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