SCENESETTER FOR TREASURY SECRETARY SNOW'S JUNE 15

C O N F I D E N T I A L SECTION 01 OF 02 PARIS 004067

SIPDIS

FOR TREASURY SECRETARY SNOW FROM CHARGE ALEX WOLFF

E.O. 12958: DECL: 06/10/2010
TAGS: ECON PGOV EIND ETRD EFIN FR
SUBJECT: SCENESETTER FOR TREASURY SECRETARY SNOW'S JUNE 15
VISIT TO FRANCE


Classified By: Charge d'affaires a.i. Alex Wolff for reason 1.4 (d).

Mr. Secretary:


1. (C) We warmly welcome your visit and look forward to your
assistance in moving forward the deep and complex
relationship we enjoy with France. As a member of the G8 and
the UN Security Council with extensive ties to former
colonies around the world, France plays a prominent role in
the international community. Your prior G8 meetings in
London will have addressed our common global interests in
financing for development and debt relief issues, but your
visit to France will provide an opportunity to advance our
bilateral agenda.

TANGIBLE BENEFITS
--------------


2. (C) Your visit comes at a time when France is
contemplating the future direction of its economic policy,
following the well-publicized defeat of the referendum on the
EU Constitution in France, which led President Chirac to
institute a Cabinet shake-up. Although political analysts
have come up with a myriad of reasons for the defeat,
including widespread dissatisfaction with Chirac himself, the
GOF has chosen to interpret the defeat as largely a call to
do something about unemployment. Paradoxically, the GOF
hopes to champion the so-called European or French model of
development (strong social protections and continued state
intervention in the economy, including by state-owned
enterprises),despite the demonstrated results of such
policies: unemployment at around 10 percent and a GDP growth
rate around 2 percent and dropping.


3. (C) Finance Minister Thierry Breton retains his portfolio
and has already announced plans to continue with the cautious
privatization of France Telecom (where he was former CEO) and
Gaz de France (GDF).

POLITICAL HURDLES
--------------


4. (C) France historically has had a curious role in European
integration: a self-styled leader in promoting integration,
it is often the last to act to implement European directives.
Its most recent "success" was its ability to thwart strict
interpretation of the EU Stability and Growth Pact, to suit
its own short-term economic interests. The government's
desire to placate a restive electorate may prove a further
test to the Pact, as France seeks to boost employment and
adopt other measures to shore up a flagging economy. The GOF
may try to divest some holdings in state-owned enterprises,
as it recently did with France Telecom shares, and plans to
do again with France Telecom and GDF, to come up with some
cash for employment programs. Proposed partial privatization
of the state electricity supplier, EDF, will be a more real
test of the government's privatization commitment.


5. (C) The GOF's predilection for defending the "French
model" of economic development puts it into a box - it cannot
abandon that position without putting at risk the electoral
chances of Chirac himself, should he decide to run again in
2007, or his party if he decides not to run again. In some
respects, the greatest obstacle to change in France today is
Chirac himself. He has become a conservative in the truest
sense, which means preserving even socialist legacies,
against the perceived onslaught of "Anglo-Saxon liberalism."
In a televised address to the nation on May 31, Chirac called
for a "national mobilization" against the economic failings
and lack of confidence that undermine France's national
strength. In his remarks, Chirac took care to insist that,
though "all" approaches to solving social and economic
problems are on the table, restructuring France's social
model was not. The GOF fears street protests and labor
unrest should it move towards reform of labor laws.

TRADE
--------------


6. (C) Your meeting with Pascal Lamy, the incoming WTO
Director General, should help to focus his attention on the
developmental aspects of success on the trade front. That
message will be even more opportune after the G8 meetings,
when the UK plans to highlight attention on actions to assist
the least developed countries. Lamy, as former EU Trade
Commissioner and incoming WTO Director General, understands
well that the EU Common Agricultural Policy (CAP) has
detrimental effects, even as now modified, on developing
countries. The Boeing/Airbus dispute will be an early,
visible and important test of Lamy's mettle at the WTO.

TERRORIST FINANCING
--------------

7. (C) France renewed its focus on counter-terrorism issues
following 9/11, and we have enjoyed excellent relations at
all levels in the context of combating terrorist financing.
France expanded the role of its Financial Investigative Unit,
Tracfin, which continues to investigate classic money
laundering activities, but which broadened its scope to
include sectors -- associations and phone cards, for example
-- it may have overlooked in the past. At the policy level,
French efforts mirror ours: prosecute the crimes that finance
terrorism and increase interagency cooperation.
FINANCIAL INTEGRATION
--------------

8. (SBU) With its headquarters in Paris, the Committee of
European Securities Regulators (CESR) plays a pivotal role in
trans-Atlantic cooperation and European financial markets
integration. On trans-Atlantic cooperation, the Securities
and Exchange Commission, the Commodities Futures Trading
Commission, and the Office of Thrift Supervision already have
begun joint cooperative activities with CESR, and that should
be encouraged. Within Europe, CESR's practice of outreach
and consultations with market participants is a commendable
practice that promises to be more responsive to market
realities and needs. The Embassy has enjoyed an excellent
cooperative relationship with CESR officials and has worked
with them on several public outreach events.

FINANCIAL SECTOR
--------------


9. (U) France has remained one of the main destinations of
foreign direct investment. Based on preliminary information
from the Bank of France, the US remains one of the largest
sources of FDI in France, with 15 percent of the stock on a
historical book value basis. The market value for US FDI may
be more than five times the USD 47.9 billion book value
reported in 2003 by the Department of Commerce, correcting
for statistical bias. About 2,000 affiliates of US firms are
based in France. Around 540,000 jobs result from US-origin
investments. Foreign-controlled firms account for 22 percent
of the workforce, 27 percent of capital expenditures, 30
percent of exports, and 30 percent of production.


10. (U) France has one of the highest individual savings
rates among industrialized countries, at 15.4% of disposable
income. The former government under Prime Minister Raffarin
had been exploring ways to increase the rate of investments
in other financial instruments (stocks and bonds),where the
rate is 6.3% of disposable income. France, like most other
countries, has seen considerable consolidation in its banking
sector, with six banks now dominating the market. In
addition, it has a sizeable share of the US banking sector.
French banks in the US have assets of around USD 179 billion,
or about 13 percent of the foreign banks doing business in
the USA.


11. (C) Financial sector profits generally were up in 2004,
although the financial community continues to have concerns
about the pace of European integration of financial markets
and the regulatory burden of so many regulators. Your
roundtable discussion with the CEOs of the leading French
financial institutions should provide insights into their
views of the French economy, the GOF handling of economic
policy, and steps the USG might take to further our vision
for economic prosperity. You might want to inquire about the
French banking and finance community's lukewarm support of
transatlantic cooperation on a single marketplace, as well as
accounting standards.


WOLFF