French come to terms with shock report on industry

 

When François Hollande asked industrialist Louis Gallois to write a report on France’s competitiveness, he can’t have expected the finished product to make for happy reading.

Yet even the French president must have been taken aback by the dark, almost despairing, tone of the report Gallois presented to the government this week.

“The crisis point has been reached,” the report stated. “French industry has reached a critical point beyond which it is threatened with destruction.”

France had lost two million industrial jobs over the past 30 years and its share of European exports was diminishing, Gallois wrote. It was “caught in a vice grip” between countries such as Germany, which had distinguished themselves with innovation and quality, and emerging economies, which could produce more cheaply.

Heavy taxes, high public spending, bureaucratic complexity and a “cult of regulation” had stymied French companies. The result, Gallois concluded, was sluggish growth, high unemployment and a real threat to living standards.

To reverse the decline the report argued for a “competitiveness shock” comprising a steep reduction in social charges financed by raising taxes such as VAT, carbon levies or property taxes.

The Gallois report is hardly the first of its kind – Hollande’s predecessor, Nicolas Sarkozy, commissioned and quietly shelved a similar study – but it has been greeted as a watershed.

The report’s publication was preceded by weeks of speculation, leaks and pre-emptive manoeuvring, and its publication on Monday got the blanket coverage more often reserved for political sex scandals.

The interest level owes something to the report’s stark language and to the bipartisan credentials of its author; Gallois, a left-leaning figure, was appointed to run two of France’s biggest companies – rail operator SNCF and aerospace giant EADS – by right-wing governments. But mainly it was about timing.

Chronic weakness

France’s economy has been stagnant for some time, but the chronic weakness of the country’s proud industrial sector has been brought into sharp relief in recent months by cost-cutting at car-makers Renault and PSA Peugeot.

The latter is set to close a plant near Paris and axe 8,000 jobs.

Reports of concern in Germany over the French economy’s underlying problems have grown increasingly common, adding to worries in Paris that a loss of economic power could damage its political authority at the heart of the EU.

“The biggest problem resides in Spain, in Italy, but also – I say it discreetly – in France. That could become a problem that would not be minor,” Germany’s former chancellor Gerhard Schröder said last month.

As if France needed reminding of foreign misgivings, the publication of the Gallois report came on the same day as a warning from the International Monetary Fund that Paris must cut public spending and reform labour or risk falling behind Italy and Spain.

If Gallois’s apocalyptic tenor came as a shock, the government’s response to it was greeted with even more surprise.

After weeks of reports predicting the cabinet would bury the study, Hollande’s prime minister, Jean-Marc Ayrault, announced it would adopt “almost all” of Gallois’s ideas in a new “competitiveness pact”.

Some €20 billion in annual tax credits will be granted to companies to lower labour costs.

To finance that the main VAT rate will rise to 20 per cent in 2014 from 19.6 per cent today, and a reduced rate that applies to restaurant bills and property repairs will rise to 10 per cent from 7 per cent, raising €6 billion.

Public spending

The government aims to save €12.5 billion from cuts to public spending and health insurance from next year, and will introduce incentives for investment in innovation. “France is not condemned to the spiral of decline. But we need a jolt at a national level to regain control of our destiny,” Ayrault said.

In one move major economic policies had been reversed. Until this week Hollande had said he would not countenance a VAT increase and insisted there could be no more cuts to public spending.

His €20 billion plan to lower labour costs is less than the €30 billion called forby the heads of France’s large CAC 40-listed companies, but it’s considerably higher than the €13 billion proposal made by Sarkozy.

The pact received a guarded welcome from employers and a somewhat more sceptical one from trade unions.

“By breaking such heavy taboos Mr Hollande is showing real political courage,” said left-leaning Le Monde in a front-page editorial.

Of all the ideas in Gallois’s report, the “shock” rhetoric is what the government seems most eager to ditch. It’s acutely conscious of the task it now faces in bringing politicians, business, unions and voters along on its sudden change of course.