Hamish McRae: France has everything going for it now

It is almost as though they are a coiled-up spring waiting for regulation to be released
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Stand by for a successful France. Or at least a French economy that starts to fulfil its potential over the next decade rather better than it has over the past generation. Indeed, I think it is quite possible that over the next three years the French economy may outpace the UK one, something that has not happened consistently for a generation.

The reason of course is the change of leadership. Or rather, that is the trigger for a faster economic pace, for within France there is considerable latent capacity to do better. The parallels are often made between France now and Britain in 1979: both economies had experienced a long period of under-performance with associated labour unrest. We had then what was in effect a revolution - a set of searing reforms that, at considerable cost, laid the base for the subsequent boom. France arguably needs similar reforms, and if it makes them it will become similarly successful.

The parallel is seductive but only helpful at the most general level. Britain's relative position in 1979 was much worse than France's now: then GDP per head was about three-quarters of France, whereas France is about 90 per cent of ours now. Our labour dissent was much more serious, our social tensions greater and our public finances even more stretched. Most crucially, our fundamental competitive position was much weaker. France won't get the radical reforms the UK experienced; but then it does not need them.

The better parallel is Germany five years ago. Germany then was under-performing, with its unemployment at a record level and its slow growth dragging most of the eurozone. The cause was partly high labour costs, the result of having gone into the euro at too high a rate, and partly domestic regulations that inhibited the growth of employment in service industries.

The German government started to tackle the latter, albeit in a piecemeal manner, under Gerhard Schroeder, and the reforms were carried further by Angela Merkel. Meanwhile, the labour cost problem was attacked vigorously by German industry, pushing down real wages and pushing up working hours. When they failed to cut costs enough, they shifted production to Eastern Europe.

This was not much fun. Living standards hardly rose in Germany for five years. But now the country is very competitive again, unemployment is falling and growth last year was the best since the late 1990s.

The point is that Germany did not carry out particularly radical policy reforms. The government chipped away at the edges of some of the more destructive regulations. But there were huge reforms by the private sector and that is what has made the greatest change.

Now look at France. The most fascinating thing I always feel about the French economy is not the high levels of regulation and taxation but how good the private sector, large and small, is at coping with these. Its large companies have gone global. Did you know that French companies supply London with electricity and the US army with catering services? Meanwhile, its small companies manage to crank out high quality goods and services using very few staff, achieving among the highest productivity in the world.

Of course not all French companies are great, but the general level is impressive given how strongly they have been held back. It is almost as though they are a coiled-up spring waiting for regulation to be released. And that is what Nicholas Sarkozy has undertaken to do.

There is a broader point here. In an ever more global economy, you want to focus on things you can do that other countries on the other side of the world cannot do as well with much cheaper labour. Mercifully, there seem to be some things that we can do here in Britain that others cannot do so well, though I do worry about the narrowness of that base. But in France there are similar natural advantages that will serve it well in open competition with the rest of the world.

Among these is a strong top-end transport engineering presence: cars, aircraft, trains. That seems likely to grow for another generation at least. There is a world-class luxury products business, in fact a larger market share at the top end than any other country in the world. The growth of the new global rich seems assured for another generation and that will drive demand there.

There is tourism, the world's largest business, where France is top of the league. There is great strength too in healthcare, in business education and in defence, again all growth sectors. It is probably a strength, too, to have the most developed nuclear power industry in the world.

No economy is ideally placed to take advantage of global markets for we all have weak suits as well as strong ones. Within France there is a real fear of the disciplines that the market economy imposes. It would follow that the more global the market economy becomes, the greater those fears. But the hand that France is playing looks pretty good to me. There are a lot of countries, even in Western Europe, who would love to have the natural advantages France enjoys.

And that seems to me to be the issue for any country facing the challenges of globalisation. You are dealt a hand of cards, which you cannot throw back and ask to be dealt again. Here in Britain we have, I suggest, the most interesting hand of cards on the planet. Long suits include finance, higher education, pharmaceuticals, communications, the English language - and so on. Short suits include a north/south imbalance and poorly-performing public services. In recent years we have played that hand quite well, but we could always make a mess of it. I worry about our present economic overconfidence and the extent to which demand has been sustained by borrowing, public and private.

In France they have had a different hand, which, while equally strong, they have played rather badly. Under their new leader they will, I am confident, start to play it more effectively. A lot of the things that need fixing, such as labour legislation, are easy to fix given the political support to do so. Some of the other things, such as public sector reforms, will be much harder.

The next couple of years could, and probably will, be bumpy - for the spirit of '68 lives on: France does riots. But there is so much latent slack in the economy that it could grow strongly for some time before hitting capacity constraints. Here in Britain we will be coping with our burden of debt.

So let's celebrate the potential French economic boom. In the medium-term the UK will probably continue to out-grow France but in the short-term France could surprise us all with its vigour. That is good for Europe and indeed for us too.

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