FRANCE : ABSORVING THE BLOWS THAT BUFFET EUROPE / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

March 7, 2010

Absorbing the Blows That Buffet Europe

By STEVEN ERLANGER

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 Japan.

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 moderation.

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 Germany.”

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 powers.

“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 companies.

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 jobs.

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 debt.

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. 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.

Nadim Audi contributed reporting.