Hamish McRae: Ségo or Sarko, who is best placed to lead France in the long slog ahead?

The run-up to the French presidential election has still a fair way to travel for the first round is not until 22 April, but the economic backdrop is pretty clear. In 2006, growth was below average for the eurozone at 2 per cent, with the prospect of much the same this year. Indeed, since that growth has been overly dependent on domestic demand, it leaves France vulnerable to any fall in consumption as interest rates go up.

So while the country is experiencing a recovery of sorts, it is easy to understand why many feel the need for a change of direction, while many others fear it.

In so far as the shorthand is helpful, the frontrunner in the polls, Nicolas Sarkozy, is the candidate that promises change in the form of more market-based policies, while his principal rival, Ségolène Royal, promises change in the form of more regulation and control. So on the face of it at least there is a clear choice; whether in practice the difference in direction will be so stark is less certain.

More about that in a moment. First, the animal that both have to deal with, the French economy. That its growth has been disappointing is beyond dispute, but it is important to balance that with an awareness of its areas of excellence.

Here in the UK, there is an understandable tendency to crow, having pulled ourselves from a GDP per head of about 80 per cent of that of France in 1979, to one of about 105 per cent. But that is largely because we have a higher proportion of population in the workforce and we work longer hours. If you look at productivity in terms of output per hour worked, France tops the league, ahead even of the US.

You would expect France (and Germany) to have somewhat higher productivity than the UK because they have a larger proportion of their populations unemployed. If you exclude your least productive workers from jobs, that inevitably increases the average productivity of the workforce. The 35-hour week will also have boosted productivity, for it pushes people to work more intensively during the time they are at work.

Nevertheless, France's productivity is impressive and forms a good base from which it should be able to grow more quickly. But it will have to improve its export performance. The quite startling story since the euro was founded is how Germany's success as an exporter has been at the expense of other eurozone members: dramatically in the case of Spain but also to a fair extent both Italy and France. France's share of overall trade in the eurozone has fallen sharply, which must reflect a declining competitiveness relative to other countries.

So something is going wrong. Quite what this might be is a puzzle. Société Générale notes that Germany has been good at squeezing down its costs, that its export markets have tended to grow faster, and that there must be some questions about the quality of the data. Still, this loss of market share appears quite entrenched and will be very hard to turn round.

Alongside this loss of competitiveness there is a problem of public finance. France has struggled to get its budget deficit below the 3 per cent Maastricht ceiling and is just about there: it is forecast at 2.7 per cent in the current financial year but private sector projections suggest it will climb back to 3 per cent in the coming year. That is similar to the UK, but the stock of debt is larger and the growth trend slightly lower. The result is that if no action is taken, the overall debt level will continue to climb. UBS has produced a paper on the forthcoming election in which it argues that this is unsustainable.

The underlying situation is made worse by the pension liabilities of the French state. So not only will there have to be tax reform, but also pension reform. A start was made in 2003 but the bank paper argues that not nearly enough has been done.

Beyond that tough issue there are the labour market matters: a set of regulations that discourage employers taking on people and discourage people from taking on work. Unemployment has come down a little but seems stuck at around 9 per cent, and participation rates are falling. Youth unemployment, with all its implications for social unrest, is much higher. Finally, there is the issue of competitiveness noted above, and excess of regulation on business, resulting in low business start-up rates.

Faced with all this, which of the two main candidates is more likely to be able to push through appropriate reforms?

The question here is whether the obvious will turn out to be right. There is no question that the Sarko project, with its stress on market-based reforms, is the more naturally appealing to the business community and fits more closely what is required in the analysis above.

The Ségo project, by contrast, with its sharp increase in the minimum wage, the promise of more labour market regulation, higher taxation and so on, would seem to run exactly counter to what is needed. The fact that her programme was greeted by a number of French millionaires saying they would emigrate gives its flavour.

But this seems to me to be too simple. As far as M. Sarkozy is concerned, it is not at all clear the extent to which he could indeed push through reforms, even with a decent majority in parliament. Further, when he was Finance Minister, he was very interventionist, preventing transfers of jobs to low-cost regions. And it is not clear how he would meet his fiscal target of holding public spending constant.

As for Ms Royal, she might be more flexible in office than she has appeared in her campaign. There is the precedent of François Mitterand in 1981, who started with a high-spend, high-tax programme, but reversed it after 18 months in office. Ms Royal's plans are almost 180 degrees the opposite of market-friendly: less labour flexibility, higher tax on dividends, make it harder for companies to cut costs by shifting jobs to low-cost regions, and so on. They are also exactly the opposite of the policies that Germany has followed, which have helped increase its competitiveness, as noted above.

But they might in practice be relaxed swiftly, or so modified as to be less destructive. Arguably Ms Royal might be more trusted to get reforms through. Of the question is whether she understands enough about economics to be able to grasp this, but I think it would be wrong to write off her programme until it is put into practice.

But then it may never come to this. M. Sarkozy is now well ahead in the polls and that in itself is a signal of the direction that France seems to want to go. His problem will be that the lags between action and effect are very long: a decade or more. So sustaining support for his policies - if he gets in - will be very difficult. That is surely the big point here: despite France's considerable brilliance, it faces a long slog ahead.