Fighting the French exception

Alberto Alesina and Francesco Giavazzi, Project Syndicate

Europe's attention nowadays is rightly focused on enlargement and on the constitution that is currently being worked out between the EU's member states. But the outcome of several Gallic skirmishes with the European Commission will be no less important in determining the fate of the new and enlarged Europe.

France has unilaterally chosen to ignore the Stability and Growth Pact by running a predicted deficit well above the 3 percent of gross domestic production limit. The French like to acclaim the rational rigor of their thinking, but where budgets are concerned, Descartes is out and obfuscation is in.

France was among the leading critics of Ireland, when, in 2000, the Irish government reduced its budget surplus, which then stood at 4 percent of GDP, by a mere 0.5 percent. Other countries have violated the Stability Pact, but France is the first to do it with smirking, open defiance.

None of this should surprise anyone. France is simply applying to EU rules its ingrained habit of viewing its own culture as exceptional. For example, France consistently vetoes reforms of the EU Common Agricultural Policy (CAP). The CAP is a handsome and totally undeserved present to wealthy European (especially French) farmers at the expense of the struggling farmers of developing countries and EU consumers.

France is also trying to return to old policies of bailing out unprofitable private companies on the verge of collapse with taxpayers' money. The EU Commissioner for Competition Policy, Mario Monti, cannot loose this battle: He needs the support of those who believe in markets and equal treatment for all.

Here the story is simple. The French government plans to bail out Alstom, a company that developed a number of high-tech products, including the TGV, the French fast train, but recently went into bankruptcy. The French government claims that it will never back down from its plan to rescue Alstom, a plan with all the familiar motivations of maintaining employment, protecting investors, etc. In addition, since Alstom is a high tech firm, the French government plays the research and development card, arguing that investment in R&D is good for growth.

Saving Alstom by nationalizing the company is obviously wrong. The company consists of many different parts, some profitable, others bankrupt: The obvious thing to do is to break it up. The profitable parts, such as the TGV, will easily find buyers; the unprofitable plants should be closed. French taxpayers' money is better spent on temporary benefits for displaced workers than on subsidies to keep an unprofitable plant alive.

It is important that the European Commission not allow France to carve out special rules for itself in competition policy, as it appears to be doing with its budget deficits. The Commission must strike down public aid to private companies in France as it strikes such subsidies down in any other EU member state.

The Commission has already achieved some success on this front, notably forcing Germany to cancel government guarantees on public banks. Alstom in particular and France in general should not be an exception and should be held to the same standards.

If the Commission fails to act, the EU will look even more like a playground for French public servants. France has already taken a leading role in EU foreign policy, with Foreign Minister Dominique de Villepin looking and acting more and more like the foreign minister of Europe. At the same time France violates key rules of common economic policy and public aid to private companies.

Will the European Commission lose what remains of its credibility and end up looking like a minor Parisian arrondissment? A defeat on Alstom would have profound consequences in Europe -- and not only for competition policy.

Alberto Alesina is Professor of Economics at Harvard University and Francesco Giavazzi is Professor of Economics at Bocconi University, Milan.