Hollande rallies Peugeot for a German collision

The French president's recent attack on national carmaker Peugeot exposed his true colours as an old school French socialist, and this represents a significant obstruction to the European agenda of deeper integration.

It is the mantra of Europe’s political elites: To overcome the crisis more, not less, integration is required: more political integration, more banking integration, more fiscal integration. At the conclusion of this process, not only will the crisis be over but Europe will be a united superstate.

Apart from the minor complication that public debt doesn’t magically evaporate when you pool it, the idea of progressive integration has a major flaw. European governments are still pursuing national policy agendas as if ignorant of Europe’s common market. The resurgence of dirigisme and protectionism under France’s new president Franois Hollande is a case in point.

Last week, France’s largest carmaker PSA Peugeot-Citron announced 8,000 job cuts in France and the closure of its factory in Aulnay-sous-Bois by 2014. Two days later, on Bastille Day, the French president fired a broadside at PSA. In a TV interview on France’s national holiday he said: "It’s a shock, particularly for the workers concerned by this brutal announcement. The state cannot remain indifferent. … Now we have to do something about it. It is unacceptable.”

Unacceptable or not, there is little the French government can do to stop PSA’s business plans as the company is privately owned. And given that credit default swaps on PSA’s corporate debt have reached an all-time high and markets signal a 51 per cent probability of default, it is indeed high time for the carmaker to cut costs and restructure its business.

PSA’s problems are manifold. It is mainly engaged in the production of small cars – an industry segment with low margins, global overcapacities and fierce competition. Further, PSA’s most important export markets are precisely those eurozone countries which are struggling the most. In other large car markets like the US, PSA is not present. To compound the company’s problems, its technological innovations lag behind those of its main competitors like Toyota or Volkswagen. Add high production costs in its French factories to the list and it is easy to see why PSA’s management could not avoid the lay-offs.

Yet no such business considerations play a role in Hollande’s world. In the worst French dirigiste tradition, the newly elected socialist president brushes all economic considerations aside. Instead, he proposes a crude mix of industrial policy and outright protectionism. This is not only economic folly, it also flies in the face of every solemn pledge to further integrate Europe.

So what does Hollande want to do? And what can he actually deliver? If he wanted to nationalise PSA, the highly-indebted French state could not afford it. Even ongoing subsidies to keep PSA’s French factories alive might be more than the French government could supply in its current fiscal state.

Hollande and his government are therefore considering all sorts of other interventions in the car market. One of them is to subsidise the production of hybrid cars to give French carmakers a competitive edge in the market. Another is to direct French government departments and local councils to buy French-made cars only.

But hybrid cars are still a niche in the market which is hardly sufficient to lead PSA back to profitability. And forcing French authorities to buy French cars only is economically dumb as it would cost French taxpayers dearly. It is also illegal under European treaty law which guarantees companies from all EU member states equal market access.

After his initial rage, Hollande had to backpedal a bit. He is not quite eating his words yet but he sounds tamer than on Bastille Day. Maybe his advisors explained that everything he proposes is either ineffective, unaffordable or illegal.

Nevertheless, the PSA incident sheds light on the new president. It exposes him as a French protectionist who feels little commitment to European free trade ideals. It also reveals his belief in a strong role for government in shaping his country’s industrial structure. In short: The new, friendly looking Monsieur Hollande shows his real face as an old school French socialist. He is certainly not leading his country towards European integration. Instead he is pursuing France’s narrowly defined self-interests.

Looking at France from over the Rhine, the Germans may well ask themselves what the much celebrated friendship between Paris and Berlin is still worth with a French president like Hollande. He openly sides with those southern European governments that expect unconditional bailouts and call for an end to Berlin’s austerity demands.

His pledged car industry support puts him on a collision course with Germany in any case, where one in twenty jobs depends on car manufacturing – without government subsidies.

Beyond that, Hollande’s open economic nationalism is incompatible with the very idea of European integration. The Europeans, even the French, cannot have it both ways. They cannot call for a common fiscal policy, Euro bonds and banking union on the one hand and still apply national policies that are grossly at odds with Europe’s common market.

In the long run, Hollande’s policies will cause more than irritations in Europe. They may tear the EU apart.

Dr Oliver Marc Hartwich is the Executive Director of The New Zealand Initiative (www.nzinitiative.org.nz).