Last July, President Francois Hollande commissioned Louis Gallois, the former chief at aerospace company EADS NV and state-owned railway company SNCF, to prepare a report with the intention of reversing the languishing competitiveness of French companies. Earlier this month, Mr Gallois presented the review, titled “Pacte pour la Compétitivité de l’Industrie Française” to the Socialist government led by Hollande, as the country seeks ways to catch up with Germany, its main trade partner.
Gallois lists 22 proposals to boost French companies, which he describes as being in an ‘emergency situation’- Vincent Micallef
In his report, Gallois lists 22 proposals to boost French companies, which he describes as being in an “emergency situation”. And, as if the Government did not require reminding, on the same day the report was published the IMF urged France to reform its labour market and to reduce public spending – or risk falling behind periphery countries Italy and Spain.
One of the most debated proposals of the Gallois report was Proposal 4, advocating for a €30 billion cut to payroll taxes – €20 billion from employers’ family and sickness contributions and the other €10 billion for staff earning up to €58,500 per annum (3.5 times SMIC, France’s minimum wage). This would amount to 1.5 per cent of French GDP, and Gallois suggests that the lost revenue would be recovered from higher VAT (raising €5-6 billion), a carbon tax (€2-3 billion) and circa €22 billion through a two per cent increase in a social charge (Contribution Sociale Généralisée).
CSG is levied upon a wide spectrum of income types, including salaries, and rental and investment income. While the proposal reduces employer costs in a country where jobless claims stand at a 13-year high, in practice, it would also shift the tax burden from employers to households.
One could say that probably the author’s intention was also to spur the economy by reviving investment spending and net exports in the GDP formula, rather than having the government spend its way out of a recession. It is widely held that Hollande equates deficit spending by the Government with economic growth.
Other proposals suggested include the maintenance of various business-friendly measures over this legislature’s five-year term; the creation of a “Small Business Act” aimed at SME growth and the creation of a framework for smaller companies to group together to better access export markets; providing incentives for life insurance funds to invest more in shares (versus bonds) by altering tax rules; and doubling the number of years university students spend in internships related to their degree, as part of their undergraduate programme.
However, Gallois steered well wide of suggesting changes to rigid labour laws, France’s code du travail, that for instance, make it hard for firms to hire and fire according to business cycles.
This is a sensitive issue the Government is already broaching with unions, separate to the report. Relaxing these laws, one would think, would be on top of any government’s agenda in its search to tackle a country’s competitive edge.
Hollande responded to the report by announcing tax credits totalling €10 billion in 2013, depending on the size of the labour force. Credits increase to €20 billion over the following two years.
The normal VAT rate is to increase from 19.6 per cent to 20 per cent starting in 2014, while an intermediate rate will increase from seven per cent to 10 per cent. There will be other spending cuts of €10 billion in 2014/2015, and other measures include the creation of a liquidity fund for companies in dire straits and multiplying the number of apprenticeships by 2017.
These measures, combined, should boost France’s GDP by 0.5 per cent in 2013.
Incidentally, at the time of writing, Moody’s downgraded France’s government bond credit by one notch from its top Aaa rating, citing, among other reasons, a “gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, good and service markets.” Among its reasons for keeping France rated highly at Aa1, Moody’s refer to “a strong commitment to structural reforms and fiscal consolidation… which may… mitigate some of the structural rigidities and improve France’s debt dynamics”.
In the aftermath of the Gallois’s report, Social Economy Minister Benoit Hamon warned: “This report is a contribution. It’s the government that governs.” Finance Minister Pierre Moscovici added: “A shock causes trauma, whereas a pact reassures”. Hopefully for France, this document will not face the same fate of numerous similarly commissioned reports in what the French daily Le Figaro describes as a “cemetery of buried reports”.
www.curmiandpartners.com
Curmi & Partners Ltd is a member of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The value of investments may fall as well as rise and past performance is no guarantee of future performance.
Vincent Micallef is an executive director at Curmi and Partners Ltd.