November 1, 2012 7:58 pm
France: Reluctant to reform
Hollande is under pressure on the economy but looks unwilling to use shock tactics demanded by business
©AFP
Hanging back: President François Hollande says proposals from industry offer ‘no magic formula’
Fabien Cohen, a tousle-haired 25-year-old in a hoodie and a denim jacket, cuts a figure about as far from the image of the suave grands patrons of French business as it is possible to imagine.
Yet the internet entrepreneur has found himself making common cause in recent weeks with the leaders of traditional industry against the policies of François Hollande, the new Socialist president.
Mr Cohen is one of the founders of Les Pigeons, a group of mostly young small-business owners that reacted furiously on Facebook and Twitter to plans to impose a sharp rise in capital gains tax. Their response wrongfooted a government more focused on fending off protests against Mr Hollande’s 75 per cent marginal income tax rate and other new levies on big companies and the wealthy.
“I didn’t believe it when I heard it,” says Mr Cohen, a university dropout who is in talks with potential investors to raise €500,000 for his second internet start-up – Whoozer, a smartphone application he likens to a “local Facebook”.
“You can’t tax someone who takes a risk and someone who doesn’t take a risk at the same level. It is unfair and it is confiscatory for entrepreneurs and their associates.”
The “pigeons” – French slang for “suckers” – clocked up more than 70,000 backers online for their warning that a proposed rise in CGT to as high as 60 per cent on entrepreneurs and investors selling out of their businesses could strangle new start-ups in France and drive investment abroad.
At the same time as the government was confronted by Mr Cohen and his fellow Pigeons, it was squaring up to the problems facing one of its most venerable industrial companies: PSA Peugeot Citroën.
PSA’s car sales are falling sharply at home and in its main southern European markets, and it is being outperformed by rivals such as Germany’s Volkswagen. The company is in the midst of a plan to close a plant outside Paris and cut its workforce by more than 6,000. It has had to turn to the state for a €7bn guarantee to prop up its finance arm.
An important moment will come next week when Louis Gallois, former chief executive of European aerospace company EADS, delivers a report commissioned by the government on how to restore competitiveness.
Industry leaders, riled by what they see as the unwarranted tax burden loaded on to business by the government since it took office in May, have been clamouring for a “competitiveness shock”. The phrase was coined by Mr Gallois himself this year.
“The profit margins of our businesses are at a historic low. Unemployment undermines social cohesion and excludes our youth. France needs profound transformation. It is urgent to act now,” wrote a group of chief executives from companies listed on France’s CAC 40 in an appeal to Mr Hollande this week.
The importance of steering the country back on to a growth path extends well beyond France itself. With Italy and Spain already battling recession, the eurozone’s struggle to emerge from its sovereign debt crisis would be hard hit if France, itself also yet to overcome a rising debt burden, were to slide into reverse.
“If François Hollande does badly, France will be sick and the eurozone will be in trouble,” says one senior state official.
The country retains underlying strengths. It has an array of leading global companies, impressive infrastructure, low energy costs thanks to its nuclear industry and high productivity. It is in the world top 10 as a destination for foreign direct investment, outperforming Germany.
But it badly needs to regain lost ground in international markets. At a meeting this week with the heads of five international economic institutions, including the OECD club of mostly rich nations and the International Monetary Fund, Mr Hollande said competitiveness was part of a triple challenge facing the country, along with indebtedness and weak growth.
The indicators are readily apparent. France has slipped in the latest World Economic Forum global competitiveness ranking to 21st, from 15th two years ago. It trails Germany in sixth place and the UK in eighth. Its share of both global and eurozone exports has dropped sharply. The trade balance has swung heavily into deficit, reaching €70bn last year, compared with a German surplus of €150bn.
The effect has been painful. In the past decade, 700,000 manufacturing jobs have been lost as the number of exporting companies has fallen 15 per cent to less than 100,000, against almost 250,000 in Germany.
There are fears that if action is not taken quickly, the weakened economy could lurch into crisis. “You remember the Titanic, supposedly unsinkable,” said Laurence Parisot, head of Medef, the employers’ federation, in an interview this week with industry publication L’Usine Nouvelle. “I feel that the iceberg is very near.”
Business wants much deeper cuts to France’s very high public spending to replace dependence on raising taxes to cut the budget deficit. “With record public spending of 56 per cent of gross domestic product, we have reached the limit of what is sustainable,” the CAC 40 bosses said.
They want reforms to free up labour and product markets – similar to those launched in Germany a decade ago, and more recently in Italy and Spain – which France has resisted for years. Pressure also comes from outside. Chancellor Angela Merkel’s German government, the European Commission, the OECD, the IMF and the European Central Bank have all made clear their anxiety for Mr Hollande to act.
Business leaders are pushing hardest for labour costs to be cut. They propose lifting heavy social welfare charges on employers, and financing the reduction with a combination of raising value added and other taxes and cutting public spending.
Mr Gallois suggested a transfer of €30bn-€50bn before starting his work for the government, and is almost certain to do so again when he publishes his report on Monday. But Mr Hollande – a famously cautious politician – and his ministers have been busily playing down expectations that they will adopt “shock” measures, talking instead of a “trajectory” of action over the president’s five-year term. “There is no magic formula,” Mr Hollande said recently.
. . .
The government has two objections to putting the emphasis on employer welfare charges. First, it disputes the importance of labour costs in French competitive weakness. Second, next year’s budget already includes €20bn in tax rises to help hit next year’s target of reducing the budget deficit to 3 per cent of GDP, and fears a further increase in VAT or other taxes would tip the economy into recession.
“I don’t think we can afford to finance such a plan,” says Fleur Pellerin, minister for small businesses and digital industry. “What we really want is not to limit the discussion on competitiveness only to the cost of labour. We think it is not really critical. The statistics show the cost of labour in industry is in line with that of the eurozone. It is a bit higher than what it is in Germany but not the other eurozone countries.”
The Elyseé is emphasising “non-cost” issues, aiming to foster innovation, skills and research and development to improve the quality and value of French products. “We need to organise our industrial policy so we focus on the sectors of the future, like biotech and the digital economy, where we know growth rates will be high in the future,” Ms Pellerin says.
It is targeting the relatively low number of small and medium-sized enterprises with export reach in France, especially compared to Germany. It is grouping state agencies into a new public investment bank, with €40bn in lending and investment firepower, to boost investment in SMEs. It is also cutting tax rates for smaller companies and extending access to the research tax credit system, one of the OECD’s most generous.
The government has also rowed back to some extent on the new CGT regime following pressure from Les Pigeons. “We’ve learnt from the experience,” says Ms Pellerin. “We must multiply the signs that we are supporting them rather than chasing them out of the country.”
Mr Gallois, the CAC 40 bosses and Medef all back these “non-cost” initiatives. But most insist urgent action must be taken to cut the overall burden of taxes on employment. “They represent 26.3 per cent of added value against just 15.6 per cent in Germany,” Ms Parisot told L’Usine Nouvelle. “The gap is gigantic. French businesses are suffocating.”
. . .
The government’s reaction to the Gallois report, due on Tuesday, will give an important indication of how far and how fast Mr Hollande is willing to go in adopting reforms.
A further test will come later this year with the outcome of talks between employers and unions on proposals for German-style changes to labour market regulation. In exchange for limiting job cuts, employers are seeking relaxation of the rigid regime on plant closures, redundancy conditions, wages and working time. Mr Hollande wants a deal – but it is not clear how far he is willing to push the unions if they hold out.
Despite holding a decisive parliamentary majority and controlling most big cities and municipalities, the president faces a significant leftist wing in his Socialist party. He seems reluctant to confront this, much less risk provoking street protests. There is already disquiet in the party over tough budget targets set by Mr Hollande and little appetite either for deeper spending cuts or appeasing the business community.
The comparison often made is with reforms enacted in Germany by Gerhard Schröder. But asked recently whether he would follow the same course, Mr Hollande pointed out that the former Social Democratic chancellor undertook his reform programme only after he had won re-election.
The question is whether a further deterioration in the economy will force the president’s hand. France is benefiting from a very easy ride from financial markets at the moment. If that changes, pressure could mount.
One veteran industrial figure sympathetic to Mr Hollande says he would have to take action, not least because Italy and Spain are rapidly improving their own competitiveness. “Hitting the rich is not enough. He will be forced to move. But he’ll do it in steps, never announcing his plans. He’s like [former Chinese leader] Deng Xiaoping. He’ll take a step in the right direction, but if it gets too hot, he’ll step back.”
For his part, Mr Cohen may not stick around long enough to find out. The young Pigeon is planning to fly off with his small Whoozer team to set up in San Francisco. He had already decided to do so before the CGT issue blew up. “That is where things are happening,” he says.
Copyright The Financial Times Limited 2012.
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