Nicolas Sarkozy won the French presidency on a platform of sweeping economic reform, and he is promising to enact a raft of new policies within his first 100 days. Will he succeed where others have failed and unleash France's full economic potential?

He faces a significant challenge. France has lost 300,000 jobs in industries ranging from aviation to automotive since 1995. Unemployment remains high despite some recent improvement. France's productivity growth has slowed. The country's large public sector is a drag on the performance of the economy as a whole. And France's share of global exports of manufactured goods has fallen. Indeed, the country's market share of exports to emerging economies has declined 16 percent in recent years—double the rate of the United States and triple that of Germany.

However, McKinsey research indicates that France has considerable potential to turn around its recent history of economic underperformance and declining competitiveness.¹ The country boasts many thriving sectors that are creating jobs and enjoying growing productivity. If Mr. Sarkozy is to become a successful "presidential entrepreneur"—as former minister for foreign affairs and close aide Michel Barnier described him—he should build on these successes, rather than focusing on the inherently less competitive parts of the French economy.

Our research divided French industry—which still generates nearly one-quarter of the country's employment and added value—into five segments and analyzed the performance and prospects of each. Of the five, three are rich with promise: innovation-driven sectors that rely heavily on technology, such as aircraft manufacturing, semiconductors, and nuclear energy; strongly branded sectors, such as haute couture, cosmetics, and other luxury goods; and regional sectors, such as basic chemicals and electricity generation, which thrive on their close proximity to the huge European market.

These are the parts of France's economy that have done well and will continue to do so—given the right conditions and government policies. Innovation-driven and strongly branded sectors posted impressive annual gains in productivity of 4.9 percent and 3.7 percent, respectively, from 1990 to 2003. They account for 21 percent of French exports, and together with regional sectors, account for 42 percent of French industrial employment. There is every potential for these sectors to play a major role in France's future prosperity and to help lower unemployment.

Other parts of French industry undoubtedly face a challenging future. Some, such as the automotive and telecommunications-equipment sectors, are truly at a crossroads as they seek to respond to intense international competition on product quality, innovation, and pricing. Sectors such as apparel and electrical consumer goods are highly exposed to even fiercer price competition from developing economies.

It is these sectors that are the source of France's competitiveness problem. From 1990 to 2003 they lost 360,000 jobs (half of all those shed by French industry as a whole during that period), and their productivity growth has stagnated. However, these sectors still account for some 20 percent of French industrial employment today.

The challenge for France's new president is to focus more on nourishing those sectors with the most potential and less on supporting those struggling to compete globally. All major industrial economies are going through a transition, away from low-value-added manufacturing activities toward higher-value sectors and services based on innovative new products and improved business processes. France must also make this transition.

Three policy changes are critical. First, and most often discussed, it is vital to make France's labor market more fluid and its workforce more employable. Mr. Sarkozy's post-election meeting with the heads of France's unions signals his will to tackle this politically sensitive topic. His initial proposals—tightening eligibility for unemployment benefits and using tax incentives to encourage French workers interested in "earning more" to work beyond today's threshold of a 35-hour workweek—are a promising start. Realizing Mr. Sarkozy's campaign promise of "full employment within five years" will no doubt require a number of in-depth reforms, such as making it easier to hire new workers and improving job-retraining programs to help displaced workers find new jobs more quickly and cost effectively.

Second, France must improve the low productivity of its public sector, which remains a very large part of the economy. With an aging population, there will be greater demands on the government. Only by raising its productivity can France meet these demands without compromising the health of the rest of the economy. Here, Mr. Sarkozy has promised to act. He has pledged not to replace half of the civil servants retiring over the next five years and also to roll back some of the pension benefits currently enjoyed by many public-sector workers. If the new president carries out (and builds on) these measures, higher public-sector productivity should follow, removing a significant drag on France's overall economic performance.²

Finally, France should unleash the dynamism of its best-performing companies, which, after all, are well placed at the heart of one of the world's largest markets, by ensuring they are exposed to global competition, removing regulations that stifle innovation,³ progressively reducing taxes, and working in conjunction with EU policy makers to lift remaining hurdles to mergers and acquisitions. France should, for example, encourage revision of the European Commission's policy on competition, notably its definition of "relevant market" in mergers, so that competitive global-scale European companies can emerge more easily.

In short, for both the public and private sectors, the new president must promote excellence in the parts of the economy with the highest potential while helping workers transition out of those that are already making heavy weather in the global economy. France's future lies in embracing competition as the driver of innovation and dynamism, and in relieving the regulatory burden that has stifled growth, employment, and the dynamism of its core industry and service sectors.