By Ian Fraser
Published: Accountancy Magazine
Date: 30 June 2008
A year into President Sarkozy’s new political regime, are France and its economy reaping the benefits of promised reform? Ian Fraser reports
The thousands of well-heeled French people who have flocked to London to live and work in recent years tend to look back at their homeland with a mixture of pride and dismay. While they clearly miss the good bits about their country – the food, wine, culture, the transport infrastructure and sophisticated lifestyle – they fear that in economic terms the country may be racing towards an evolutionary cul-de-sac. This is largely because so many of their compatriots have an ingrained mistrust of the agents of economic growth, including free markets and globalisation.
New political era
Nicolas Sarkozy, who saw off the Socialist Party candidate Ségolène Royal to become French president in May 2007, is seen by many as the best hope to shake the country out of what some regard as its chauvinistic torpor. “Super Sarko”, as he is known in the media, a former interior minister, finance minister and former mayor of the posh Parisian suburb of Neuilly-sur-Seine, promised a package of radical economic reforms to modernize the French economy, also promising to deliver “la rupture”, a break with the outmoded ideas, habits and behaviours of the past.
Sarko’s core economic pledge was that he will boost people’s “pouvoir d’achat” (purchasing power). In addition he said he would reduce unemployment, cut taxes, reward hard work, keep the trains running even during strikes, reduce bureaucracy, reform pensions and make it easier to start a business.
Sarko – famed for his hard-line approach to handling riots in the Paris “banlieues” (suburbs) in 2005 – got off to a reasonable start. Unlike his predecessors he seemed to have necessary gumption to push through unpalatable economic reforms which, ultimately, would ensure a higher living standards and a more certain economic future for France.
One of his government’s biggest aims, perhaps reminiscent of the early days of Thatcherism, is to encourage French people to work harder by reducing the tax take. He wants to slash taxes and social security payments by 4% over the course of his five-year presidency, with a commensurate cut in government spending.
As an initial step the government, led by French prime minister Francois Fillon, last summer approved a package of tax cuts worth €13.5bn (£10.7bn), with overtime being exempted from tax and social security charges. There were also measures designed to persuade the French to become bigger spenders, including tax breaks on mortgages and property purchases and efficiency reforms in the civil service.
However, one year into Sarkozy’s five-year term, the jury is out over whether Sarko’s goals are going to be achievable. The son of a Hungarian immigrant father, he has not only been buffeted by the fall-out from the global credit crunch. He also suffered a marked drop in his personal popularity, partly because of his flashy lifestyle. His high-profile divorce and subsequent marriage to the Italian former supermodel Carla Bruni gave the impression he had other matters his mind than the niceties of reforming the economy.
Already, the public has noticed that its ‘pouvoir d’achat’ has not grown as much as promised – indeed rising inflation has meant it has marginally declined – and plans for public sector job cuts, other alterations to public services, changes to pensions and privatisation plans have sparked an outbreak of strike action by among others secondary school students, transport workers and dock-workers. Sarkozy’s goal of cutting taxes by 4% by 2012 is starting to look ambitious.
According to INSEE, the government’s economics and statistical institute, the government deficit climbed to 2.7% in 2007, much higher than the government’s forecast of 2.4%. According to the European Commission, the figure will reach 3% next year. Meanwhile spending rose by 4% in 2007 and revenues were up by 3.4%, with the overall tax burden falling to 43.5% of GDP. Government debt was valued at 64.2% of GDP.
Many of Sarkozy’s predecessors have talked convincingly of the need for reform but, when it came to crunch, have caved in when confronted by strike action and violent protests on the streets. This is what happened to former president Jacques Chirac – who was forced to abandon pension reforms when strikers brought Paris to a standstill in the mid-1990s – and subsequently to former prime minister Dominique de Villepin (over the introduction of a more flexible employment law for young people).
However Sarko is, so far, showing little sign of buckling under pressure. Speaking in a television interview in April, he reaffirmed his commitment to modernising the economy and said he is resolute in his determination to balance the budget by 2012 and said that a target of 1.8% growth this year remains attainable. In the interview, he said that France had been “asleep for 25 years” and that the challenging global macroeconomic backdrop means there is all the more reason to accelerate reforms. He also defended his efforts to reform the 35-hour working week, which he described as an “economic catastrophe”, saying “France’s problem is that it does not work enough”.
Sarkozy may be helped by the fact that France’s economy – and the wider eurozone – looks better equipped to ride out the aftermath of the credit crunch than many other countries. The country’s residential property market, for example, is looking much less precarious than those of countries such as the US, UK, Ireland and Spain. Ratings agency Standard & Poor’s is upbeat about the nation’s housing market, partly because French household indebtedness is low (47% of GDP in the third quarter of 2007, compared with 59% in the eurozone, and 97% in the UK).
Recent economic data is also encouraging. In May 2008, it emerged that France’s economy grew by the unexpectedly high rate of 0.6% in the first quarter of 2008 and by 2.1% in the whole of 2007 (significantly ahead of the earlier 2007 figure of 1.9%). It also emerged that, despite the unusually strong euro, French exports held up remarkably well in the first quarter.
Before these figures emerged, the French government had downwardly revised its forecasts for economic growth for 2008 to between 1.7% and 2%. This compares to an EU forecast of 1.7% and a less sanguine IMF forecast of 1.4%. The Economist Intelligence Unit says: “Higher energy and food prices will exert upward pressure on consumer prices in 2008, but a strong exchange rate and weak domestic price pressures should keep a lid on inflation.”
While many of Sarko’s critics like to rail against globalization and the damage his reforms will wreak on their society, a select band of leading French companies have quietly been transforming themselves into global leaders in their fields.
These include Axa in insurance, Carrefour in retailing, EDF in utilities, LVMH and PPR in luxury goods, Pernod-Ricard in drink, Total in oil and gas, Michelin in tyres, L’Oreal in cosmetics, PSA and Renault in cars, Sanofi-Aventis in pharmaceuticals and Sodexho in catering. Also, despite the strictures of the 35-hour week, the country’s small and medium-sized enterprises have, amazingly, among the highest levels of productivity in the world.
France is also a world leader in tourism. With at least 75 million tourists a year, it is the most visited country on earth and generates the third largest income in the world from tourism. In transport, its network of Trains a Grande Vitesse and autoroutes are the envy of many other nations.
Yet “economic nationalism” prevails in many sectors of the French economy – as indeed it does in other southern European countries. Two years ago, the EU was up in arms after the French government orchestrated a merger of two utilities, the publicly-listed Suez and the state-controlled Gaz de France, to defend the former from a likely takeover by Italy’s Enel.
Also France’s banks are less weakened by subprime-related writedowns than their peers in the US, UK and Switzerland. While the rogue-trading scandal at Societe Generale clearly came as an embarrassment, France’s six largest banking groups including BNP Paribas, Credit Agricole and SocGen, have so far made relatively limited total writedowns of €11 billion. And whilst both Credit Agricole and SocGen have launched rights issues to strengthen their balance sheets, the diversified nature of these banks give analysts cause for optimism.
Elisabeth Grandin, a credit analyst at Standard & Poor’s, says: “The size of French banks’ corporate and investment banking divisions leaves them exposed to a potential worsening of the financial markets in 2008. However their business diversification and sound domestic activities give them a cushion to offset against continued poor corporate and investment banking performance and limit the potential decline in net profit.”
Moody’s analyst Stephane Le Priol says: “In the longer term, the credit crisis may even have some positive impact for French banks: a general re-pricing of credit risk may signal the long-awaited end of the steady and unsustainable erosion of credit margins for both individual lending and corporate lending in France.”
There are also some promising regulatory reforms in the pipeline. In April, France’s finance minister Christine Lagarde unveiled a package of measures designed to modernize the economy, partly by putting the consumer, rather than the producer, at centre stage. These included abolishing all charges and tax on start-ups until such firms make a profit, and a reform of the Loi Galland, which bans retailers from selling at below cost price.
Other proposals include a freeing up of planning laws to make it easier to build new hypermarkets in France – at the moment these tend to have local monopolies – and permitting shops to hold sales for a two further weeks a year. Such measures would almost certainly help bring down food prices in France but are seen as unwelcome by the country’s still-strong independent retailers.
France has also, belatedly, tried to seize the green agenda. Last October President Sarkozy unveiled a package of measures which he believes will put the country in the front line in the war against global warming. He said that by 2020, all new buildings in France should “produce more energy than they consume” and declared that by 2010, incandescent light bulbs and single-paned windows would be banned. He also unveiled measures to promote greater use of greener vehicles and said foreign-owned trucks would have to pay an additional tax to drive through France.
Speaking at the time Sarkozy said: “I’m committed to a revision to our tax laws to consider the creation of a climate energy tax in exchange for a lightening of tax on labour to preserve our competitiveness.” However the “Elephant in the room” for the environmental movement is Sarkozy’s continued support for France’s nuclear power sector, which produces around 80% of its electricity.
In overall terms Sarkozy clearly faces some serious challenges as he seeks to turn France, with its population of 64 million, around. However Jennifer McKeown, an economist with London-based Capital Economics, believes he still has a real chance of success and that what he has already achieved often gets under-estimated. “He has failed to live up to the French public’s great expectations,” she says, “but he has made greater progress on the two key pre-election pledges of boosting spending power and improving labour market flexibility than is typically thought.”
“Sarkozy had the courage to do what other presidents didn’t,” says Philippe Braud, a professor at the Institut d’Études Politiques de Paris (Sciences Po). “His track record is not to be underestimated even if the French aren’t convinced.”
An edited version of this article was published in the July 2008 issue of Accountancy Magazine. Read an abridged version online