" ECONOMIC PATRIOTISM " TAKES SHAPE IN FRANCE

C O N F I D E N T I A L PARIS 000357

SIPDIS

SIPDIS

STATE FOR EUR/WE AND EB/OIA - WES SCHOLZ AND JAMES ROSELI
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT - GAY SILLS
STATE PASS USTR

E.O. 12958: DECL: 01/19/2016
TAGS: EINV ETRD ECON EUN PREL FR
SUBJECT: " ECONOMIC PATRIOTISM " TAKES SHAPE IN FRANCE

REF: A. A) 04 PARIS 0626


B. B) 05 PARIS 5441

Classified By: Classified by Econ M/C Thomas J White, reasons 1.4 b & d

Summary
--------------

1. (C) As reported reftels, the GOF continues to enact
elements of Parliamentarian Bernard Carayon,s &economic
intelligence8 recommendations, as outlined in his 2003
report. The GOF issued a decree on December 31, 2005, to
define which sectors merit protection from foreign control
for &national defense8 reasons, and to refine its review
process for proposed foreign investments. The GOF tried to
bypass EU concerns by making the decree applicable only to
non-EU entities, but will need to further amend the decree to
deal with EU concerns about its economic space. Officials
assure us that the decree is only a technical amendment, but
that assessment is belied by PM Villepin,s public remarks
signaling the decree is part of his &economic patriotism8
agenda, as well as potential loopholes to be found in the
text as published. While the Government,s official policy
remains one that publicly encourages foreign investment with
the goal of creating jobs in France, the decree demonstrates
that at least some key officials do not fully appreciate the
benefits of foreign investment and an open investment regime.
End Summary.

Investment Controls Enacted
--------------

2. (U) The GOF tightened foreign investment controls by
decree published December 31, 2005, and revised January 4,

2006. The underlying legislative basis for scrutinizing
foreign investments in France remains unchanged. Currently,
Article 151-3 of the French Monetary and Financial Code
provides that the Ministry of Economy and Finance must
approve all foreign investment that a) could impair France's
public order, public security, or national defense interests,
and b) is related to the research, production or selling of
arms, ammunitions, powders and explosive substances. The
penalty for an investor who contravenes the law can be up to
double the amount of the illegal investment.


3. (SBU) What has changed in France is the regulation
implementing the legislative authority. The new decree,
number 1739-2005 of December 30, 2005, as published in the
Journal Officiel on December 31, does not define strategic
sectors as specifically as expected. When initially leaked
to the press, the GOF reportedly had identified 10 specific
industries. However, the new decree lists several categories
of covered activities, only one of which, the gaming industry
(casinos),represents a discrete business activity.


4. (U) The eleven covered categories are:
-- activities involving gambling;
-- activities concerning private security, specifically where
security is provided to an operator of vital importance;
provided to civil aviation or maritime ports; or provided to
zones where national defense secrets are kept;
-- activities involving the research, development or
production of means to combat the illicit use by terrorists
of pathogenic or toxic agents or to prevent the health
consequences of such use;
-- activities concerning the material used for the
interception of communications and for eavesdropping;
-- activities for the centers of evaluation for security
certification for computer products or systems;
-- activities for the goods or services of security for
computer systems used by contract by public or private
operators of defense installations;
-- activities related to dual-use technologies, as defined by
EU regulation 1334/2000 of June 22, 2000;
-- activities relative to cryptology resources as well to
cryptology for ensuring confidence in the digital economy;
-- activities exercised by firms that are depositaries of
national defense secrets;
-- activities of research, production or sale of arms,
munitions, powders and explosive substances destined for
military use;
-- activities exercised by firms that have concluded
contracts for study or for providing equipment for the
Ministry of Defense, either directly or by subcontractor, for
any of the goods or services listed above.


5. (SBU) Although the decree more or less tracks the same ten
industrial sectors identified in previous press leaks, what
is most striking about the way it is written is its emphasis
on &activities,8 so that an investor has to think twice
about getting approval for investing in a firm that even only
tangentially is involved in the national defense.

The Mouse that Roared
--------------

6. (U) The decree also changes the triggers for GOF
investment scrutiny. The prior decree required GOF review if
a proposed investment were to rise above the threshold of 33%
of the outstanding shares or voting rights. Now, the decree
spells out that any investment that grants control of a firm,
or surpasses the 33% threshold, or involves any part of any
branch of any firm that has established headquarters in
France, is subject to GOF review.


7. (C) In our analysis, this last criterion appears aimed at
preventing the purchase of firms with the intent of moving
production, or trade secrets, or patent right ownership, out
of France, since foreign ownership would automatically create
an incentive for moving a firm,s headquarters and thus its
properties, both tangible and intangible. The symbolic
attachment to &headquarters8 can be explained in part by
the Texas Pacific Group,s acquisition in 2000 of part of the
firm Gemplus, which at the time had its headquarters in
Gemenos, France. The purchase started the whole uproar in
France over economic patriotism. The firm, a manufacturer of
&smart8 cards, did in fact move its headquarters ) albeit
only to the Grand Duchy of Luxembourg, not to the U.S.

A Tortured History
--------------

8. (C) We spoke with Vincent Guitton, Office Director for
Investments at the Ministry of Economy and the chief
architect of the decree, on January 12. Guitton said that as
originally envisioned a year ago, the decree was only
supposed to be a technical amendment. Against Guitton,s
written recommendation, the new Prime Minister last summer
decided to vaunt the decree as part of his &economic
patriotism8 agenda (reftels). As soon as that happened,
Guitton related that the drafting of the decree became an
inter-ministerial nightmare. According to one local diplomat
also covering the same issue, several ministries fought to
greatly broaden the scope of the decree, in line with their
views of what industries needed protection and/or help toward
becoming European (that is, French) champions.


9. (C) According to Guitton, another problem arose in
September 2005 when the European Commission voiced concerns
about the compatibility of the decree with EU economic
rights. The Commission viewed with suspicion the idea that
French officials could prevent capital flows among its
citizens, when treaty rights spell out the opposite. To
forestall Commission concerns, the GOF inserted a clause
making prior approval a requirement only for people not
members of the European Community, firms not headquartered in
those states, or French citizens who do not reside in those
states. The decree as originally written required prior GOF
approval for investments by citizens of the EU, firms
headquartered in the EU, or French citizens residing in the
EU states; the GOF added the ¬8 to each category (a
significant typo) by amendment on January 4. There was also
a legal disagreement within the GOF about whether &European
Community8 included the countries of Lichtenstein, Iceland
and Norway. The GOF finally concluded yes, but the Commission
lawyers now take the opposite view. So, Guitton said the GOF
will issue another amendment clarifying that the decree does
not apply to citizens or firms from the European Economic
space.


10. (C) Among the factors that shaped the final decree was a
conference at the National Assembly on 10 October 2005, in
which US Treasuy and Embassy reps participated, which
addressed the possibility of creating a French equivalent to
the Committee on Foreign Investment in the United States
(CFIUS) and a French version of the Exon-Florio provisions.
The new decree explicitly allows the GOF to negotiate and
apply conditions to mitigate national defense concerns before
an investment can proceed. According to Guillot, this had
been the prior GOF practice, but the GOF lacked legislative
authority. U.S. participants had pressed the GOF to allow
for mitigation, so that potential investors are not faced
with stark choices, but have the possibility to take some
action that would allow the investment to proceed.

Comment
--------------

11. (SBU) The need to allay the French people's fears of
high unemployment has affected how the current government is
using its &economic patriotism8 agenda. As far as we are
aware, there are no significant new outside threats to
France,s national economic interests. While the &economic
patriotism8 proposals supposedly seek to level the playing
field with France,s trading partners, in fact it appears to
strive to inject a bit of GOF control into the enterprises
through which it can still project French power, namely, the
defense industries. We have seen an evolution in the
&economic patriotism8 rhetoric. The PM,s rhetoric is now
much more focused on making France a champion for employment,
and a protector against outsourcing, as that obviously plays
better to the electorate. However, since the Prime Minister
clearly signaled his intent to use the decree to create
French champions, our focus will be on how the GOF uses the
decree, and what conditions it chooses to impose. We will
also be curious over time to see whether the current
investment climate chills new investment in the targeted
areas of activities.

Please visit Paris' Classified Website at:
http://www.state.sgov.gov/p/eur/paris/index.c fm

Stapleton