Investing in France: Vive la révolution

A closer look at Sarkozy's France.

Short sellers must love Ben Bernanke. “At this juncture,” said the chairman of the Federal Reserve in March, “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” That encouraged the bulls, which is why in late July Bernanke’s definition of containment was almost as hot a topic as the S&P 500’s worst weekly plunge in five years, not to mention the S&P/TSX composite’s largest fall since 9/11.

The Fed boss, of course, simply meant that the financial sector itself is not facing a systemic failure à la the savings-and-loan crisis of the 1980s. Stock valuations, on the other hand, appear to be held well within whatever container Bernanke thinks is containing fallout from the mortgage meltdown. Actual losses could easily dwarf the pain inflicted by the S&L fiasco. That’s why investors should be looking for markets far removed from the crisis the U.S. financial sector so creatively created.

You don’t hear much about France. Nevertheless, the second-largest eurozone economy may be worth a look, at least in the long term, and not just because France, unlike the U.K., appears to have little exposure to America’s subprime woes.

Believe it or not, the French, who have plenty of well-known large-cap multinationals, are attempting to take on the city of London for title of eurozone financial centre. And they have a shot, thanks to the merger between the Paris-based Euronext stock exchange and its American cousin. The partnership, which represents almost 66% of the global stock capitalization, could favour financial circle growth in Paris over New York, where companies must comply with Sarbanes-Oxley rules and the world’ssecond-highest corporate tax rate.

More importantly, France’s economic future looked bright after the election of so-called pro-business president Nicolas Sarkozy, who promised tax, labour and institutional reforms. But before you dump your savings into a France ETF, keep in mind Sarkozy failed to impress free market lovers in July when he called on Europe’s central bank to manipulate the euro.

Sarkozy obviously likes publicity, which is why he was seen with French celebs during his campaign and rushed to embrace Libyan leader Moammar Gadhafi as soon as the opportunity arose after his election. He has also made silly economic suggestions before. As finance minister, for example, he proposed selling France’s gold to pay down debt. “Is there a lawmaker here who would consider it natural and normal that these reserves generate no revenue?” he asked opposition legislators who jeered his revolutionary idea. “This isn’t a subject for political argument.”

But government control over the gold in question was something far less debatable. “There is no question of selling [gold] to give the money obtained directly to the government,” responded Bank of France governor Christian Noyer. What is possible, he said, is an independent decision by the central bank.

Weakening the euro wouldn’t necessarily be good for France, which exports most of its goods to euro and euro-linked nations. Either way, European central bankers will ignore the French leader. “The ECB will not follow [Sarkozy],” says an international fund manager, who remains bullish on France. “So what has Sarkozy accomplished? Sadly, he has cheapened his new presidency by showing himself to be too much of an opportunistic politician.”

And that raises the question: How serious is Sarkozy about taking on labour leaders? Investors might want to watch from the sidelines until reforms actually appear. After all, Sarkozy’s popularity didn’t contain the recent market tumble from dragging down French stocks.