Is France closing for business?
Arnaud Montebourg, a member of the French parliament, has a problem with the iPhone. He thinks consumers in France should pay more for it than they already do. Why? Because, he says, the iPhone is made by “exploited” laborers in China who are taking away the jobs of French workers and the best way to redress that is by putting in place trade barriers and taxes that will stop “excessive imports.”
Then there’s Renault in Morocco. When the French automaker opened a new factory in Tangiers in February, Montebourg decried the move as “a humiliation for French industry,” because Renault hadn’t built the plant in France even though the French state is an important shareholder.
Montebourg’s protectionist stance – he calls it “deglobalization” – is well known in his native France, but now he’s unleashing it on the world. In the new Socialist government, Montebourg is the “minister for productive recovery,” a job whose precise perimeter remains hazy but that appears to cover large swaths of industry and commerce. His first official statement was an announcement that he intends to lean on companies including Shell, ArcelorMittal, Unilever and Peugeot, that are planning to close facilities or lay off workers in France.
It’s still too early to tell how adept President François Hollande will be in steering the French economy through these difficult times, but already there are some early indications – including the appointment of Montebourg – that the business climate in France may be about to change for international companies.
France remains one of the world’s largest recipients of direct foreign investment, and international companies play a prominent role in the French economy, employing more than 2 million French workers and accounting for about one-third of the nation’s exports. Over the past decade, successive governments in Paris have worked hard to burnish the nation’s reputation as a business-friendly place – even as opinion polls continue to show a high degree of skepticism among the French public about the benefits of globalization. The efforts have paid off: Foreign direct investment into France in 2011 totaled $40 billion, according to UNCTAD. While that’s less than half the amount it received in the peak years of 2006 and 2007, it was an increase of 10 percent from 2010 despite the financial crisis, and kept France in the world’s list of top 10 FDI recipients.
France’s rich cultural life is an obvious draw, but over the past few years a range of fiscal and other measures have been put in place that are aimed at attracting foreign business. They include a tax credit for research and development expenses covering up to 40 percent of the amount invested; it ranks as the most generous in Europe.
The wind is now changing. Hollande was voted into office on a platform that is substantially less business-friendly than that of other left-leaning European leaders before him, including Britain’s Tony Blair or Germany’s Gerhard Schroeder, let alone his two conservative French predecessors, Nicolas Sarkozy and Jacques Chirac.
Significant tax increases are high up on Hollande’s agenda, with the first ones expected already this summer. Corporations and individuals will both be affected. The full details have yet to emerge, but it’s already sure that income taxes for senior managers will rise quite sharply. A new marginal income tax rate of 45 percent will be introduced for income above the threshold of 150,000 euros, and all earnings over 1 million euros will be taxed at a marginal rate of 75 percent. Corporate tax bills will also be going up, and a slew of tax breaks will be eliminated. It remains to be seen if any of the measures specifically put in place to attract foreign business will be targeted.
Another of Hollande’s early decisions is also revealing. This one is an omission: The new government does not include a state secretary specifically charged with overseeing foreign trade. This post, attached to the Ministry of Finance, ensured that foreign investors had a clearly identified person with a voice in the policy deliberations. Among those who have held the job are Christine Lagarde, who went on to make a career as finance minister and now serves as the director general of the International Monetary Fund. But in the first Hollande administration, there is no foreign trade post. Its responsibilities have simply been folded into the numerous other portfolios of Finance Minister Pierre Moscovici. That decision brought a rebuke from the last person in the job, Pierre Lellouche. “I’m astonished that there’s no minister in charge of this portfolio in a country confronted by the challenges of globalization and 20 years of trade deficits,” he said.
But it’s the presence of Montebourg in the new government that is causing the most concern in the foreign business community. “He’s scaring everyone,” says one highly placed official at an international Chamber of Commerce, too nervous to be named. During his election campaign, Hollande talked frequently about the need to “re-industrialize” France, and Montebourg’s brief is to bring that about. How he intends to do that remains to be seen, but it’s already evident that he believes companies should not be allowed to shutter operations or lay off staff if the business is deemed to be “viable.”
As one international lawyer, Jean Martinez of Hogan Lovells in Paris, pointed out in an opinion piece in Le Monde this week, “restructuring is a normal economic practice and indispensable for the competitiveness of companies.” French governments have long railed against plant closings, as the Mittals and others have long since discovered. But if closing or reducing operations in France becomes impossibly difficult, then that could act as a major disincentive for companies to invest in the first place. France would risk becoming the Roach Motel of FDI, the place you can invest in but from which you can never check out.
Montebourg, for one, doesn’t seem to mind. “It’s not consumers who should be governing our country,” he told a German newspaper before the election. France and Europe should stop being such wimps on trade issues, he added. “In the U.S. there are 300 million consumers and they are ultra-protectionist, like the Chinese, the Indians, Canada and the main Latin American countries. All countries practice protectionism, except for the Europeans, unfortunately.”
PHOTO: Arnaud Montebourg, France’s newly appointed minister in charge of industrial renewal, arrives to attend the first Cabinet meeting of the new government at the Elysée Palace in Paris, May 17, 2012. REUTERS/Regis Duvignau