Lessons from the Nationalization Nation: State-Owned Enterprises in France

With a steep recession in full swing, it’s French-bashing time again on the editorial pages and in the business sections of American newspapers. As the Obama administration frantically weighed policy options, pundits agonized over the prospect of the U.S. government’s taking stakes in banks, and automakers contemplated France with a mix of horror and resignation. When, last February, the Washington Post dared a tentative endorsement of government takeovers, it did so apologetically, reassuring its readers that it shared their distaste for Gallic planning: “We can understand why talk of bank nationalization freaks out the stock market: The very notion is so, well, French.” The New York Times’s economics columnist David Leonhardt called for temporary nationalizations, but he took pains to distinguish them from the nefarious takeovers inflicted by leftist ideologues. Atop Leonhardt’s ash heap of history lay a triptych of state-engineered dystopias: Lenin’s totalitarian nightmare, Hugo Chávez’s oil-fueled tragicomedy, and last but not least “the folly of Mitterrand.” For Leonhardt, 1980s France offers a cautionary tale for American policy makers: “Mitterrand made the nationalization of some banks and heavy industry the centerpiece of his agenda…. He held it out as the alternative to the laissez-faire ideology of Ronald Reagan and Margaret Thatcher…and its record is pretty dismal. France’s economy staggered through the 1980s, as government-run banks backed political pet projects that didn’t work out.”

The coup de grâce came with Roger Cohen’s [no relation to the author] op-ed in the New York Times, “One France Is Enough.” Cohen confessed that the Obama budget “made me a little queasy. There is a touch of France in its “étatisme”—the state as all-embracing solution rather than problem—and there’s more than a touch of France in the bash-the-rich righteousness with which the new president cast his plans.” America, Cohen intoned, needs to draw from its own entrepreneurial, can-do spirit to find its own way: “I love France, but I don’t want there to be two of them, least of all if one is in the United States.”

The France to which these writers gesture is immediately recognizable to American eyes. This is the land of suffocating bureaucracy and high taxes, inefficient nationalized industries and an enormous taxpayer-subsidized public sector, disruptive strikes and guaranteed life employment; inhabited by the fun-loving French; great with wine and seduction, but when it comes to the hardnosed business of business, not entrepreneurial or hardworking enough; too wedded to their long vacations, short workweeks, and early retirements, and too addicted to generous handouts from a bloated welfare state to cut it.

This France is in large part an imaginary place. France today boasts the fifth-largest manufacturing economy in the world; subject to European Union competition and trade rules stricter than American regulations, it is sufficiently attractive to global capital to make it the third leading recipient of foreign direct investment (ahead of Germany and China); its workers are more productive per hour than their American counterparts and less unionized (in 2003, 12.4 percent of eligible workers in the United States were unionized, while only 8.3 percent in France were). Home to the world’s fifth-largest stock exchange, France, with its vaunted engineering schools, has dispatched armies of math whizzes and economists into New York and London investment banks to invent the trading strategies and exotic derivatives that helped get us into the current mess. For better or worse, “socialist” France is fully integrated into the global capitalist economy.

If the French model is going to be dragged into the debate over American economic policy and held up as proof that state planning is doomed to failure, let’s get the model right. If, as Newsweek’s February 16 cover trumpeted, “We Are All Socialists Now,” and if, in coming years, “we will become even more French,” then France’s extensive experience with nationalized companies deserves close attention. Not only is almost everything Americans believe on the subject wrong, but there might even be something in France’s folly not only to praise, but to learn from.

France’s embrace of nationalization did not in fact begin with the Socialist François Mitterrand’s 1981 election to the presidency, but decades earlier and under a right-wing president. With France’s economy in ruins at the end of the Second World War, ravaged by German requisitions and Allied bombing, the post-Liberation provisional government led by Charles De Gaulle, with broad support across the political spectrum, launched a wave of nationalizations in order to direct the reconstruction effort. Between 1944 and 1946, the state took control of businesses in energy, transportation, and finance. Private coal companies were reorganized into the public mining giant Charbonnages de France; gas and electricity producers were likewise nationalized to create Électricité de France and Gaz de France. The state absorbed Air France. It nationalized the country’s eleven largest insurance companies, along with Banque de France and the four biggest commercial banks (including Crédit Lyonnais, Société Générale, and what would later become BNP). Because it wasn’t part of a broader plan to reorganize France’s automobile industry, Renault’s nationalization was a special case (Peugeot and Citroën were left untouched). Shortly after the company’s founder and owner, Louis Renault, died in prison (under mysterious circumstances) while awaiting trial for producing trucks for the Wehrmacht during the Occupation, the government confiscated the company. Taken together, these measures transformed the state into a giant economic actor: in 1946, it directly controlled 98 percent of coal production, 95 percent of electricity, 58 percent of the banking sector, 38 percent of automobile production, and 15 percent of total GDP. Beginning with Jean Monnet, the first director of the General Commissariat for Planning, the government managed public enterprises and drafted five-year plans in order to shape long-term economic development.

It was, by any measure, a great success. Nationalized industries and five-year plans may transgress the treasured tenets of neoliberal orthodoxy, but they didn’t stop France from enjoying three decades of sustained economic growth and prosperity. In the period between 1950 and the first oil shock in 1973, recalled in France today as les trente glorieuses (the “thirty glorious years”), its economy grew at the impressive clip of 5 percent a year (while United States growth averaged 3.6 percent), unemployment was virtually unknown (2 percent in France, compared to 4.6 percent in the United States), and French women and men experienced dramatic increases in their standard of living.

American attitudes toward French economic policy were very different in those years. Not only did France pursue its postwar path with full American blessing, it received direct financial assistance from the Marshall Plan. American economists and officials traveled to France to learn firsthand how the Plan’s technocrats were working their dirigiste magic. In 1969, Stephen S. Cohen [no relation to the author], a future adviser to presidents Carter and Clinton, published Modern Capitalist Planning: The French Model, a policy-wonk paean to economic planning à la française, which saw in it not socialism but a successful form of hybrid capitalism. Perhaps the greatest achievement of the Washington Consensus was to wipe our national memory clean of the more ecumenical views that prevailed before the 1980s. Are there many Americans today who would not be surprised to learn that the highest marginal income tax rates in the United States exceeded 90 percent in the early 1960s, or that an American president imposed wage and price controls and tried to seize U.S. steel mills in the 1950s? Other times, other customs.

Mitterrand initiated the second wave of nationalizations when, as president, he put in place the “common program” campaign platform drafted by the Socialist and Communist parties. With a wide-reaching 1982 nationalization law, the government took over the major industrial groups CGE, Péchiney, Rhône-Poulenc, Saint Gobain, and Thomson; defense manufacturers Dassault-Bréguet and Matra; steel giants Usinor and Sacilor; computer companies Bull and ITT-France; and the pharmaceutical lab Roussel-UCLAF; along with the country’s thirty-six biggest banks—all at a cost of fifty-eight billion francs to the taxpayer. And although there was an important element of rupture to the 1981–1983 socialist spring, the government conceived and presented these nationalizations as an extension of the state’s postwar economic planning.

But the political landscape had changed since the Liberation. In stark contrast with the postwar consensus over which de Gaulle presided, nationalization had become a politically polarizing issue, and the Right fought the 1982 law every step of the way. It also pursued successive waves of privatizations whenever it returned to power. Jacques Chirac’s 1986–1988 government sold off a list of companies, including CGE, Saint Gobain, Société Générale and Matra. The 1993–1995 Balladur government privatized Rhône Poulenc and others and began unwinding the state’s positions in Elf-Aquitaine and Renault; the 1995–1997 Juppé cabinet put the state’s shares in Bull, Péchiney, Usinor-Sacilor, and other companies on the block.

But the most striking shift of the post–Mitterrand era was the French Left’s rallying to the privatization creed. In spite of a joint Socialist-Communist campaign promise to halt privatizations, the Socialist-Communist-Green coalition led by Lionel Jospin that took power in 1997 undertook the privatization of Crédit Lyonnais and other corporations, as well as selling minority stakes in Aérospatiale, Air France, and France Télécom. Back in power since 2002, the Right has done little more than pick up where Jospin left off. Rather than a straightforward dismantling of the Mitterrand nationalizations, these wide-ranging privatizations represent nothing less than a rejection of the postwar edifice of French capitalism that De Gaulle helped erect.

Does France’s current privatization consensus (contested, it is true, by far-left parties, the left wing of the Socialist Party, and some centrists) signal that nationalization proved a dismal failure? Have French leaders, chastened by reality, seen the free market light, as nationalization’s critics on this side of the Atlantic claim?

The move away from state ownership was not in fact born of a rational economic calculus but rather of specific political choices. From Chirac’s praise of Ronald Reagan and Margaret Thatcher in the 1980s to Nicolas Sarkozy’s emphatic embrace of the American free market model in the 2007 elections, the Right’s antipathy toward nationalizations has been fundamentally ideological. For the Left, the move was shaped rather by its commitment to European unification and to France’s special relationship with its closest ally, Germany. Mitterrand fatefully cast the Socialist Party’s lot with Europe during the early 1980s recession (provoked, we should recall, by Paul Volcker’s tight monetary policies), as French growth stalled, budget deficits climbed, capital fled, and the franc had to be repeatedly devalued. Opting for austerity in 1983, Mitterrand abandoned wage indexing, reined in government spending, and loosened capital controls in order to avert another devaluation, keep the thrifty directors of the German central bank happy, and move forward the negotiations that culminated in the 1992 Treaty of Maastricht and the creation of the European monetary union. Although Mitterrand himself never renounced his nationalizations, the strict free market rules imposed by Maastricht and subsequent EU treaties committed member states to privatization.

How did nationalized companies themselves perform? Did irresponsibly managed, unviable enterprises limp along thanks only to a constant IV-drip of state subsidies, as Milton Friedman’s disciples would have us believe? Among the six largest industrial groups nationalized in 1982 (CGE, Saint Gobain, Péchiney, Rhône-Poulenc, Thomson, and Bull)—several of which were losing money before the takeover—all were turning profits by 1985. True, between 1982 and 1985 the state had to pump in forty-five billion francs to recapitalize them. But the nationalization balance sheet cannot be closed there. A 1990 report by the Cour des comptes—a French General Accounting Office with judicial teeth—showed that when the costs of nationalization and recapitalization are weighed against dividend income and privatization proceeds, the 1982-1990 cycle of nationalization/privatization had a net zero impact on government finances. Over the long term, Mitterrand’s nationalization adventure didn’t cost French taxpayers a centime.

But there are other ways to skin the balance-sheet cat for publicly owned companies. Consider how successive governments used their stakes in France’s traditional smokestack industries to guide industrial reorganizations. Faced first with cheaper coal imports in the 1960s, and then opting in the 1970s to develop nuclear power, the government put in place a decades-long plan to wind down Charbonnages de France’s coal mining and power generation activities. The company gradually shrank its work force by relying exclusively on retirements and transfers to other public companies. From its peak in 1946, when Charbonnages employed 350,000 miners, to 2004 when the last coal mine in France shuttered its shafts, the company didn’t lay off a single worker. Though unemployment today remains higher than the French average in the old mining regions of northern and eastern France, this policy spared communities the social dislocation of abrupt shutdowns. A far cry from Thatcherite Britain’s brutal mine closures and bloody union-police confrontations.

The state also used nationalization to save companies about to go under. When France’s privately held steel giants were bleeding money during the 1970s worldwide steel downturn, the government first tested alternatives to nationalization, stepping in with massive subsidies. In a sobering illustration of the risks of government bailouts without ownership—which Karl Marx aptly called “privatizing profits and socializing risks”—these not only cost more than the total amount of public moneys invested in all nationalized companies in the same period, but failed to reverse steelmakers’ fortunes. With Usinor tottering on the brink of bankruptcy in 1977, the state brokered a “shadow” nationalization (public banks bought up controlling stakes) to launch the industry’s reorganization, before Mitterrand nationalized Usinor, Sacilor, and Sollac outright in 1982. The state bankrolled an early retirement scheme to reduce payroll, shed excess production capacity, and stanch losses, in anticipation of the European Economic Community’s mandated end to all public subsidies for steel in 1986. In 1988, restructured, fully weaned from subsidies, but still nationalized, newly merged Usinor-Sacilor posted its first profits since 1974, and by the end of the decade had become the second largest steel producer in the world. Although the company went into the red in the early 1990s, its losses never again hit 1970s levels, and for France’s steel mill towns, this strategy avoided the haphazard way rustbelts have been allowed to emerge elsewhere in the world.

The story of Renault, publicly held from the Liberation until the 1990s, starkly belies the myth that nationalized companies can’t perform. When competition from Japanese competitors challenged French and American carmakers alike, and Renault’s losses began to mount, the government imposed a wide-reaching restructuring (entailing layoffs), which returned the company to profitability by the end of the 1980s. By the time the state began selling off its stock in 1990, becoming a minority shareholder in 1996 (it maintains a 15 percent stake today), Renault was in good health. In 2006, Renault employed over 125,000 workers and sold close to 2.5 million vehicles worldwide (making it bigger than Chrysler); it acquired an ailing Nissan in 1999 and turned it around. Although Renault has not been spared in the current downturn, its profits dropping to 599 million euros in 2008, these are numbers every American automaker would trade their SUV-assembly lines for in a heartbeat. State management is no small part of the reason why France today is home to profitable automobile manufacturers whose product lines are focused on small, innovative, fuel-efficient cars.

At a time when loss-making airlines in the United States have renewed their time-honored tango with Chapter 11, Air France’s recent history provides still more evidence that states can manage businesses just fine. Although the state ended its control of the airline when Air France merged with KLM in 2004 (in reality, a friendly acquisition of the Dutch company), it today retains a 17 percent stake in what is the largest passenger airline in the world, which netted nearly 750 million euros in profit in 2008. Far from being a consequence of privatization, these profits are a testament to prudent public stewardship: the year before the KLM merger, Air France had posted six consecutive years of profits. Nor has Air France built its economic health at the expense of its employees: powerful unions have earned its flight crews one of the most enviable compensation packages in the industry.

The state has also found public investment to be an invaluable tool for creating new industries and stimulating growth. Neither France—nor indeed Europe—would today have a robust civilian aircraft industry, employing hundreds of thousands of people in high-skilled, well-paying jobs, had the French state not taken the lead (with a 37.5 percent stake) in initiating the British-French-German Airbus consortium in 1966. The French government still owns 13 percent of a company that posted a $2 billion profit in 2008 and tallied its sixth consecutive year of building more planes than its competitor Boeing.

Nationalization’s history, of course, has not been uniformly rosy. The French government’s shadowy reliance on its oil mastodon Elf-Aquitaine (created in 1966 under the name ERAP) to maintain influence in its former sub-Saharan colonies illustrates the darker purposes to which public enterprises can be put. And for free marketeers, Crédit Lyonnais is a poster child for mismanagement of public companies. In the high-rolling late 1980s and early 1990s, the bank took flamboyant risks, throwing away billions to bankroll Hollywood studios and using a shell company to brazenly acquire Executive Life in violation of U.S. regulations, which at that time prohibited banks from owning insurance companies (the bank eventually pleaded guilty in federal court and agreed to pay over 700 million dollars in fines). In 1993, fearing the potential consequences of a Crédit Lyonnais bankruptcy, the state stepped in, first to recapitalize Crédit Lyonnais and then to shift 123 billion francs in toxic assets to a “bad bank” in 1995 (which it is still unwinding today). The bailout may have averted a systemic failure of French banking, but it came at a great price. Its total cost to French taxpayers has been put at around twenty billion euros, and the Cour des comptes found that careless government oversight boosted the final price tag. The privatization process has produced its share of aberrations as well, like the charitably low fifteen billion euro price at which a right-wing government sold off highway concessions to French construction companies in 2005-2006—when the Commissariat général du Plan estimated their true value to be twenty-six billion.

Pointing to individual examples of public mismanagement like Crédit Lyonnais may serve the needs of neoliberal rhetoric nicely, but cherry-picking the evidence is a poor method for evaluating nationalization’s true costs and benefits since 1944. A growing list of private sector counterexamples, from Enron to AIG and General Motors to Citibank, make it clear that state-owned enterprises have no monopoly on titanic mismanagement. A better methodology would consist in surveying the performance of publicly owned enterprises as a whole. The Cour des comptes did just this in a 2007 report entitled “The Shareholder-State,” which makes for illuminating reading. Even after repeated rounds of privatization, a substantial share of France’s economy remains in state hands. In 2006, the state controlled ninety companies directly (representing 3.7 percent of total employment) and 755 indirectly (notably via the Caisse des Dépôts et Consignations, an institution nationalized just after the Second World War, which today functions something like a discrete sovereign fund). Its holdings include not only controlling interests like its 85 percent of Électricité de France, but also minority stakes—35.7 percent of Gaz de France-Suez and 27 percent of France Télécom. At the financial market’s 2007 zenith, its portfolio was estimated at 191.9 billion euros.

And in the aggregate, these companies not only cost taxpayers nothing, but may well keep taxes down. The state’s biggest fully owned enterprises, for example, are flourishing, even in this increasingly difficult climate. La Poste’s annual profits fell to a more than respectable 530 million euros in 2008. The SNCF (the state railway monopoly created in 1938 during the Popular Front) saw its profits drop from 1.1 billion euros in 2007 to 575 million in 2008—all the while employing 158,000 railway workers, charging passengers considerably less than Amtrak or its privatized British counterparts, keeping France’s carbon-gas emissions low, and operating what is one of the best rail systems in the world. Indeed, nationalized businesses are an important source of regular revenue for the state. For fiscal 2008 alone, the shareholder-state received no less than 5.6 billion euros in dividends from its holdings.

But nationalization’s benefits have been much broader than simple profits. Over the entire period since the Liberation, French planning’s record of creating employment and prosperity is considerably better than neoliberal critics would have it. The state has used planning as a flexible tool to restructure companies and save jobs, to create new industries from scratch and promote job growth, to soften deindustrialization’s blow to workers and their communities, and to orient transportation and energy policy onto more sustainable pathways.

As the United States struggles to find a new economic course, Americans could do worse than take a hard look at France (and other models like Sweden or Germany). With the U.S. unemployment rate climbing higher than France’s, as it did last summer, and its workers far more vulnerable to prolonged cycles of joblessness, many observers persist in rehearsing their condescending shibboleths about European alternatives. Roger Cohen thus recalled how during his time in France he endured “the stifling attentions of the European nanny state, which has often made it more attractive not to work than to work. High French unemployment was never much of a mystery.” The facts suggest otherwise. Taking seriously what a bigger state role in the economy might entail would open a conversation not only about social justice but also about efficiency. It is time this conversation began.

Paul Cohen is Assistant Professor of French History at the University of Toronto. He writes on early modern France and contemporary French political life.

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