A/S WAYNE DISCUSSES FRENCH APPROACH TO "ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 PARIS 002717 SIPDIS E.O. 12958: DECL: 04/21/2016 TAGS: ECON EFIN PREL FR SUBJECT: A/S WAYNE DISCUSSES FRENCH APPROACH TO "ECONOMIC PATRIOTISM," LABOR UNREST AND GLOBALIZATION Classified By: DCM Karl Hofmann for reasons 1.4 (b) and (d). Summary: -------------- ¶1. (C) A/S Wayne heard from a noted economic advisor to the French Government and the head of the local AmCham that one of the main reasons PM de Villepin's "economic patriotism" agenda has resonated with the French people was because most people were shocked to learn that so much of the French economy was already owned by foreign investors. The observers also believed no candidates for the 2007 presidential election will propose significant economic reforms before the election. While France's economic policy options remain limited by EU institutions and budgetary commitments, under the right conditions France remains an excellent place to invest and to make money, they agreed. End Summary. ¶2. (U) On 20 April EB Assistant Secretary Wayne met with Elie Cohen, economist and member of France's non-partisan Center of Economic Analysis which advises the President and the Prime Minister, and Francis Bailly, Chairman of AmCham France and CEO of GE France. DCM hosted the luncheon meeting and Econ Counselor attended as notetaker. Economic Patriotism -------------- ¶3. (SBU) A/S Wayne asked the two Frenchmen for their thoughts about the significant press attention that PM de Villepin's comments about "economic patriotism" had received over the past months. Cohen responded forcefully that the only reason the economic patriotism issue and especially the rumored takeover of Danone by Pepsi (which started the whole debate in France in the summer of 2005) made headlines was because France was one of the most open -- if not "the" most open country -- to foreign investment. He continued by saying that ever since the mid-80's when the Mitterrand government started to sell off parts of state-owned companies, foreign investors were playing an increasingly large role in France. The CAC 40 (roughly the French equivalent of the S&P 500),he explained, was by value over 42 percent owned by foreigners, and 45 percent of the "French" companies listed were foreign-owned. The "massive" privatizations, coupled with the fact that pension funds do not exist in France, meant that the for eign component of all investment in France is huge by necessity. Cohen, however, agreed that the idea of portraying Danone ("a company founded by a Bulgarian who had been living in Spain," he said ironically) as a "French treasure" was foolish. ¶4. (SBU) On the Suez/Gaz de France merger, DCM asked Cohen why the government felt compelled to be seen as the driving force behind that merger. Cohen conceded that France had one of the only governments in the developed world that explicitly says it wants to protect its companies. Moreover "it is a perfect match; if this had happened without government involvement, the markets would have applauded this 'perfect' merger wildly." Cohen also claimed that other countries were equally as susceptible as France to "nationalist" uproar over foreign takeovers. He cited the Biersdorf (Nivea lotion) case in Germany and the CNOOC and Dubai Ports case in the U.S. Despite other countries' similar activities, France seems often to be singled out as the most "protectionist," Cohen opined. ¶5. (SBU) Bailly added that the real damage done by the economic patriotism debate was the lingering impression it left. The image it gave to the rest of the world was that France was a country hostile to foreign investment. He did not dispute the facts presented by Cohen, but said that the image hurt everyone who was working to attract investors to France. CPE (Contrat de Premiere Embauche or Youth Employment Plan) -------------- -------------- ¶6. (SBU) A/S Wayne asked about the CPE (the recent controversial youth employment scheme which resulted in recent large demonstrations across France and which the Government subsequently withdrew). Both Bailly and Cohen pronounced the idea ill-conceived from the start. Cohen commented that the PM had really wanted to take a step that would help make it easier to hire young people and would introduce some flexibility to French hiring practices. Unfortunately de Villepin had been too timid in his proposal. The idea of limiting the reform to youth, he added, was particularly ill-conceived. Cohen explained that the universities and technical schools were where France "parked" its unemployment problem. "These young people know they'll never get a job until they get near 30; they were already full of resentment," he said. Adding the CPE to this sense of hopelessness only compounded the "insult" this age group already feels. Cohen commented that de Villepin should have been bolder in his reform and that a m ore robust program may have at least won the support of the business community; as promulgated, even the business community felt little love for the CPE proposal. The real legacy left by the CPE fiasco, Cohen concluded, was that no reforms will be attempted - or even discussed -- by anyone prior to the 2007 presidential election. This was very unfortunate. Bailly agreed. Presidential Candidates -------------- ¶7. (C) DCM asked Cohen and Bailly about the likely candidates for the 2007 presidential election, Nicolas Sarkozy (UMP) and Segolene Royal (Socialist). Bailly observed that many people in the business community were concerned about Royal's lack of experience in business and apparent lack of familiarity with economic issues. Cohen noted that Royal had focused her efforts on policies related to the family and that this, as an electoral tactic, was very effective. She is positioning herself as a "family values" candidate, but from the left, he said. He agreed that Royal was limited in the economic arena, but several of his sources had claimed that she had received briefings from the investment firm Lazard. While he could not confirm this, he did not discount the story either. On likely UMP candidate Sarkozy, Cohen commented that while Sarkozy continues to talk about reform, since the CPE debacle - in which Sarkozy came off well - he has not uttered his often-expressed desire to represent a "rupture with t he past" in terms of economic policy. Just because Sarkozy likes to be seen as a politician who represents "action," the USG should not automatically assume he is a "liberal" on economic policy; he is not afraid of state intervention, Cohen stated. Does the Finance Minister have a Role? -------------- ¶8. (SBU) A/S Wayne noted that Finance and Economy Minister Thierry Breton had been virtually invisible throughout the debate over the CPE. Was there a role for Breton in this, he asked? Cohen responded that the Finance Minister in France holds much less power than before the advent of the euro and the European Central Bank (ECB). In fact, Breton as Finance Minister, had little latitude on any economic policy decisions of consequence. "Privatizations will continue," he said, "for the simple reason that the state desperately needs the money; the Finance Minister has no choice in this." He said that between the ECB and the stability and growth pact, French officials had little control of the French economy. Bailly took issue with this assessment, noting that the Finance Minister is still in charge of taxation and has a good deal of latitude to implement policies which could enhance economic growth and set the tone for the investment climate. Wither France? Wither the EU? -------------- ¶9. (C) A/S Wayne asked whether all French policymaking was frozen until after the presidential election. Cohen again responded that he would be astonished if any politician on the right or the left would dare to float any significant reform proposals. That was the conclusion the political class had taken from the CPE and the May 2005 referendum on the EU constitution which was rejected by a majority of the French population. Cohen opined that at least as worrying as the upcoming policy inactivity in France was the lack of leadership at the EU level. He suggested that the EU had become unworkable with twenty-five members, and that in time it would become clear that a group of "serious" countries (he cited France, the UK, Germany, Spain, Poland and Italy) would need to step into a leadership position in the EU. "This is the only way to break through the current situation," he observed. Bailly commented that the lack of leadership at the EU level was indeed worrying. Regarding France, the situation was n ot ideal, but that for GE's part, France was still an excellent place to do business, as GE units were making record profits (8.5-12%). To succeed in France, however, a business needs to be specialized and have a highly skilled workforce. GE operates in such fields in France, he noted, with great success. He was not pessimistic about France or about his company's future here, he concluded. ¶10. (U) This message was cleared by A/S Wayne. Please visit Paris' Classified Website at: http://www.state.sgov.gov/p/eur/paris/index.c fm Stapleton