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After a generation of dogged support for the motor business, the Peugeot family has conceded that they will have to dilute their dominant stake in PSA in favour of an outside investor. The maker of the Peugeot-Citroen brands is badly in need of a cash injection to make up for the €3-billion ($4.1-billion) cash drain last year. But the motor company, living on its past glories and resistant to change, is almost a symbol of France's difficulties. After years of drift, the problems of Peugeot and of France have become almost intractable, the leadership has no solutions and public debt has soared to almost equal the size of the French economy.

News of the €37-billion increase in public debt in the first quarter of the year, came hard on the heels of a warning from France's Court of Auditors which called for action to reduce public spending and state intervention in the economy. It's a a difficult task for a French President who was swept into office on a tide of anti-market sentiment. Indeed, this French administration has made its mark with determined efforts to prevent restructuring in the private sector, notably PSA Peugeot Citroen. The motor company has suffered badly from a dramatic shrinkage in the European automotive market to which it is heavily exposed due to a failure to invest in more buoyant markets overseas.

PSA's most likely partner is General Motors which owns 7 per cent of the company. But GM too is heavily exposed to Europe through its Opel brand and would be unlikely to offer assistance without a commitment from the French government to support extensive closures and redundancies. Unfortunately, the French government has shown itself unwilling to accept any form of foreign meddling in French industry. Arnaud de Montebourg, the industry minister, likes to adopt the ideological posture of a 1960s student rebel. Earlier this year he locked horns with Arcelor Mittal, caricaturing its boss, Lakshmi Mittal as a villain for trying to close down redundant blast furnaces, and more recently, he scuppered the sale by France Telecom of DailyMotion, a video-sharing website, to Yahoo.

If foreign solutions are to be rejected or are simply unavailable, the question must be who will rescue PSA and, more generally, who will save France? According to the Paris branch of Ernst & Young, France is lagging far behind Germany and the U.K. in foreign direct investment in Europe, having suffered a 13 per cent decline in FDI projects last year. According to E&Y, France is in danger of becoming a secondary European investment location and it suggested investors were giving France a last chance dernier appel.

Although the warnings from abroad come thick and fast they tend to be rejected at home in favour of electioneering and political grand-standing. France has lost much of its political influence in the European Commission and now often finds itself isolated. President Barroso recently attacked the leftists in the French government as reactionaries, drawing a swift rebuke from Paris, rejecting the "diktats" from Brussels and accusing the EU president of providing ammunition for the French extreme right.

President Hollande has been forced to accept the need for absolute cuts in public spending, the first such measure for half a century, but the state auditor made clear yesterday that much more was needed to meet the target of bring France's public deficit ration within target, even after the two-year's grace granted by the European Commission. France needs to cut €28-billion from spending to get within the 3 per cent ceiling. According to the Court of Auditors, this means a wholesale attack on the privileges of France's public sector, such as the indexation of civil service salaries and benefits, not to mention 10,000 job cuts and reductions in state intervention in the economy.

For France to really embark on such a programme of shrinking the size of the state sector would represent a wholesale attack on the privileges of France's pampered professional middle class. It might be an interesting challenge for a true socialist but it's debatable whether it is one for President Hollande.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .

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