Monday, March 8, 2010

France: Absorbing the Blows That Buffet Europe

Hi. I found this story fascinating, the actions taken full of common
sense and so effective, it puts into perspective the insanity,
impotence and damage of what's happening here.

Absorbing the Blows That Buffet Europe

"France moved early. It concentrated on saving companies and jobs, sometimes
to the annoyance of its European Union partners; emphasized investment in
job-creating infrastructure; propped up its banks and pressed them to lend;
and decided to let its budget deficit expand further for a few years, but in

Published: March 7, 2010, NY Times

QUIMPER, France - HB-Henriot is one of the oldest companies in France, an
artisanal producer of faïence - hand-painted glazed earthenware - since
1690. The company was founded here in Brittany for its waterpower and
riverbed clay.

The salting of the River Odet has rendered local clay unusable, because the
salt causes the earthenware to crack in the kilns. But the company remains,
having absorbed a rival in 1968, as one of two faïenceries in the region,
and holds a plaque from the government as an "enterprise du patrimoine
vivant" - a company of the living heritage of France.

That designation brings HB-Henriot no money, said its director general,
Michel Merle, and it has been hit hard by Asian competition, a weak dollar
and the economic crisis in its main export markets in the United States and

Still, the French government stepped up early, helping to save the company
and its 54 jobs, Mr. Merle said. Paris accelerated payments and tax
reimbursements to small and medium-size companies; it deferred tax payments
and accepted deductions immediately, auditing them later; it gave subsidies
equal to almost a month's salary per worker so firms could reduce labor
costs and inventory without losing employees. And Paris provided some credit
guarantees, so that shell-shocked banks were more willing to make loans to
small companies like this one.

HB-Henriot is a prime example of how France is not only weathering the
economic storm, but has emerged as one of the most stable economies in
Europe, the first to pull out of recession and with unexpectedly large
growth in the last quarter of 2009, while the German recovery stalled.

France moved early. It concentrated on saving companies and jobs, sometimes
to the annoyance of its European Union partners; emphasized investment in
job-creating infrastructure; propped up its banks and pressed them to lend;
and decided to let its budget deficit expand further for a few years, but in

As Greece struggles to avoid default or bailout, Spain and Portugal watch
anxiously, Sweden falls back into recession, Germany argues about
historically high budget deficits and Britain grapples with deficits and
debt of Greek proportions while France looks both solid and even wise.

But France was also lucky, neither as export-oriented as Germany nor as
go-go as Britain and the United States. Alexandre Delaigue, an economist
with a popular blog, éconoclaste, said simply: "France was hit less because
its real estate was less important than Ireland and Spain, its finance less
important than the U.K., and it was less exposed to Eastern Europe than

France's recession was not nearly as deep as Germany's, let alone that of
the United States. Growth for this year is forecast to be positive but
modest at about 1.2 percent, about the same as in Germany, compared with 0.7
percent for Europe as a whole and with 2.2 percent in the United States. But
French banks are in better condition than those in Germany, and France is
far less dependent than Germany on finding markets for manufactured and
luxury goods.

French policy is far from perfect, with unemployment increasing, especially
among youth, along with the budget deficit and the already high national
debt, issues that will outlast the crisis. The government now promises to
cut growth in total public spending to less than 1 percent a year from 2011
and get the deficit to 3 percent of gross domestic product by 2013, although
its growth forecasts seem too high and tax increases may be necessary,
despite steady denials.

But in general the verdict is positive for President Nicolas Sarkozy and his
government, which moved quickly to recognize a crisis and exercise state

"France resisted the crisis better than most of her European partners and
got out of recession first," said Prime Minister François Fillon.

Mr. Fillon, Patrick Devedjian, the minister in charge of implementing the
recovery plan, and Christine Lagarde, the minister of economic affairs,
industry and employment, are given a lot of the credit.

In an interview, Ms. Lagarde said: "I think we've done relatively and
reasonably well. We applied the three 't's': timely, temporary and
targeted." France decided to put half its package into investment and half
into stimulus, she said, concentrating on small and medium enterprises,
since they are "more agile" and represent 95 percent of the two million
registered French companies.

A key decision, she said, was to accelerate state payments. "We swamped
companies with cash, with whatever was due them, because we knew the cash
and credit situations were difficult," she said. Credit insurance was
extended to exporters, a government agency guaranteed loans and shared them
with banks, and the government created a sovereign fund to invest in

Mr. Sarkozy created a "credit mediator" to intervene between companies and
banks upon appeal and push the banks to reconsider, a process Ms. Lagarde
said worked in 65 percent of cases, involving 16,000 companies and 150,000

A year ago, he had announced a $34 billion stimulus plan over two years that
propped up the car industry and went to infrastructure projects. Then in
December, he announced a $52 billion investment package, called "the Big
Loan," supposedly aimed at the future, to put money into universities,
renewable energy and electric cars. More than 60 percent of the money will
be borrowed by the government, and the rest is supposed to come from bank
repayments of capital the state pushed on them a year ago.

Jacques Mistral, an economist at the French Institute for International
Relations, said that "what Sarkozy did for the recovery has been pretty well
designed and managed - he had a good early view of the seriousness of the
crisis, earlier than most of his counterparts." Mr. Sarkozy was quick with a
stimulus package, but modest with it, too, given the already large French

But for some critics, the French success is hardly surprising, and has more
to do with the structure of the economy than with government policy. The
size of the state sector - the sheer number of state employees, protected in
their jobs and salaries - went some way to cushion the recession and keep up
consumption. About a quarter of the labor force works for government, and
more than half of gross domestic product is due to stems from state
spending, including pensions and health care.

The main reason France did well was that its economy was "neither virtuous
nor vicious," said Daniel Cohen, professor of economics at the École Normale
Supérieure. France was never as virtuous as Germany with its competitive,
export-driven economy, which suffered badly when consumption dropped
worldwide. In fact, France has long been losing market share in world trade.

"France was not dependent on a bubble of credit like the British or on a
bubble of housing like the Spanish or on both of them together, like the
Americans," Mr. Cohen said. "So we suffered less than the others."

Economists worry about cumulative French debt, nearing $2 trillion, and
rising fast as a percentage of gross domestic product. G.D.P. It has gone
from 22 percent of G.D.P. in 1981, when François Mitterrand took power, to
63.8 percent in 2007, when Mr. Sarkozy took over. Insee, the National
Institute of Statistics and Economic Studies, projects it could reach 81.5
percent in 2012.

But what really sets France apart is the size of its high debt combined with
high levels of public spending, with the government deficit in 2010 expected
to be 8.2 percent of G.D.P. Mr. Delaigue says that given the crisis, "it
would be suicidal now to try to balance the budget. For the time being,
there is no other way than debt."

But the economists point out that both Mr. Sarkozy and his predecessor,
Jacques Chirac, men of the right, have for years been cutting taxes while
increasing government spending, which is why the budget deficit rose so
quickly, even before the crisis.

The stimulus program is only a small part of the projected budget deficit,
Mr. Cohen said. Nearly half represents structural deficit, given tax cuts
and increased social spending on an aging population, with a generous
pension system that Mr. Sarkozy and Mr. Fillon say must be reformed. Over
the last 10 years, income from taxes has fallen $80 billion a year,
representing a third of next year's deficit.

"After the crisis there will have to be a moment of truth on how much
structural deficit you can live with," Mr. Cohen said. "The government is
saying, 'No tax increase,' but how long will this last?"

As for HB-Henriot, with a new owner and new American distributor, it is
trying to raise exports from 10 percent of its business to 30 percent,
through ties to specialty stores like Pierre Deux.

"We're an artisanal product in a niche market," said Mr. Merle, the director
general. "We try to develop a market of the 'coup de coeur,' where the heart
speaks before the wallet."

But the company will only survive if exports reach 50 percent of sales, he
said. So its representatives are traveling to trade fairs in the United
States, with French government advice and aid for travel, and it is also
exploring collaboration with larger chains with online catalogs, like
Williams-Sonoma in the United States.

"You have to go and get your clients," Mr. Merle said. "It's necessary to be
there, to occupy the terrain."

Otherwise despite all the state aid, and all the rhetoric about national
identity and patrimony from French politicians, HB-Henriot too, like the
auto companies, will have to consider outsourcing French jobs to compete
with cheap Asian imports.

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