Realpolitik and the European Union. Chapter 5: France’s voyage from state to market

France’s voyage from state to market.

As with Germany, the years prior to 1945 cast a long shadow over post-war France. The defeat of 1940 was blamed by both Vichy and the Resistance on the failings of a liberal economy. The state-corporatist mechanisms, rooted in legislation of 1941 and 1945, were designed to overcome the hesitancy of bourgeois France to invest in the nation’s industrial regeneration. Central to the inflationary growth policies pursued under the aegis of the Finance Ministry in the four decades following the end of the war was the idea that state influence alone could transform short-term savings into long term investments. Equity markets were sidelined on Marxist grounds that the interests of a narrow class of shareholders were not compatible with those of the nation as a whole, in a vibrant economy based on high levels of employment, the near-equal of Germany. This “overdraft economy”[1] was constantly modified by shifts in public policy and by the economic and social forces which its successes generated.

The public discourse of French economic policy after 1945 had two objectives: industrial expansion, and (from 1958 on) the promotion of exports into world markets. Jean Monnet’s first plan of 1947 set the tone for the coming decades by defining the choice confronting the country as one between “modernisation or decadence.” Economic growth was the key measure. Already high under the Fourth Republic, French growth rates were surpassed between 1960 and 1973 only by Japan. The rule of thumb for French state planners was to create large enterprises where 20% of firms would account for 80% of national manufacturing output.[2] “Expansion, production, competition, concentration,” de Gaulle declared, “these, evidently, are the rules which henceforth the French economy, traditionally circumspect, conservative, protected and dispersed must impose on itself.[3] By the early 1990s, 2% of firms accounted for 74% of exports, 67% of investment and 93% of research and development expenditures.[4] Per capita incomes came to equal those of Germany.

Growth rates slowed after 1974 to about 3.5% per annum, but continued to exceed Germany’s. In the first half of the 1980s, France for the first time since 1945 grew below the average rate of its main OECD partners. The economy picked up from 1987 on, but in the early 1990s sank back again, achieving negative growth in 1994 and recording moderate rates of growth in the two decades between the Maastricht treaty and the crash of 2008. As can be seen in the graph below, the trend has been in line with the secular slowdown in growth of the European Union.

Graph: Gdp per annum growth in 2010 constant dollars. 1960-2015

There were specific reasons for the very high rates of growth in the years 1960-1973: in the early years of the EEC, French closed markets were opened up to German and Dutch industrial products; large farms benefitted from the protection and subsidies of the Common Agricultural Policy(CAP); the labour force in manufacturing and construction was hugely expanded by the inflow of people leaving the land, and by immigration, especially from Spain and Portugal. Like the whole of western Europe, cheap oil replaced coal as the prime source of energy, and enabled the government to spread manufacturing around the hexagon, (with coal as the prime fuel, industry was located near to the mines). Not least, President Pompidou (1969-1974) welcomed in foreign direct investment, especially from the United States.

One by one these advantages fell away. The sharp rise in oil prices in 1973, and again in 1979, made the French economy more dependent on capital inflows, and on borrowings from the London markets. British entry helped to finance the EEC farm budget into the 1980s, when Prime Minister Thatcher had a cap put on British contributions; subsequent enlargements spread the CAP budget thinner; with the development of Spain and Portugal, the inflow of migrant labour slowed, to be replaced increasingly by immigration from the Maghreb and from sub-Saharan Africa. France became less of a target destination for inward investment. With a more open economy, the old policy of high growth and inflation, followed by regular devaluations became redundant. As growth slowed, unemployment rates edged upwards from half a million in 1974 to over 3 million in the early 1990s.

Throughout, French elites took Germany as the benchmark . The defining characteristic of this lengthy discussion about Germany through French eyes was its consistent framing in terms of national patterns of policy. Germany was to be imitated because thereby France could resist German competition better, or Germany was not to be imitated because France could only compete with Germany on markets by developing its own sui generis capitalism.There have been two discernible “German models” in French economic policy: one was centred on the banks, in putative imitation of German practice, and the other was centred on the state as the guarantor for national success. This way of framing French economic policy has been repeated under successive presidents, and has been repeated in the campaign for the French presidency in 2017 between Emmanuel Macron, former banker and Finance Minister, and Marine le Pen, lawyer and leader of the National Front.

Finance Minister Debré’s bank reforms of 1966 enabled two investment banks to form federations of companies, accounting in the aggregate for 48% of industrial value added and 60% of exports.[5] An alternative programme to this French version of the “German model” had been forged with the signing in 1972 of a common programme between the communists, and the revived socialist party.[6] Following his electoral victory of May 1981, the new President Mitterrand opted for a 100% nationalisation of 36 private banks, two investment banks and 11 industrial conglomerates. This extended public sector accounted for one third of sales, one fifth employment and over half of industrial investments. State banking encompassed 90% of banking activity and employed 200 thousand people. The purpose of this state-led “force de frappe”[7] was to foster investment, to promote new technologies; to reduce national dependence on foreign suppliers; and to encourage greater risk taking. State capital was to flow into a few publicly-owned groups, organised on Japanese keiretsu lines.But capital injections to industrial groups went on current expenditures.[8] The state paid heavy indemnities to the owners. State corporations had to borrow from state banks. Corporations threatened closure unless funds were made available.

The crescendo to the French political battle over nationalisation and privatisation, and over national protection or freer trade within a wider European context, was reached in 1983, when Mitterrand decided to keep the existing exchange rate arrangement, tying the franc to the DM. Financial market reforms, already in preparation, were accelerated. Unlike in Germany, the French state revolutionised its capital markets fast, introduced a Banking Act in July 1984, which provided a uniform set of prudential rules for all financial institutions, and all registered banks, mutuals and cooperatives. The Act centralised regulatory powers for all bank sectors, and initiated a revolution for banking in France. Banks could no longer count on automatic rediscounting at the Banque de France, while tighter regulations forced banks to raise their own capital, and to pay more attention to profits. Finance Minister Bérégovoy also moved forcefully to constitute a “unified capital market”,[9] and to push French corporate financing towards the model of Anglo-American financial markets.[10] The reforms entailed wholesale importation of U.S. methods to French conditions. In 1988, the six regional stock exchanges were merged with the Paris Bourse, and French law was adapted to accommodate mutual fund techniques developed by “les Anglo-Saxons“. But withdrawal of the Finance Ministry from refinancing banks meant that France’s undercapitalised firms might fall into foreign ownership.

This did not prevent governments of both right and left from privatising state assets in three waves in 1986-88, again in 1993, and especially in the years 1997-2002, when the left government presided over even larger sales than its conservative predecessors. Market capitalisation of equities rose to levels comparable to those in the UK. If we add to that the original intent of the 1984-86 government to introduce New York style capital markets to Paris, the creation of money market funds, or the opening in the 1990s of the Nouveau Marché for hi-tech stocks—also along Nasdaq lines (in 2005,it was merged into Eurolist)-then the conclusion could well be drawn that, despite rhetoric to the contrary—or perhaps as an explanation of official rhetoric about “le capitalisme sauvage”—that France is more “Anglo-Saxon” than it would care to admit.

Graph: Foreign direct investment outward stocks as % gdp. 1990-2016.

Indeed, French corporations are more invested abroad than is the case of German corporations(see the Graph above). What has hindered France in developing the full potential of the reforms of 1984, is the lack of locally supplied liquidity in capital market. Unlike “les Anglo-Saxons”, France lacks major pension funds or institutional investors. Social security is provided on a pay-as-you earn basis and the burden of financing additional welfare is allocated to employers and employees. Companies are not able to keep pension reserves as own funds, as in Germany. The reformers of 1984-88 had recognised the urgency of developing funded pensions. But they ran into resistance from managers, who disliked to lose existing prerogatives; trade unions which were opposed to losing their position as co-managers of social spending in the social security system; and political parties of left and right which, following Mitterrand, talked about equity markets as “Anglo-Saxon”.

When in 1996 the conservative government tried to spring reform of social security on the public without consultation, it retreated in the face of massive strikes. The left government of 1997-2002 then took to consultation with a vengeance as the smoothest way to introduce extensive privatisation, and to smuggle in reforms in the social security system. The reforms lower the strain on the public pension system by reducing the average pension and smuggling in the possibility of lengthening work lives. But the prospect of a longer working life has elicited strong opposition. Meanwhile, a Pensions Reserve Fund was set up in 2001 from the proceeds from privatizations of state holdings to finance the expected shortfalls of the state system, as the population ages.

The shortfall has been made up by foreign institutional investors. So when successive French governments privatised, they faced the prospect of previously nationally-owned industries being “dissolved in Europe”.[11] Here the “German model” served a purpose, but the tools were distinctly French. French diplomacy in Brussels secured legislation in EU directives, allowing bank-insurance tie-ups to act as “a powerful and organised financial heart” of corporate ownership. The savings banks—with 30% of total French deposits–capped by the Caisse des Dépots et Consignations (the CdC), –were available as a source of funds at the disposal of the Finance Ministry. The nationalised insurers were regrouped into holding companies and took advantage of new legislation to buy participations in banks and industrial companies.

France is a Napoleonic state, and its educational system is designed to ensure that careers are open to talent. The senior ranks of the French state and business are dominated by the engineers and financiers who have made their way to the pinnacles of both public and private sectors, through the highly selective educational system. Keeping senior corporate positions on the career circuit of the “grand corps d’état” is ever present as a consideration. Besides, the purpose of privatisation was not to divest the state of all shares, so much as to open up capital to the corporations as crucial to their becoming national champions, capable of entering alliances with foreign corporations from a position of strength.

But over time, this model of a hard core of corporate owners began to dilute: in 2003, Alcan launched a bid on Pechiney, and the “hard core” shareholder group did not resist. On the other hand, Jean-Marie Messier, President of the global telecommunications and media giant, sought to identify Vivendi with global markets, made his primary residence in New York, and talked aloud, saying that France’s “exception culturelle” was an outdated idea. This alienated the Parisian left bank, nationalist cultural establishment. Without friends in Paris, and within a month, his career lay in ruins. France’s “cultural exception” policy  remains well in place as the heart of French rationale for a French-led Europe to resist the US hyper-power.

Joining the world but proclaiming the French exception was a difficult balance to achieve. Gallo- capitalism in its ancient 1940s format seeks to allocate national resources for national purposes. But as markets open to foreign competition, government officials find themselves immersed in an ocean of corporate details, about which they know next to nothing. Foreign investors seek entry, and  bring access to technologies, management skills and foreign markets. Inward investors compete with national producers on their home markets, and this prompts national producers to retaliate by entering international markets by both trade and investment. As state capitalism’s corporations internationalise, so their tendency is to seek to loosen the ties that bind them to their home state.

That is what in a nutshell has happened to France. It has a major agricultural sector, large industrial base, a highly skilled workforce, and has a favourable geographic location in its main markets of Europe. France is an open economy, in terms of cross border trade and investment flows; the world’s leading tourist destination; deeply networked into the world infrastructure; and highly globalized in terms of a host bi- and multi-lateral agreements, signed since 1945. Sixty per cent of shares of the 20 largest French corporations are recorded as “widely held”, compared to Britain’s 100% and Germany’s 50%.[12] Productivity per head is higher than German. It has a first rate infrastructure.

Its Achilles heal is unemployment, labour market rigidity, and burdensome and complex taxation. Since 1987, when the policy of the “hard franc” was introduced, France has grown below its potential. If high levels of employment had been the policy objective, the answer would have been to reduce the average time for a job seeker from France’s current 86 weeks, to the 10 weeks or so in the UK. Policy moved in the other direction: companies are very reluctant to hire, given the costs attached to severance. Unemployment has stuck at the official figure of above or below 10% for two decades or more. Ghettoes have formed in the suburbs, as the EU’s open doors policy has encouraged continued immigration from the Maghreb and sub-Saharan Africa. Meanwhile, government outlays have continued to climb to 57% gdp, against Germany’s 42%. Successive governments have shied from the liberal market reforms required of membership in the single currency. Foreign direct inward investment has languished (see Graph below).

FDI inward stocks as % gdp.1990-2016

France has been a market economy since the 1980s, while retaining some of the institutions and much of the spirit of Gallo-capitalism—the vision of France as a plucky resistant determined to retain independence in the world as it is. The reality is rather different: it is more “globalized” than Germany, and almost identical to the UK. Where it retains its specificity is its political culture: Catholic, Napoleonic, Marxist and the idea of “la grande nation”. Of 19 countries surveyed worldwide in 2016, in 18 more people saw globalisation as a force for good rather than bad in the world; France was the one which thought otherwise.[13]

Why? Because a very large majority of French people do not like the idea of free markets. Mitterrand entrapped France in a currency union, which its voters reluctantly endorsed in the 1992 referendum, but the implications of which they reject. A poll from 2007, showed that just over a third of French people think a free market economy is the best system to develop the country.By way of contrast, the survey found that 65% of Germans, 59 % of Italians, 66% of the British and 74 % of the Chinese were in favour of the free market. Even the Russians were more favourable.[14] A study in 2001 came to a similar conclusion. [15] The political culture of France opposes the domestic implications of French foreign policy, which has been to embrace Germany as closely as possible in an indissoluble European Union. That has not changed, nor will it.

[1] Michael Loriaux, France After Hegemony: International Change and Financial Reform (Ithaca: Cornell University Press, 1991).

[2] Charles-Albert Michalet, “France” in Raymond Vernon (ed.), Big Business and the State: Changing Relations in Western Europe. (Cambridge, Massachusetts: Harvard University Press, 1974).

[3] Charles de Gaulle, Mémoires d’Espoir: Le Renouveau, 1958-62 (Paris: Librairie Plon, 1966).

[4] OECD Economic Surveys, France. 1991.


[5] François Bellon, (1980) Le Pouvoir Financier et l’Industrie en France, Paris: Seuil, p.74. See also François Morin, (1974) La Structure Financiere du Capitalisme Français, Paris: Calmann-Lévy ; (1977) La Banque et les Groupes Industriels à l’Heure des Nationalisations Paris, Calmann-Lévy.

[6] The new socialist secretary general told his party militants, in language redolent of the neo-socialist fascists of the 1930s that “the dominant phenomenon of capitalist concentration, money, enters everywhere and devours those whom it is supposed to assist”. Quoted in Catherine Nay, (1984) Le Rouge et le Noir: ou l’histoire d’une ambition, Paris, Grasset,.p. 322. Mitterrand had started his political career on the far right.

[7]French industrial policy“, Financial Times, January 8,1982.


[8] First Report of the High Council of the Public Sector., cited in L’Année politique,economique,sociale et diplomatique, 1984. Paris,Editeur du Moniteur, 1985.p.492.

[9] [9] Ministère de l’Economie, des Finances et du Budget, Le Livre Blanc sur la Réforme du Financement de l’Economie, March 1986

[10] Dov Zerah, (1993) Le Système Financier Français: Dix Ans de Mutations, Paris: Documentation Française,.

[11] The expression is that of Olivier Pastré, consultant to the Trésor: “Pastré: le reveil des ZINvestisseurs”, La Tribune de l’Expansion, September 7, 1992.

[12] Rafael LaPorta, Florencio Lopez-de-Silanes, Andrew Schleifer, “Corporate Ownership around the World”, Journal of Finance, Volume LIV, No.4. April 1999;ç492,

[13] Yougov, International Survey, November 17,2016.


[14] BBC.”France versus the world”, November 17,2016.

[15] Philip H.Gordon, Sophie Meunier, « Globalization and French Cultural Identity », French Politics, Culture and Society, Vol.19.No.1. Spring 2001.

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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