is at record levels. Unemployment, while still at 10 per cent, is falling faster than in either Germany or Italy (see graph). Living standards are rising sharply, helped by the cut in VAT from 20.6 to 19.6 per cent last month. And, as you can see from the other graph, wages are rising sharply too.

Yet this is the country that brought in the compulsory 35-hour week, something that most economists expected to make French companies less competitive and so eventually decrease employment rather than increase it.

It is the country of big government - accounting for more than 50 per cent of GDP - high taxation, and a mass of regulations that supposedly hamper business start-ups. And it is, on the face of it, not especially Web-friendly, seeking to ban such terms as "le start-up" and "le e-mail". What's going on?

It's easy to see bits of the explanation for the French success story. Firstly, policy is often in practice less restrictive than it appears in theory. The 35-hour week is a great example of this. Sure, it places a new burden on business, but in practice it has been used by many companies as an opportunity to introduce new ways of organising its workforce.

The evidence is so far anecdotal but it's at least possible that, far from increasing unit labour costs, it may actually have cut them. Companies have been able to push through changes in work practices that they otherwise would not have been able to obtain.

It's also not at all clear that, at a senior level at least, the 35-hour week is really having much effect. In the age of the laptop, the mobile phone and the airport lounge which doubles up as an office, who can really count how many hours an executive is actually working?

Secondly, at the margin, France seems to have benefited from the weak euro to an extent that neither Germany nor Italy seems to have done. This seems odd. Like Germany and Italy, France's main export markets are within the eurozone so there should be no particular currency boost.

But the French economy is unusually diversified. And in some key areas the main markets are outside the eurozone: for example it is the largest exporter of tourist services in the world and the US and UK are significant markets. (In the centre of Paris, to judge by the chatter on street corners American-English seems to have become almost the main language at the moment.)

Thirdly, France is more Web-friendly than most people outside the country think. In some ways it is ahead of the UK: if you include Minitel, its pre-internet electronic information and trading system, the proportion of commerce done online is actually even higher than that which takes place in the US.

True, we don't yet know whether Minitel-based business will migrate to the Net and, if it does, whether that will give France a European lead in e-commerce. But at least the game is open.

There are other technologies in which France is ahead of the US and the UK - the use of smartcards for example.

There is also the French equivalent of Silicon Valley at Sophia Antipolis, in the hills above Nice, where there is a cluster of hi-tech firms specialising in software, telecommunications, and management consultancy.

But none of this really answers the big question: Why, by continental European standards at least, is France doing so well? It's easy enough to see bits of the answer but hard to grasp the whole picture. Why, in particular, does France seem to be outperforming Germany and Italy?

If there is a common theme, I think it is that France, thanks to luck as much as anything else, is structurally well suited to the way the world's economy is moving in the 21st century. It has areas of excellence in sectors such as luxury goods and services, and in high technology industries that happen to be well placed the new industrial forest. And it does not have a long tail of bog-standard mass consumer industries challenged by East Asian imports. France's excellent technical education has re-enforced the success of the hi-tech bits of the economy. And its strong cultural identity has buttressed the lower-tech bits.

Further, it does not have a burden on the scale of East Germany or the south of Italy - areas that have to be carried by more prosperous regions. So, stir in a bit of general growth in continental Europe and, zip, up comes France.

Looking ahead, can this better performance be sustained? After all, France had low-trend growth for much of the 1980s and 1990s. There seems to be a window of opportunity here. There are undoubtedly big structural reforms that France needs to make. These include cuts in direct taxation, simplification of the social welfare system, and cutbacks in regulations. These will not be popular. But the country has a couple of years of people feeling richer, which gives it a chance to do unpopular things.

So come what may, the immediate outlook is all right. The test comes later. And, while the core of Paris glitters, there are the grave social and economic problems in the housing estates on the periphery. Running an economy with 10 per cent unemployment is really not going to be acceptable when Britain and America have levels of half that. The exodus of France's young, bright people to London is troubling too.

The country has a solid base that deserves recognition and respect, particularly because this progress was not expected by many in the UK and US. But it only deserves two cheers, not three.