Sarkozy embraces state intervention and protectionism

Nicolas Sarkozy has this month been calling for European governments to follow the bailouts of banks by taking ownership stakes in other industries, such as the motor industry. The French President has been anything but evasive in the language he uses to describe the protectionism and state control he is advocating: "We can't be naive, we must protect our industry".

Although some free marketeers were encouraged by President Sarkozy's charisma both since and prior to his election last year, he has been a consistent and vocal opponent of what he appears to view as an exclusively Anglo-Saxon liberal economic model. His acceptance of and advocacy of a high degree of state control of the economy is expressed most often in his protectionism.  Tory MEP Martin Callanan warned about this tendency some time ago.

President Sarkozy must hope that the ongoing economic crisis provides an unusual opportunity for new thinkers (and indeed some very old and hitherto mostly discredited thinkers) to be heard and heeded. But centre right leaders around the world should be exceptionally cautious about doing so. Bad policy can do far more harm than the occasional storm in financial markets.

While 1929 is so often cited as if it were a counterexample, the Great Depression provides perhaps the strongest demonstration of this point. The stock market crash of October 1929 was not *that* bad - one reason to be unimpressed by comparisons between share prices (or whatever) in 1929 and share prices today. Misguided policy in 1930, in 1931 and beyond - not what happened on Wall Street in 1929 - were key to the Great Depression. Government activity, including tariffs restricting trade and a massive decline in the money supply (and arguably the New Deal and public works schemes too) were what made 1929 the prelude to a Great Depression. Governments around the world, like Reagan's and Thatcher's, responded very differently when the stock market crashed to a similar extent in October 1987 - and within two years even share prices had recovered completely.

The sort of command economy and protectionist measures now being advocated by President Sarkozy may well get their strongest hearing right after a market crash. But they are are arguably the surest way to achieve the very thing - sustained recession - that they are introduced to head off.