European Integration and Production in the French Economy

I. INTRODUCTION By some criteria, the French economy in recent years has been doing well with growth of real gross domestic product (GDP) of more than 2% per annum and increasing tax revenues. However, while many other Western European countries are reducing taxes and government regulation to enhance the opportunities for growth, France's public sector has been growing as a percentage of GDP. Moreover, recently announced plans to cut taxes appear to break a commitment for a balanced budget in the near future. While its neighbors have been privatizing state-owned companies, France has maintained its state involvement in industry, and a proposed privatization and reform program has met with protests from labor. (1) In earlier periods, when European economies were more isolated from one another, such differences may have been less important. Now, however, as the economies of Western Europe become increasingly integrated, such differences can have a more substantial impact on the economy of an individual country. In fact, domestic frustration with a recently worsening economy and with the European Union in general were partly blamed for the victory of hard-right Jean-Marie Le Pen over socialist Prime Minister Lionel Jospin in the first round of the French presidential elections in April 2002. (2) Although the euro was fully implemented as a common currency in January 2002 with fewer market disruptions than many people anticipated, as time passes new concerns are emerging regarding the economic integration of Europe and its impact on the economies of individual countries. Such economic reform issues as increased labor flexibility and cuts in public spending are clearly hot issues in most of the euro zone, and particularly so in France. (3) Because economic globalization is likely to continue to be a critical issue in France, the authors examine its potential impact on the country from a production perspective. Accordingly, the nature of the relationships among the productive inputs, including domestic labor and capital and imported inputs, and their implications for France as she plays a greater role in the international economy are investigated. Before this analysis is undertaken; however, the authors briefly summarize French postwar economic history, focusing on events that have directly impacted the current economic structure of the country. The period between the end of World War II and the mid-1970s was characterized by strong economic growth in France. However, rising oil prices (in 1973 and again in 1979 and 1980), and the corresponding increased cost of imported energy products combined with a worldwide recession had a detrimental effect on the French economy, including business profits, investment, and the balance of payments (Tuppen, 1988, pp. 90-93). Since World War II, the French economy has been characterized by a substantial amount of dirigisme, or government intervention (Hough, 1982, pp. 43-45; Organisation for Economic Co-operation and Development [OECD], 2000, pp. 73-103). Nevertheless, governmental influence in the economy particularly increased in 1982, after the socialists came to power in mid-1981 and implemented a widespread nationalization program intended to revitalize an ailing national economy. By the end of that year, nationalized firms produced 22% of total value added and comprised 31% and 21%, respectively, of industrial investment and employment. Moreover, this heavy government involvement extended to such key industries as heavy metals, motor vehicles, electronics, chemicals, telecommunications, and aerospace. (4) The interventionist measures of the government have included selective price controls, limits on business firm access to external funds (including financial credit and foreign exchange), regulation of imports, establishment of a minimum wage rate, and restriction of employee layoffs (Adams, 1989, pp. 99-106; Ardagh, 1982, pp. 32-34 and 116-112). …