GOF PUTS GROWTH FRONT AND CENTER

UNCLAS SECTION 01 OF 02 PARIS 003741 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EIND EINV ETRD ELAB PGOV FR SUBJECT: GOF PUTS GROWTH FRONT AND CENTER Summary -------------- ¶1. (SBU) The Sarkozy government has spent the political rentree talking up proposals to stimulate economic growth. Despite the OECD's September 5 downward revision of French growth estimates to 1.8%, the government is maintaining its 2.25% projection. In an August 30 keynote speech to the annual summer conference of the French business organization, MEDEF, Sarkozy said it was incumbent on the GOF to "find" an additional percentage point of growth. Separately, Sarkozy inaugurated a commission chaired by socialist Jacques Attali to look at impediments to growth. So far, there is more form than substance: Sarkozy was the first sitting president to address MEDEF. The forty member Attali commission may not reach agreement on the causes of slow growth but it fits with Sarkozy's broad approach to co-opting the smartest voices of the opposition to his reform agenda. End summary. Sarkozy at the MEDEF -------------- ¶2. (U) In an August 30 speech before 4,000 French business leaders, President Sarkozy said he wasn't afraid of making a clean break with the past ("rupture") and pledged to continue with measures to encourage work and create wealth. It was incumbent on the government to pursue policies that could extract an additional point of GDP growth above current estimates to solve France's problems, he said. Sarkozy said he would pursue fiscal reform, including cutting payroll taxes. In what was interpreted as an allusion to continuing debate over replacing some payroll taxes and "social charges" with a VAT hike (the "social VAT"),Sarkozy noted that continually increasing taxes on factors of production was harmful to growth. ¶3. (U) Hitting back at critics who say his program is little more than demand-side stimulus, Sarkozy underscored his intention to focus on supply-side measures, including broadening a previously announced R&D tax credit, and measures to encourage investment in small and medium-sized enterprises. Sarkozy emphasized digital, biotech and clean energy as priority sectors for France. In a general call for labor market reform Sarkozy asked why in France a husband and wife can have an amicable divorce, but an employer and employee cannot. He also confirmed that the separate French agencies dealing with unemployment insurance and job placement/training would merge before the end of the year to improve functioning of the labor market. And he touched on product market reform, suggesting that stores be allowed to open on Sundays. ¶4. (U) In vintage form, Sarkozy mixed his pro-business message with a dose of populism. He supports a capitalism of entrepreneurship, he said, not of finance and speculation. Drawing almost word for word from earlier speeches, Sarkozy said "reciprocity" should guide the EU's foreign economic relations. France could not abide "social, monetary and environmental dumping." The EU was created to protect, not to leave Europeans more vulnerable. Sarkozy also stepped up his criticism of exchange rate policy, saying the euro "should serve the economy." To much applause, he said he would fight in Brussels and at the WTO for "an American-style Small Business Act" for Europe. (Note: In a subsequent panel discussion EU Trade Commissioner Peter Mandelson pushed back forcefully against Sarkozy's suggestion that Europe had suffered from openness, noting that the EU's position on world markets was stronger than ever.) Impediments to Growth -------------- ¶5. (U) Sarkozy's intervention at the MEDEF followed his August 30 inauguration of a 40 member commission to look at how best to remove hurdles to growth. Headed by socialist Jacques Attali, the commission includes a wide array of French and EU personalities ranging from former EU Competition Commissioner Mario Monti (much decried by Sarkozy during the negotiations over French state aid to engineering firm Alstom) to neurologist Boris Cyrulnik. The new commission will focus on the growth of very small and small businesses and will make proposals to allow Sarkozy to "go out and get" the point of growth France needs. The proposals will help inform a law on the modernization of the economy, to be presented to the National Assembly in spring 2008 and tipped to address competitiveness and product market reform issues. Reducing Government -------------- ¶6. (U) Sarkozy, PM Francois Fillon and Finance Minister Christine Lagarde have been equally active in priming plans for reform of the state and cuts to the civil service. PM Fillon told the annual gathering of French Ambassadors that France's 2008 budget would be marked by an "unshakeable will" to hold the line on public expenditures. Finance Minister Lagarde subsequently called the GOF's plans for public sector reform an "austerity program," comments which were pounced upon by the opposition and unions and "clarified" by the Elysee. PM Fillon subsequently said the government had no choice but to reduce expenditures, that the GOF would do so by introducing a plan to improve the efficiency of state institutions and cut the number of civil servants progressively. PARIS 00003741 002 OF 002 Comment -------------- ¶7. (SBU) The Sarkozy government got off to a quick start in pursuing its economic policy agenda with passage of a "fiscal package" of tax measures in July. The demand-side stimulus of those measures may well give a kick to French growth in the near-term. But the harder reforms lie ahead. Reigning in state spending, loosening the labor market and opening product markets will offend entrenched constituencies. For now much of the action on these issues has been turned over to "social partners" (in the case of labor market reform negotiations),or to broad-based commissions. Crunch time will come when those efforts come to a term and it's up to the government to take the hard decisions. Stapleton