French Interventionism Is Out-Performing All Other Western Economic Models

Holder Schmieding, chief European economist at the Bank of America, writes Newsweek's The Global Investor column, more or less monthly. In his latest he argues that the French penchant for aggressive state intervention in the economy is the only Western model that presently is working well. His list of models which have failed include those of the United States, the United Kingdom, Germany, Denmark and the European Union as a whole. Here are the final paragraphs of Schmieding's analysis:

While all these models have lost credibility, French-style pragmatism is spreading across Europe. When financial markets were working well, the Parisian penchant for supporting state-favored industries and national policy objectives was met with deep skepticism abroad. But with the unfolding crisis, the French habit to readily intervene in market processes has become a more widely accepted norm.

At its core, the French approach to economic management reflects a deep-rooted suspicion that the free movement of capital may not always yield politically desired outcomes. Unfortunately, the global credit crunch has strengthened this French argument, although closer inspection suggests that much of the financial excesses that turned to waste can be traced back to misguided signals sent by governments and central banks, rather than to alleged private-sector malfunctions. We expect France to continue its calls for tighter regulation of global capital markets.

Fortunately, France's forceful president, Nicolas Sarkozy, is not only an interventionist. He also champions a common-sense approach to labor markets, with a strong emphasis on old-fashioned work ethics and a contempt for socialist lunacies such as the compulsory 35-hour workweek. So far, the European Union has been characterized by a very liberal regime for capital markets, and often grossly inefficient labor markets. If the French model continues to gain steam, this may be flipped—labor markets may be allowed to work better, while financial systems may be more regulated than before. Global investors can only hope that Europe gets the balance right. If ad-hoc interventionism spreads too far, the continent may eventually have to pay a hefty price in terms of constrained opportunities for innovation and growth. Europe would then be outclassed once again by the eventual resurgence of the more flexible United States.