Of yoghurt, biscuits and economic patriotism

MENTION the word ‘Danone’ and it’s most likely that the Frenchman on the street will conjure up visions of yoghurt in all its lip-smacking flavours, with biscuits and water operations bringing up the rear.

By M.n Hebbar

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Published: Thu 12 Jul 2007, 8:39 AM

Last updated: Sun 5 Apr 2015, 1:13 AM

The Danone dairy products group is a segment of French industry that evokes national pride and loyalty in equal measure.

No wonder then that a rumoured takeover bid by US multinational Pepsico in 2005 raised the hackles of the French government whose president Jacques Chirac expectedly thwarted the attempt, prompting the government to launch its policy of “economic patriotism”. This was followed up by introducing “poison pill” legislation to make it harder for foreign predators to acquire domestic champions.

Now even the more liberal newly elected president, Nicolas Sarkozy, has wasted no time in defending the government’s right to intervene in the interest of French companies. What is more, he has returned home from Brussels with the trophy of having removed a clause enshrining “free and undistorted competition” as an EU objective, signifying “the end of competition as an ideology and dogma” in Europe.

Back to Danone. For a company that had to call on political allies in Paris to fend off the unfriendly approach from Pepsico two years ago, imagine the consternation to find that Danone is now actually proposing to sell its successful biscuit division to –hold your breath – a US multinational – Kraft. Why the turnaround, you might ask. The company justifies the move as part of its strategy to focus on the faster-growing yoghurt and water divisions. Right. This makes for a sensible strategy even if the company is thereby obliged to shed a business that employs even more people than its dairy activities because the biscuit operation no longer fits with the company’s global strategy.

But it also exposes the inherent hypocrisy of French economic patriotism. Two years ago the French company thought it fit to encourage the French people and the government to rally in its support against an unwelcome US multinational because it suited its then strategy of not wanting to be taken over. Now there is no murmur when the song of economic patriotism is dumped for a song of opportunism.

There may be a heavy price to pay, however. The protectionist wave the company unleashed two years ago could now come to haunt it. Union protests have already erupted over the decision to sell its biscuit division to Kraft. This may conceivably grow to the point where the government may feel compelled to intervene – in the name, of course, of economic patriotism.

Is Sarkozy taking a leap back into economic nationalism? He has long advocated an unorthodox blend of free-market economics with unapologetic industrial interventionism. On fiscal policy and labour market reform, he seems genuinely liberal. But his track record as finance minister in 2004 showed him helping a French drug firm to take over a Franco-German rival, as well as thwarting an effort by a German company, Siemens, to buy bits of Alstom, a French engineering group. He persuaded the European Commission to let him use taxpayers’ money to rescue Alstom, thus not only reflecting his belief in national champions but also in the notion that such champions should not be blocked by Brussels.

Not surprisingly, there is now an ideological battle in Europe between those who genuinely believe in the liberalising process agreed in Lisbon in 2000 – committing its members to market reforms and the creation of a knowledge economy – and those don’t. Britain’s new Chancellor of the Exchequer Alistair Darling has openly criticised the French stance, calling economic patriotism as “protectionism”, which was “nonsense”.

Sarkozy’s electoral triumph may have shown that his Anglo-Saxon credentials are still in place although his equations with Britain’s new premier Gordon Brown have yet to crystallise, given the latter’s Eurosceptic instincts. His attitude towards the US is sufficiently welcoming in that he seeks to put an end to “freedom fries” in Congressional dining rooms as well as to references to “cheese-eating surrender monkeys” by Americans reacting to Chirac’s unalloyed anti-Americanism.

Interestingly, Sarkozy also wishes to rewrite the European Union’s economic policy. He has criticised the way the eurozone exchange rate is set. He contends that politicians, not central bankers, should be in charge of exchange rate policy. Also that the euro’s exchange rate should be deliberately kept from appreciating above a certain threshold. But Germany begs to differ and has also been angered by Mr. Sarkozy’s recent statement that France would not be ready until 2009 to keep its budgetary deficit below the stipulated three per cent of GDP. This might well lead to the re-emergence of an old Franco-German disagreement over the conduct of economic policy.

By all accounts, Sarkozy promises to be a vigorous defender of French industry. Taking up for national champions is one thing. But in less than a fortnight he faces delicate negotiations over the future of the aerospace group EADS at a Franco-German meeting in Toulouse. He is still holding out with his continued opposition to Turkish membership of the European Union. He has to tread carefully.

This is not all. Sarkozy insists on the continued subsidisation of France’s not-so-poor farmers even if it threatens the success of the Doha Round, a stance no doubt driven by the harsh realities of French political life. He calls for tax harmonisation to force low-tax EU countries to raise rates to French levels, desires an increase in France’s stake in Airbus, and intends to create a national energy champion by merging Gaz de France and Suez. Finally, he plans to shield important French companies from foreign takeovers. It all adds up to ‘dirigisme’, not reform.

Germany has its own story too. While France was rushing to the rescue of Danone, German politicians were baying for the blood of the so-called “locusts” of foreign capitalism stripping the country of its assets. Even today, many in Germany’s grand coalition look upon private equity firms and hedge funds as dangerous insects.

Chancellor Merkel has added a new species to this list – the so-called sovereign-wealth funds from China and oil-rich nations. Plans to introduce new legislation to make it harder, if not impossible, for such funds to take over German companies are in the offing. Oh, the compulsions of realpolitik!

M N Hebbar is a Berlin based writer



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