FRANCE: IMPACT OF PRESIDENTIAL CANDIDATES' ECONOMIC

1. (U) SUMMARY. According to an evaluation of the leading French
presidential candidates' job-creation proposals by a prominent think
tank aligned with French business groups, only center-right UMP
candidate Nicolas Sarkozy's policy proposals would create jobs and
add to GDP growth; centrist UDF candidate Francois Bayrou's and
Socialist Party candidate Segolene Royal's proposals would have a
net effect of destroying jobs and reducing GDP growth. END OF
SUMMARY

Think Thank Evaluates Impact of Job-creation Proposals made by
Leading Presidential Candidates


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2. (U) COE-REXECODE, a prominent think tank and forecasting group
aligned with French business groups, evaluated the short-term and
medium-term impacts of job-creation proposals made by center-right
UMP candidate Nicolas Sarkozy, centrist UDF candidate Francois
Bayrou and Socialist Party candidate Segolene Royal.

Sarkozy's Proposals Would Result in Job, GDP Growth


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3. (U) According to COE-REXECODE, Sarkozy's proposals to allow
over-time hours above the annual 220-hour maximum, and exempt
overtime pay from taxes, would enhance wage-earners' purchasing
power, especially in sectors with labor shortages. The resulting 45
percent increase in overtime pay to employees would be a "strong
direct incentive" on labor supply, while the 26 percent decrease in
the cost of overtime to employers would favor an increase in work
hours and eventually labor demand thanks to a decrease in the
average cost of labor. The proposal would create 180,000 jobs
(120,000 jobs and 60,000 "job equivalents" induced by the extension
of worked hours) and in the short-term add 1.3 percent to the
present 2.0 percent French GDP growth rate. In the long term, the
impacts of measures would be more significant as the elimination of
the 35-hour work week would help restore France's competitiveness.


Bayrou'S Proposals have a Mixed Effect


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4. (U) According to the study, Bayrou's proposals would have a
mixed effect. His proposal to increase by 35 percent overtime pay
(for hours 35 to 39 worked per week), and to reduce related social
taxes by 17 percent, would initially increase GDP by 0.5 percent.
His proposal to eliminate social taxes on two new jobs created per
company ("emplois francs," targeting very small companies and
individual entrepreneurs) would increase GDP by 0.6 percent and
create 90,000 jobs - "a modest performance relative to its cost"
(7.4 billion euros or 9.6 billion USD). However, the proposal to
limit payroll tax breaks on low wage jobs (up to 1.3 times the
minimum wage versus 1.6 times currently) to small and medium sized
companies (versus applying the tax breaks to all companies) would
increase the business sector's overall tax burden, cut GDP by
1.3-1.6 percent and result in the loss of 230,000 jobs. The overall
net result of Bayrou's proposals in the short term would be a 0.3
percent decrease in GDP growth and a net loss of 60,000 jobs. The
long-term effect on economic growth and competitiveness would be
relatively neutral as the measures would cancel each other out.


Royal's Proposals Would Harm Competitiveness


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5. (U) Royal's proposal to increase the monthly minimum wage (SMIC)
to 1,500 euros by 2012 would cause an increase in the costs of
production that would harm competitiveness. The proposal would
result in the elimination of 50,000 jobs and a 0.3 percent cut in
GDP. The elimination of the new hiring contract ("Contrat Nouvelle
Embauche - CNE") by itself would destroy another 30,000 jobs and cut
GDP growth by an additional 0.2 percent. Her proposal to impose the
35-hour work week on all French companies would be even more
detrimental, resulting in additional 0.9 percent cut in GDP and loss
of another 150,000 jobs. Royal's proposal to increase local
government-sponsored jobs ("emplois-tremplins") to 450,000 from
50,000 currently would create some jobs in the short term, but would
require financing by regions that would inevitably increase taxes
and drag down economic growth. That said, COE-REXECODE did not
seriously expect the measure, which could sap up to 30 percent of
the regions' budgets (7 billion euros or USD 9.1 billion), to reach
its full potential given other existing government-subsidized
contracts. In the long-term, Royals' proposals would result in a
decline in competitiveness and purchasing power.

Economic Reform on a Short Wire


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6. (SBU) Rexecode Director Michel Didier told Emboffs on April 16
that if Nicolas Sarkozy is elected he would have to push through
economic reforms during an extraordinary summer session of
parliament. Waiting until fall would allow the opposition to
coalesce and likely stall reform efforts. (Note: Sarkozy has said
he would act just after the June legislative elections, assuming UMP
controls the National Assembly. End note.) Didier thought Sarkozy's
proposed measures, such as eliminating taxes on overtime pay, would
have an important psychological effect that could lead to further
reform of the labor market. Didier expects that, if elected,
socialist candidate Segolene Royal would impose further rigidities
on the French economy. Didier felt that none of the candidates had
a long-term vision for the French economy, and instead were simply
tinkering within the existing policy framework.

The Usual Caveats


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7. (U) COE-REXECODE warned it did not evaluate the impact of all
factors, including possible changes in labor contracts (e.g.
Sarkozy's proposal to create a single labor contract - replacing
some that are highly protective and some that are highly flexible)
or in union representation (e.g. Royal's proposal to encourage
unionization of employees with tax incentives). The evaluation also
does not include "the very long term impact of support to higher
education and research, although they are parts of the three
candidates' programs." COE-REXECODE's evaluation is limited to
job-creation proposals of the candidates, and holds other variables
constant.

Comment


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8. (SBU) The study should be taken with a grain of salt, given
Didier's affinity with Sarkozy. However, even in the most
optimistic scenario the study shows that only 180,000 jobs would be
created. Whoever is elected President may well be tempted to
continue the French tradition of resorting to government-subsidized
contracts to create jobs, should real reform prove too difficult.
In 2006, government contracts supported 370,000 new jobs.
Employment in the private sector benefited from
government-subsidized alternative training contracts (412,000),
payroll tax exemptions (214,000), and government-subsidized
contracts in favor of full-time jobs (150,000).

STAPLETON