IS THE FRENCH MODEL REALLY BACK?

C O N F I D E N T I A L PARIS 000236 E.O. 12958: DECL 2/13/19 TAGS: ECON ETRD PGOV FR SUBJECT: IS THE FRENCH MODEL REALLY BACK? REF: Paris 212 Classified by EMIN Seth Winnick for reasons 1.4 (b) and (d) 1 (C) Summary: There is a strong undercurrent of Franco-European triumphalism in the almost daily "economic crisis: what went wrong?" conferences that inform public debate here. But despite the rehabilitation of the "French model" -- and the near-giddiness of some in and out of government trumpeting the return of the State -- when the bottom is found the pendulum may swing in the opposite direction. Increasing corporate wariness over the state's heavy-handed role, an air of skepticism about the government's ability to pull the economy out of crisis, and a (possibly not unrelated) rise in entrepreneurial activity suggests there may be a limit to the attraction of the interventionist model. The current crisis may have diminished U.S. economic credibility on some issues here, but there continues to be an undercurrent of support for developing an environment for private sector business creation. End summary. Putting Up With Interventionism - - - - - - - - - - - - - - - - ¶2. (C) French business has been publicly supportive of Sarkozy government efforts to cope with the crisis, and in fact may have little alternative. But the deputy director of French business federation MEDEF, Jean-Charles Simon, told us recently the business community is chafing at the heavy-handedness of conditions imposed on headline support measures. GOF support for the automobile industry, formally announced on February 9 (reftel),will bring the government into a micro level of corporate decision-making. The tension has been strongest at PSA-Citroen, Simon said, a traditionally family-owned business with little experience with the State as shareholder. According to Simon the Elysee has told the firms the GOF will have to approve the companies' operational plans, strategy, models, and even marketing plans. This is in addition to the more general commitments not to close plants in France for five years, or to lay off workers. ¶3. (C) The GOF's recently-announced Strategic Investment Fund includes a host of private sector advisors and board members. But, Simon says, they are largely window-dressing for the real decision-makers who will sit in the Ministry of Finance and at the parastatal bank the Caisse des Depots et Consignations (CDC). According to Simon, one private sector advisor, former Printemps CEO and Rothschild Corporate Finance Board member Laurence Danon, confided that the SIF's initial investments indicate it is more likely to prolong the life of dying industries, rather than bring new, transformative ones to life. ¶4. (C) President Sarkozy's populist calls for policies, such as increased mandatory profit-sharing, also have the potential to exacerbate tensions with the business community. In his February 5 televised interview Sarkozy sharply criticized shareholders' "ridiculous demands for profitability," and suggested a three-way split of profits among shareholders, workers and reinvestment as an appropriate rule-of-thumb. The issue will be discussed during February 18 social consultations at the Elysee between unions and business, with a view to possible enactment of legislation. Response from business has been muted, but one of French academia's few genuinely liberal advocates, University of Paris Professor Pascal Salin, pointed out in a February 10 op-ed that putting a straightjacket on investors' risk-reward calculations risked "undermining capitalism." "When there's no more capitalism, there are no more jobs," he concluded. An Army of Entrepreneurs - - - - - - - - - - - - ¶5. (SBU) Against this backdrop, France's annual gathering of entrepreneurs -- the "Salon des Entrepreneurs" -- attracted a record 70,000 visitors, with Junior Minister of Industry Herve Novelli drawing a standing-room-only crowd of 6,000 to the February 4 opening plenary. Novelli was on hand largely to pitch his "auto-entrepreneur" initiative, a new legal status for small-scale entrepreneurs that simplifies business registration procedures and lowers the tax burden on micro-enterprises (with up to 80,000 euros in annual revenue). The plan has been a hit, with the government having upped its estimates for the number of registered "auto-entrepreneurs" by the end of 2009 from 200,000, to between 300,000 and 400,000. Novelli told the crowd the enthusiastic response shows there is a "credible alternative" to being a wage-earner, that the life of an entrepreneur is "a means of taking your destiny in hand." The "auto-entrepreneur" is a "democratic revolution" that will help end the perceived divide between owners and workers. ¶6. (SBU) Novelli's rhetoric may have edged over the top, but the crush of "salon" visitors clearly had taken his message to heart. Entrepreneurs (and wannabes) wandered a pavilion crowded with exhibitors ranging from software vendors, to banks, to business support organizations, to consultants hawking the next big thing ("selling the self-image," "green," "simple and easy," etc.),taking notes and pitching ideas. Crowds were four-deep at the government's "auto-entrepreneur" stand to learn how to start and register their own businesses. Amid the throngs a director from the Paris Chamber of Commerce's Advancia business school told us he thought the turnout was evidence of an increasingly entrepreneurial culture taking root in France. The crisis -- and ultimately the State's perceived inability to ward it off -- was reinforcing the notion of self-reliance and, he thought, accelerating an entrepreneurial trend underway for several years. ¶7. (SBU) Statistics appear to bear out his observation. Despite the downturn, 327,000 new businesses were created in France in 2008, an increase of 1.8 percent (following a 12.5 percent increase in 2007). And an OpinionWay survey carried out from January 30 to February 5 shows what pollsters say is a "certain pessimism" about the ability of government to respond to the crisis. Asked what the government crisis-response priorities should be, among top responses were "reduce public expenditures," "lower payroll taxes on enterprises," and "lower taxes on individuals." The Metro-Krief Group, which commissioned the poll, concluded the French believe the "recovery will happen through the good health of its enterprises (rather than through government)." ...But We'll Take Your Money - - - - - - - - - - - - - - ¶8. (C) Entrepreneurs at the Salon were happy to call for more State involvement in credit markets. To a skeptical crowd response, financial sector panelists said there was no evidence of a drop in credit available to small business, but rather that banks were "taking more time to make their decisions." The head of French bank Caisse d'Epargne acknowledged the perception of "credit paucity," but claimed that much had come back following various state support initiatives. Conditions were "not normal," but nor were markets "terrorized." Outstanding Caisse credit to enterprises had increased 24 percent in 2008, he claimed (though from a low starting point). But banks must "choose our risk...the sub-prime crisis showed what happens when you don't manage your risk." Rene Ricol, the GOF's "credit mediator" (appointed by President Sarkozy to jawbone banks benefiting from government support into lending) said he had 4400 files under consideration, with over 1000 cases successfully adjudicated. (The MEDEF's Simon dismissed the mediator's position as little more than a gimmick.) ¶9. (C) Comment: After years of being perceived as class laggard, the French are enjoying a moment of intellectual vindication. Aspects of what is popularly perceived as the "French model" -- a substantial social welfare system that cushions downturns, wariness of financial innovation and a reliance on universal banking, and a general distrust of market and self-regulatory mechanisms to address market failures -- will emerge reinforced from this crisis and continue to inform French thinking internationally. But the prospects are poor for long-term success of direct GOF involvement at the micro level of the corporation, and fly in the face of what appears to be a nascent interest among the French for self-employment and start-ups. President Sarkozy is right to hedge its bets by insisting it will move forward with its reform agenda. PEKALA