This is my take, and I think this will be controvertial, but I want it to be that way. Its not a question of the welfare state. Clearly the problem is deeper and more structural than that, and I think it goes to the very heart of the French notion of republicanism. IMO, the republican ideal is a very "modern" (in the technical sense) concept (indeed, perhaps a hyper-modern construct) in a post-modern world where the kind of unifying narrative and assumption of the fundamental similarity of people is no longer viable. Strangely, this is exactly how the neo-cons think too, and it is why they think you can invade a country and "remake" a culture, indeed a region, in an American image. Indeed, there is much about the French republican model that the American right would like - ie "color blind," all individuals are basically the same, they must conform to some kind of model of "Frenchness," etc. Its not for nothing that neo-cons are often called "Jacobins," as too are those who favor a centralized state-model in France.

I think the proof is in the pudding here. The French republican ideal is simply incapable of dealing with a multi-ethnic society, and as such, I think it has to be rethought to provide a more flexible, decentralized polity. (and I don't mean in terms of economics, I'm going deeper here) Actually, although Sarkozy is an opportunist and a thug, he actually has some ideas along these lines. From an outsider's perspective, Sarkozy actually talks some sense - in terms of his willingness to challenge "laicite" fundamentalism (which to American center-leftist, seems to be a ridiculously dogmatic policy) and to suggest affirmative action programs for Arabs and Africans.

As to the French left, I think you are being slightly unfair. As some above point out, the left has not really been in power much since WW II. And under Mitterand, there were some sensible moves to devolve power away from Paris and towards the regions. Likewise, as Jerome notes, when Jospin was PM, he made some common-sense policing reforms, devolving police responsibility to a local level, which Sarkozy has since repealed.

The French left's problem is that is deeply divided between social liberals (basically, people who pursue ideas like the American Democratic Party, although this analogy isn't great, or perhaps the British Liberal Democrats) and anti-capitalists, who reject capitalism out-and-out. While many of these folks are in the Communist Party and various Marxist-type offshoots, there are a fair contingent within the Socialist Party itself. Witness the split over the referendum. If I had to take a guess, I would say that the second contingent is much larger. Thus, it becomes very difficult for the French left to get into power, and is the main reason why Le Pen was able to get into the 2nd round in 2002 (because the left split so many different ways). IMO, the near future for the left is not auspicious, because so many within the "left" refuse to countenance compromise with capitalism. As such, I wouldn't be surprised to see Le Pen and Sarkozy get into the second round in '02. Basically, the left can't get a substantive and dramatic challenge to the status quo together because too many of its voters and adherents are too wedded to it - in other words, to being anti-capitalists in a world where anti-capitalism is bankrupt. (no pun intended) Or, at the very least, it has no realisitc opportunity of presenting a candidate who will win over the nation's voters as a whole.

Fundamentally, I think it is going to take Sarkozy winning in '07 before enough people wake up. Sarkozy's brilliance is that he presents himself as the man with no-nonsense solutions to what pretty much most folks in France recognize is something of a societal malaise. I think there are other folks who can/could offer such a strategy of "rupture" outside of the right, but the above circumstances make it very hard for such alternatives to emerge. Because non-right wing politicians simply don't have a constituency for a kind of politics that would attack traditional shibboleths.