PRESIDENT SARKOZY AND FRANCE'S INDUSTRIAL POLICY

C O N F I D E N T I A L SECTION 01 OF 04 PARIS 003269

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E.O. 12958: DECL:08/01/17
TAGS: ETRD WTRO ECON PGOV FR
SUBJECT: PRESIDENT SARKOZY AND FRANCE'S INDUSTRIAL POLICY

Classified by Economic Counselor Stuart Dwyer for reasons
1.4 (b) and (d)

Summary
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1. (C) President Nicolas Sarkozy's calls for a more
aggressive industrial policy have elicited criticism in
some quarters of the EU, but largely favorable responses at
home. Sarkozy's perspective is in line with France's long-
time perception of an EC liberal "bias" (a perception
partly behind the "No" vote to the 2005 referendum on the
EU's constitutional treaty). Sarkozy advisors downplay
what they see as alarmist reactions to his (successful)
efforts at eliminating competition language from the
pQamble of the EU cQtitutional treaty, saying the
president believes in competition principles, but as means
rather than an end. While presumably this elevates other
"means" - including state intervention - to equal standing,
Sarkozy will be pragmatic in choosing his battles. Rather
than attack the foundations of EU competition policy, he is
likely to assert GOF interests in discrete cases where he
can be reasonably certain of success. End Summary.

Why an EU Industrial Policy?
--------------


2. (SBU) Following France's rejection of the European
constitutional treaty in 2005, interpreted by many as a
protest against French powerlessness in the face of rampant
EU "liberalism," Nicolas Sarkozy and a majority of his UMP
Party extolled the virtues of a European Union that would
"sustain globalization while controlling it and protecting
from it." In the run-up to presidential elections, many
French economists with whom Sarkozy consulted, including
pro-market thinkers Elie Cohen and Jean-Paul Fitoussi, told
him that France's challenge lay partly in the "absence of
an economic and industrial policy."


3. (SBU) What they meant was largely a perceived lack of
coherence in the government's approach to encouraging
innovation and R&D. This diagnosis was in line with a
clutch of French parliamentary and government-sponsored
reports published since 2005 (including by the UMP's
committee on "industrial voluntarism"). Among them, a 2005
report authored by former St. Gobain Chairman Jean-Louis
Beffa, at the behest of Jacques Chirac, recalled that many
of France's successes -- aerospace, nuclear engineering,
electronic components -- were the result of a "triptych of
public research, public enterprise and public procurement."
Beffa's report concluded nonetheless that such an approach
was no longer appropriate. But the nostalgia was barely
concealed, and the conclusion -- that well-targeted
government intervention, particularly in favor of
innovation, is critical to maintaining France's industrial
fabric - informs Sarkozy's calls for a "multifaceted
industrial policy" that can deliver both "growth and
legitimacy."


4. (SBU) Sarkozy broached industrial policy issues during
the Paris Air Show on June 23. Speaking before the
management of the European Aeronautic Defense and Space
Company (EADS),he restated the need for a "real European
industrial policy" founded on the principle of "reciprocity
and common European interests," rather than one
"subordinateQ to competition policy. He pointed to the
economic decline of Europe, arguing that if present trends
continued, in 20 years the average U.S. citizen would be
twice as rich as the average Frenchman. Implying that the
public sector's role in promoting industry (through R&D
spending, support for small business and other measures)
was partly responsible for the performance gap, Sarkozy
said that France and Europe should implement industrial
policy "with the same freedom of interpretation as that
which our American, Chinese, Indian or Brazilian friends
allow themselves."

Alstom and Sanofi as Precedents
--------------


5. (C) Sarkozy's industrial policy combines support for
innovation with a willingness to intervene when he believes
he better understands what's right for France and its
economy than does the marketplace. He undoubtedly sees
Alstom's return to strong profitability following the 2004
GOF bailout of the company (while he was Minister of
Finance) as vindication of his approach. (Never mind that
conditions imposed by the EC forcing Alstom to sell off
assets and open itself up to cross-border partnerships were
at least as critical to the company's long-term health as

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the injection of state cash.) And his apparent success in
helping convince Sanofi to sweeten its hostile takeover bid
of Aventis in 2004 to create a French national
pharmaceutical champion is likely to have further confirmed
him in his instincts for using the political process to
shape outcomes, quickly.


6. (C) Sarkozy may be driven by a more expansive definition
of market failure (one that includes a healthy dose of
Gallocentrism) than many of his EU counterparts; but the
risks to France's -- and the EU's -- competitive
environment should not be exaggerated. Sarkozy is unlikely
to embark on what he knows would be a futile frontal
assault on EU competition policy. He will choose his
battles carefully, and is likely to intervene only when he
believes he is not leaning into a heavy wind. A reprise of
the rhetorically-charged flap over the 2006 Mittal/Arcelor
marriage, when shareholder interests were strongly at odds
with initial French (and other European) government views,
is unlikely. In an early test (admittedly mild, given
that thorny questions over the shareholder's pact were not
in play) Sarkozy came down in favor of a more streamlined
commercially-viable management structure for EADS, even
though it puts Toulouse-based Airbus under the control of a
German.


7. (C) On the other hand, the Sarkozy government displays
no more enthusiasm for liberalization of the energy sector
than did its predecessor. The prevailing view is that
strong integrated companies are required to deal with
cartel-like suppliers, and ultimately offer consumers a
better deal. Reports that EC Competition Commissioner
Neelie Kroes has opened procedures against EDF for its
long-term low-cost power contracts with French industry
will only confirm the Sarkozy government in its thinking
that Brussels focuses excessively on the theoretical
benefits of competition. It is not surprising that one of
the more prominent rumors here has the Sarkozy government
pursuing a buyout of Siemens' stake in nuclear giant Areva,
with the long-term goal of encouraging an Areva-Alstom-
Bouygues tie-up and creation of French power plant
construction champion. The rumors are unconfirmed, and the
project may be a bit ambitious even for this government,
but the scenario is consistent with Sarkozy's modus
operandi.

Fault Lines in the Government?
--------------


8. (C) While Sarkozy clearly has his own well-formed views
on the subject ("It is not a right of the state to help
industry, it's a duty," he said as Finance Minister in
2004.),as on many subjects he has surrounded himself with
advisors who will offer conflicting views. Sarkozy's
Secretary of State for Enterprise and Foreign Trade, Herve

SIPDIS
Novelli, comes from the liberal wing of the UMP and in 2006
was openly critical of Sarkozy's anti-ECB, "EU must tame
the market" rhetoric. Novelli has established his own
Council of Entrepreneurs that will meet for the first time
in September to help inform work on a law on the
modernization of the economy (to be prepared for spring
2008). The law will focus on improving the business
environment and promoting exports. Elysee officials tell
the Embassy that Sarkozy Chief of Staff (Secretary General)
Claude Gueant is also firmly in the liberal camp of
advisors.


9. (C) But sitting on the opposite side of Sarkozy's office
from Gueant, Special Advisor (and former campaign
speechwriter) Henri Guaino will undoubtedly encourage the
president to maintain an expansive view of the state's role
in the economy. Guaino, who oversaw France's Commissariat
General du Plan in the 1990s (the now defunct organization
that in its heyday implemented the GOF's five year plans),
has on numerous occasions lamented Brussels' intrusion on
the French model of public service. Following energy
market discussions at the 2002 EU Barcelona summit, Guaino
complained of a "dominant (EU) ideology" that sees
competition "as the solution to all problems and that is
always efficient, even when, as in the case of electricity,
it is not true."


10. (SBU) At the time Guaino complained that the "ideology
of competition" had taken hold of European institutions
"from the very start." France was "paying the price" for
having ratified treaties and texts that enshrined the
principles of competition, but which called into question
France's notion of public service. Guaino said (in the
context of power sector liberalization) there was no going

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back on competition issues, and "no choice" but to assume
the consequences of those decisions and "do as much as
possible to ensure that we lose as little as possible."
More recently, asked in a July 22 interview with Le Monde
whether he "didn't like competition," Guaino said it was
critical not to create a false opposition between markets
and the political process. Even the "most liberal
economies" were a mixture of "organization and market."
The most effective approach involved a successful marriage
of public sector strength and private initiative, he said,
citing the United States and Japan as examples.

Marching Orders to Minister Lagarde
--------------


11. (SBU) For now many aspects of Sarkozy's industrial
policy remain amorphous. His July 11 "letter of mission"
outlining priority foreign economic policy objectives for
his Minister of Economy, Finance and Employment, Christine
Lagarde, dealt largely in generalities (in contrast to the
domestic portion of the letter, which went into
considerable detail). Sarkozy tasked his minister with
improving France's international competitiveness by
rationalizing tax policy. Lagarde was asked to generate a
policy of economic intelligence to develop and reinforce
French centers of research and development, and to
encourage the excellence of its financial centers. The
president wrote that "it is in improving the quality of our
products that we will conserve our industry, improve our
trade balance and increase our purchasing power." Lagarde
is to work with EU partners in developing an industrial
policy and boosting R&D efforts that help to retain
industry. And she is to develop measures to encourage
"popular shareholding" so that the French can "own their
largest companies and multinationals."

Next steps
--------------


12. (SBU) Sarkozy has asked former Foreign Affairs Minister
Hubert Vedrine to prepare a report by mid-September on
France's - and the EU's -- role in the world, to include
concrete initiatives that "reflect (France's) ideals,
values, as well as better defend (her) interests." At the
same time, Sarkozy's UMP party has appointed National
Assembly member Bernard Carayon to head a new Committee on
Globalization. Vedrine has been described by former
Socialist Minister of European Affairs Pierre Moscovici as
a "protectionist." As for Carayon, whose thinking on
industrial strategy underpinned the government's policy of
"economic patriotism," he has called for an end to French
and European "masochism" which benefits "our competitors in
the name of dogmatic and naove liberalism."

U.S. Interests
--------------


13. (SBU) Despite the rhetoric, U.S. business in France is
relatively sanguine about Sarkozy's policy line. In a
recent meeting with visiting U/S Reuben Jeffery, AmCham
members focused more on the potential upside of Sarkozy's
domestic reform agenda than the pitfalls of the president's
"political voluntarism." Managing Director of KKR France
Jacques Garaialde told Jeffery that French political
interest in his firm continued unabated, but that the focus
was not so much on the flag of the capital but rather on
the impact of investment on management and jobs. Garaialde
noted that KKR had recently taken a majority stake in the
French Yellow Pages with barely a hiccup.


14. (SBU) Goldman Sachs Managing Director Jean Raby echoed
those views, saying he expected Sarkozy to proceed
pragmatically. "If Sarkozy looks back on Alstom, he could
probably conclude that it turned out quite well." But the
president would be unlikely to wade into deals where he
couldn't be assured of success, he thought. Raby
acknowledged a strong political interest in the "kind" of
capital behind certain investments in France, an interest
that had been made explicit during the MittalQakeover
(Goldman officials, as bankers to Mittal, had testified
before the French Senate on that deal). While he thought
there was a continuing naivete in the French political
class about the long-term benefits of unimpeded capital
flows generally, he did not think the Sarkozy government
would be a step backwards for U.S. interests.

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


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15. (C) Sarkozy's efforts to loosen the rigidities in the
French system -- assuming they don't get watered down --
may, over time, create the kind of dynamic economy that
could weaken the political appeal of interventionism. In
the nearer term we can expect inherent tension as Sarkozy
bumps up against the strictures of competition policy, and
pushes the envelope with his EU partners on issues ranging
from the exchange rate to "economic government." We have
an interest in how these issues play out, but our EU
partners will be better-positioned to engage directly. We
would do well to quietly encourage Sarkozy's efforts at
reform, while paying careful attention to ensuring that any
GOF efforts to create a more muscular industrial policy do
not set back the global investment environment.

PEKALA