FRANCE'S EVOLVING INDUSTRIAL POLICY

UNCLAS SECTION 01 OF 04 PARIS 000493 SENSITIVE SIPDIS STATE FOR EB and EUR/WE E.O. 12958: N/A TAGS: ECON EIND EFIN ETRD PREL FR SUBJECT: FRANCE'S EVOLVING INDUSTRIAL POLICY NOT FOR INTERNET DISTRIBUTION REF: A) Paris 0287 B) Paris 212 C) Paris 0334 D) Paris 236 ¶1. Summary: President Sarkozy's domestic and European industrial policy objectives reflect a blend of political Gaullist traditionalism and results-oriented economic strategy. Sarkozy defends "France's grandeur" through a vision of strategic sectors for which he shuns foreign capital at home but solicits competitive alliances abroad. Evidence may weigh against the efficiency of interventionism, but the French have managed a sufficient number of successes (trains, nuclear plants) to embolden those who argue the point. Still, a growing constituency, including in the Ministry of Finance, is working to focus government policy on boosting competitiveness rather than saving dinosaurs. End summary. The Appeal of Industrial Policy During a Crisis -------------- -- ¶2. (SBU) Per reftels, the economic crisis has sharpened French interventionist reflexes. In November 2008 President Sarkozy established the Strategic Investment Fund (FSI),touted in some circles as a French Sovereign Wealth Fund. Representatives of the 20 billion euro venture capital fund tell us the FSI's public mission is accomplished solely through its goal of investing for the medium and long-term. While they and other supporters downplay the defensive aspect of the Fund, initial investments in Daher, a family-held maker of equipment for the airplane, nuclear, defense, and auto industries, the car equipment manufacturer Valeo, and purchase of a blocking minority position in Korean-owned Chantiers de l'Atlantique shipyard, suggest expectations for medium to long-term returns track closely with the GOF's vision of maintaining France's industrial fabric. ¶3. (U) Other GOF crisis measures designed to save French industry are potentially one-off affairs, but do little to force serious restructuring. They include a 9 billion euro aid package for France's auto sector (ref B),trade financing for the aeronautic sector (ref C),and a variety of measures designed to boost financing to small and medium- sized enterprises. The GOF did introduce re- training/job transition assistance in its auto industry package, though such measures have taken a back seat to more highly-visible calls for companies to maintain employment in the sector. Industry is Strategic -------------- ¶4. (SBU) State intervention is frequently aimed at keeping the industrial base of "strategic sectors" the definition of which can be difficult to pin down -- in French hands. "We are not talking about subsidizing failing companies, but of stabilizing companies that could become prey for predators," Sarkozy said in a December 4 speech on launching France's economic stimulus plan. This argument is not new to the GOF. In 2005, Prime Minister Dominique de Villepin quietly published a decree listing 11 industrial sectors to be protected on grounds of national security. The list, which Sarkozy described earlier this year as "complicated," ranges from antiterrorist biometric technology to casinos. The decree, known as Villepin's "Danone Law" was prompted by PepsiCo's reported bid for Danone. At the time it was labeled "economic patriotism" and struck a deep national chord. The "yogurt as strategic sector" vision is frequently ridiculed here as Gaullism gone awry, but in an era of liberalized capital flows, political sensitivities remain remarkably attuned to the flag of capital. ¶5. (SBU) Sarkozy often emphasizes that "France's industrial heritage is a strategic asset" which must be preserved and prevented from further erosion; he noted in a November 2008 speech at Daher that 730,000 industrial jobs were destroyed between 1995 and 2003. Sarkozy has long advocated a forceful industrial policy on the grounds that "once the PARIS 00000493 002 OF 004 factories go, everything goes" and that France should remain a global player and not become "a simple tourist reserve." If France loses its industrial base Q cars, ships, trains, planes - it will be "ready to lose its services as well," he said at Daher. and innovative -------------- ¶6. (SBU) But in a 2007 speech shortly after his election Sarkozy also emphasized a less-Gaullist vision for how the State should pursue industrial policy. Industrial policy is "mostly about promoting innovation, especially in the nuclear, aeronautics and space sectors," he said. Strategic companies have skills, technology, and jobs that are "irreplaceable for France." Laurent Cohen-Tanugi, French industrial policy expert and author of a recent GOF-commissioned report on France's progress on the EU's Lisbon Agenda, told us recently the economic crisis has given new impetus to promoting a knowledge-based economy. In tune with the Lisbon strategy, the GOF has spurred efforts to boost France's competitiveness through regional networks of innovative PMEs. President Sarkozy has placed an emphasis on tying support to performance with such policies. And marching orders for the newly-minted Strategic Investment Fund underscore the priority given to targeting economically-viable SMEs in strategic industrial sectors that offer "future growth" opportunities. Promote R&D, SMEs and Cluster Development -------------- ¶7. (SBU) Sarkozy has tripled (to 30 percent) the so-called Research Tax Credit (CIR),which provides tax breaks to support corporate R&D investment. This tax incentive amounted to 1.5 billion euros in 2007 and 4 billion euros in 2008. As part of a French-style "Small Business Act," Sarkozy's major economic bill (the 2008 economic modernization law) reserved, on a five-year experimental basis, 15 percent of all high-tech public procurement to SMEs. ¶8. (SBU) President Sarkozy has also renewed emphasis on France's three-year old system of "competitiveness clusters." In a nice juxtaposition of Lisbon with Gaullism, the cluster strategy aims to strengthen technological expertise and bolster economic growth, while reducing outsourcing and combating "deindustrialization." The cluster strategy is based on the now-common assumption that proximity can be an innovation multiplier among industry, public/private research centers, and training organizations who work as partners on a common domain. The cluster strategy underscores local, rather than top-down, coordination; but it is the GOF that has orchestrated their formation and cooperation. The GOF tool kit for cluster promotion includes state-sponsored venture capital funds, training programs, business advisory services, and research and development programs. When President Sarkozy announced phase II of the cluster policy in 2008, he stressed direct public financing to the 71 clusters would be conditional upon efficiency requirements, including commercial viability. Sarkozy: The Deal Breaker, the Deal Maker -------------- ¶9. (SBU) President Sarkozy's occasionally- conflicting industrial policy in part reflects his claim that his "only ideology is pragmatism." However, a remark to Alstom factory workers in February that he is an economic "nationalist", rightfully defending French industrial interests and jobs, may have been more revelatory. Sarkozy will use whatever tools he believes most effective in pursuit of that goal. And when he thinks the market has failed Q a fairly low-set bar here that the current crisis will bring down an additional notch or two -- he will not hesitate to wade into the fray. ¶10. (SBU) Sarkozy has referred to his oft-cited battle with the EU Commission over a 2004 GOF bailout of Alstom as evidence of the positive role the State can play as a long-term investor. (Alstom recovered and the GOF later sold its stake for a PARIS 00000493 003 OF 004 profit.) In early 2008 Sarkozy again raised Alstom when he obtained from Lakshmi Mittal a commitment to invest 30 million euros in ArcelorMittal's Gandrange site, and 10 million euros for technological development and training programs. And in 2007 Sarkozy personally stepped in to prevent the planned merger between state-owned Gaz de France and the Franco-Belgian Suez group from collapsing. The deal created the world's third-largest listed power and gas company and successfully kept Italian company Enel, which had expressed interest in Suez, at bay. Doing the President's Bidding -------------- ¶11. (SBU) Informed observers say the President and his immediate staff (to date primarily economic advisor, Francois Perol, who recently left to become the CEO of the newly-merged Banque Populaire/Groupe Caisse d'Epargne bank) keep a tight grip on major deals involving partially state-owned enterprises. A former member of Perol's team told the press that when Perol and his Elysee successor, Xavier Musca, worked together at the Finance Ministry, they delegated little and showed minimal professional trust beyond a small coterie of officials. Sarkozy's Gaullist instincts are undoubtedly reinforced by advisor/speechwriter Henri Guaino (septel),a former French government "Planning Commissioner" who by most accounts drafts the President's soaring rhetoric on the role of the State in industrial policy. ¶12. (SBU) Sarkozy's industrial policy is not always supported by those it's designed to help. Economist and occasional Sarkozy advisor Elie Cohen told us the President blocked Siemens' ambitions in state- owned nuclear energy giant Areva in favor of a potential merger with Alstom, something Areva CEO Anne Lauvergeon opposes. Total was favorable to Sarkozy's move to give the company a stake in France's second EPR investment, the company tells us, but expressed some reservations about participation in a possible Areva recapitalization the President is pushing. Sarkozy's memorandum of understanding with Libya on nuclear development also made industry somewhat "uncomfortable", said Pierre Randenne of the French Green Party's Energy Commission, because doing business there could compromise commercial strategy and security, he thought. Influencing Europe -------------- ¶13. (SBU) France's relations with the EU on industrial policy can be awkward. Early in his presidency, Sarkozy took frequent aim at what he saw as overzealous enforcement of EU competition policy rules, indirectly blaming the EU's alleged liberal bias for France's "no" vote in the 2005 referendum on the EU constitutional treaty. He proposed a system of "European preferences" to "protect (Europe's) products, its companies, and its markets" and advocated a European-wide industrial policy to strengthen the EUQs economic competitiveness. Citing the dramatic comeback of European steel, he has pressed for "grand European champions" in transportation, high-speed rail, nuclear energy, aeronautics/space, defense electronics, pharmaceuticals, agro-food, and shipbuilding, all areas in which France excels. But despite the rhetoric, from Areva/Siemens to GDF/Enel it is clear the creation of European champions should not come at the expense of French control. ¶14. (SBU) Comment: It would be a mistake to believe that Sarkozy wants to (or can) turn back the clock on the French model. Current circumstances will reinforce interventionist instincts, but they will not undo decades of liberalization of the French economy (the GOF sold 87 billion euros in assets between 1986 and 2005). And even in economic crisis, Sarkozy has been conspicuously absent at times, including with Airbus' decision on outsourcing to India, Continental and Sony French plant closures, or in response to Budget Minister Eric Woerth's call for Total S.A. to make a "social gesture" regarding its unprecedented 2008 profits. Interventionist rhetoric and occasional high-profile activism in "strategic" parts of the economy will PARIS 00000493 004 OF 004 continue to capture headlines, but the long-term health of the French economy depends on the kind of structural reforms candidate Sarkozy promised. That the government insists it will press forward with its reform agenda in the face of increasingly-vocal opposition from the French street, indicates that it knows this. PEKALA