Hollande Urged to Put House in Order, Leave Businesses Alone

By Mark Deen & Francois de Beaupuy - Jul 8, 2013 11:28 AM GMT+0200

French business leaders had a message for President Francois Hollande this weekend: Put your own house in order and leave us alone.
They clashed with Finance Minister Pierre Moscovici at a conference in Aix-en-Provence, in southern France, accusing the government of over-taxing business and zigzagging on economic policies, a charge the minister called “inelegant” and “facile.” Business leaders called on Hollande to halt what they said were constant changes in regulations and urged him to focus on shrinking state spending before elections constrain his ability to push through difficult and unpopular policy measures.

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After about 70 billion euros ($90 billion) in tax increases over three years, French consumer spending has stalled and investment has collapsed. Photographer: Osama Faisal/AP Photo

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July 7 (Bloomberg) -- French Finance Minister Pierre Moscovici discusses the outlook for growth, taxation and job creation. He spoke with Bloomberg Television's Caroline Connan in Aix-en-Provence, France. (Source: Bloomberg)

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July 6 (Bloomberg) -- Renault SA Chief Executive Officer Carlos Ghosn talks about the outlook for the global car industry. He spoke with Bloomberg Television's Caroline Connan in Aix-en-Provence, France. (Source: Bloomberg)

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July 7 (Bloomberg) -- European Union Economics and Monetary Affairs Commissioner Olli Rehn talks about Greece's debt burden, Portuguese politics and U.S.-EU trade talks. He spoke with Bloomberg Television's Caroline Connan in Aix-en-Provence, France. (Source: Bloomberg)

“In France, the real problem is the state,” said Christophe de Margerie, chief executive officer of Total SA. “The state must obviously cut public spending and put business back at the heart of the preoccupation of the French. It should mind its own business rather than tell us what to do.”
The remarks from the head of Europe’s third-biggest oil company encapsulate the frustration of business leaders as France enters the third year in which the economy has contracted or barely grown. Hollande, a Socialist who’s in the second year of his presidency, is struggling to balance their needs with demands from his own party to ease the pace of deficit cuts to protect citizens as joblessness rises to a record high.

Plunging Margins

After about 70 billion euros ($90 billion) in tax increases over three years, French consumer spending has stalled and investment has collapsed. Decades of policies to shrink the work week and limit job cuts have eroded corporate profit margins, which last year fell to the lowest since 1985.
Profit at French non-financial companies is less than 15 percent of gross domestic product, compared with about 25 percent in Germany, Organization for Economic Cooperation and Development data show.
After just over a year in office and with his popularity at a record low, Hollande has 11 months before voters get to voice their anger in European elections on May 25. He needs to accelerate putting in place business-friendly measures before potential electoral losses hamper his ability to steer the nation, business leaders said at the Cercle des Economistes annual conference.
Focus is now turning to Hollande’s ability to deliver spending cuts in the 2014 budget, being prepared by the finance ministry and due to be published Sept. 25.

Credibility Question

Public spending in France accounts for 57 percent of GDP, the second-highest among the world’s richest countries that form the OECD, just behind Denmark.
“The state has become too large,” said Augustin de Romanet, CEO of Aeroports de Paris, said in Aix. “Are we ready to say that the king is naked, and that we don’t have the means to buy the next election with new social spending?”
Hollande’s own cabinet and Socialist Party have been resisting deficit-cutting efforts. Last week, Hollande fired Delphine Batho from her job as energy and environment minister after she criticized spending cuts in her department, calling his 2014 budget plans “bad.”
Concern that Hollande will seek higher taxes to shrink the budget deficit rather than the difficult task of cutting public spending has created a crisis of confidence among businesses, making them reluctant to invest.
National statistics office Insee said last month that investment by non-financial companies will drop by 2.4 percent this year, more than the 1.9 percent decline in 2012.

Business Climate

Businesses are sagging under the third-highest hourly wages among the 17 nations using the euro, after Belgium and Luxembourg, making reforms more pressing, Ernst and Young said last month in a report entitled “France: Last Call.”
The best thing the government can do is create “a climate conducive to doing business,” said Marwan Lahoud, strategy head at European Aeronautic, Defence & Space Co., the parent of aircraft maker Airbus SAS.
“Leave the rest to us,” he said. “Don’t hinder the activities of companies, don’t interfere in their daily operations.”
High labor charges and shrinking investment have resulted in companies cutting jobs or not hiring. Hollande, who has pledged to reverse the trend of rising joblessness by the end of the year, is struggling to meet that goal as companies from carmaker PSA Peugeot Citroen (UG) and phone-equipment maker Alcatel-Lucent to drugs company Sanofi cut thousands of jobs.

‘Reduce Uncertainties’

More than 3.26 million people are jobless in France, according to government figures for May, putting the country’s unemployment rate at 10.8 percent, the highest in 14 years.
“Economic policy needs to accept one simple reality: that it is companies that drive growth and employment in the medium term through investments,” said Pierre-Andre de Chalendar, CEO of glass-maker Cie de Saint-Gobain. “Economic policy, above all, should try not to get in the way. It should reduce uncertainties in tax policies and lift regulatory obstacles.”
To be sure, Hollande has put policies in place to appease businesses. He pushed through a law in April making firings easier and labor rules more flexible.
In October, under pressure from business lobbies, he watered down a tax increase on capital gains made by entrepreneurs, and unveiled 10 billion euros of 2014 tax credits for companies.

‘Pessimistic Atmosphere’

Former European Central Bank President Jean-Claude Trichet, who as head of the French treasury helped engineer a decade of trade surpluses in the 1990s, lauded Hollande for achieving a revamp of labor rules while adding that “a lot remains to be done.” The 2014 budget will be critical, he said, because the government needs to show it is able to carry out “massive” spending cuts compared with what has been done in the past.
While France has taken “the first steps with the competitiveness pact and the labor-market legislation,” the payroll tax needs to be simplified, the services market needs to be freed up and state spending has to become more efficient, said Philippe Aghion, a Harvard University economics professor.
Reflecting the frustration of the some of the business leaders at the conference, Finance Minister Moscovici was jeered as he tried to defend steps taken by the government.
“The objective is not to be re-elected,” he said. “We need to be creators of hope. We’re aware of the need for structural reforms, the need to act quickly and strongly.”
He said he was “struck by the pessimistic atmosphere here,” adding that Hollande is trying to hold down tax increases.

‘In Denial’

Taxes will go up by between 0.2 and 0.3 percent in 2014 and the rest of the deficit cutting will come through spending cuts, he said.
Still, the government’s actions have sometimes left lingering doubts.
Hollande has repeatedly said he’ll cap public spending to shrink the budget deficit -- the seventh-highest in the European Union last year after Spain, Greece, Ireland, Portugal, the U.K., and Cyprus.
Yet one of his first acts after being elected was to lower the retirement age to 60 from 62 for workers who started their work life early, affecting about 110,000 people a year and funded by a 0.1 percentage-point increase in payroll charges.
He recently slapped the richest households with 1 billion euros in new taxes a few weeks after pledging to keep a lid on the tax wedge, which is already the third-highest among the 27 European Union nations.
“In France, we have the feeling that we moved in the past year from denial to zigzag,” Saint-Gobain’s Chalendar said. “There’s been some important progress, but a lot remains to be done.”
To contact the reporters on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net
To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net