Search

 

Cablegate: French Economic Performance and Reform in 2007

VZCZCXRO2495
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #0082/01 0151429
ZNR UUUUU ZZH
R 151429Z JAN 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 1705
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 PARIS 000082

SIPDIS

SENSITIVE
SIPDIS

PASS FEDERAL RESERVE
PASS CEA
PASS USTR
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA


E.O. 12958: N/A
TAGS: ECON ETRD PGOV FR
SUBJECT: FRENCH ECONOMIC PERFORMANCE AND REFORM IN 2007

1. SUMMARY: The scope of Sarkozy's reform agenda remains ambitious,
but despite much jawboning, progress is slow. With weaker than
predicated growth and considerable economic uncertainty, reform
becomes both more important and more difficult. This cable reviews
France's 2007 economic performance and provides an update on
Sarkozy's reforms for 2008. End Summary.

2007 ECONOMIC PERFORMANCE
-------------------------

2. (U) The Sarkozy government is pursuing its economic reform agenda
at a time of softer growth and considerable uncertainty. Initial
estimates indicate that the French economy grew by 1.9 percent in
2007, below the government's forecast of 2 - 2.5 percent. GDP
growth rebounded in the third quarter reaching an annual rate of 3.2
percent (perhaps showing the "Sarko" effect,) but moderated in the
fourth quarter.

3. (U) Domestic demand contributed 2.2 percent to 2007's growth with
household consumption increasing by 2.0 percent. The French
consumer drove the economy in 2007 with purchasing power rising by
an estimated 3.3 percent (compared with a 2.4 percent increase in
2006.) Nominal household disposable income rose 4.8 percent, a half
point boost over the year earlier, while inflation slowed by a tenth
of a point to 1.5 percent. Income tax cuts, and increases in wages,
self-employed income and social benefits supported the rise in
disposable income. Government consumption increased 1.4 percent,
equivalent to 2006.

4. (U) Investment growth slowed (3.9 percent compared to 4.1 percent
in 2006) mainly due to slower household investment (up 1.3 percent
compared to 5.1 percent in 2006). The French were in a wait-and-see
attitude before the presidential elections, anticipating tax credits
on mortgage interest. Corporate investment did better, rising 5.1
percent (est.) compared to 4.6 percent. However, the national
statistical agency, INSEE, detected some year-end weakening in
corporate investment as companies reacted to a more uncertain
environment by increasing capacity utilization in lieu of expansion.

5. (U) The foreign trade contribution to GDP growth in 2007 is
estimated at minus 0.3 percent as import growth (4.5 percent est.)
slowed compared to 2006 (7.1 percent), but remained higher than
export growth (3.6 percent est. compared with 6.3 percent.)
Government analysts blame the weak dollar, soft world demand,
financial market turbulence and oil prices for the
weaker-than-expected performance. France's trade-in-goods deficit
was a record-setting 38 billion euros for the 12 months ending in
November 2007. Though the strong dollar is a favorite culprit,
Trade Minister Novelli has admitted that structural problems in the
French economy are also to blame.

6. (U) Higher oil and agricultural prices pushed inflation to 2.4
percent in December 2007 compared with December 2006, up from 1.5
percent the year earlier. Finance Minister Lagarde expects
inflation to be higher in 2008. Consumer confidence was at a
19-month low in December, reflecting in part growing concerns over
inflation.

7. (U) Unemployment declined to 7.9 percent in the third quarter of
2007 from 8.1 percent in the second quarter. Unemployment has
continued to decline by an average of 20,000 individuals per
quarter, even as economic growth slowed. INSEE estimated that
348,000 jobs were created in 2007 (up from 282,000 in 2006)
concentrated in the first half, and in the service and construction
sectors. INSEE attributes faster job creation to improved growth in
2006 and 2007 combined with slower gains in productivity.

Update on Reforms
-----------------
8. (SBU) Fiscal Reform: The government's just-release estimate of
its summer 2008 tax cut shows significant increases in gift-giving
among relatives and in overtime hours worked (20 million more in
October alone). The impact of mortgage interest and small and
medium-sized companies (SMEs) investment exemptions will be assessed
in August. Finance Minister Lagarde is again weighing tax system
changes, including a possible "social" value-added tax increase to
finance a payroll tax cut.

9. (SBU) Budget Balancing: The GOF started the year with a deficit
target of 2.5 percent of GDP. Stronger than expected performance
pushed the deficit downward despite additional spending and tax cuts

PARIS 00000082 002 OF 003


by the incoming Sarkozy government, which were only partly offset on
both the expenditure and revenues sides. However, slower economic
growth in 2008 may undermine efforts to cut the budget deficit
further or even to hold the final estimated 2007 level of 2.3
percent.

10. (SBU) Shrinking the civil service: The government plans to cut
the size of France's civil service by not replacing one of three
retirees in 2008, and one out of two by 2012. Some 22,800 jobs will
be eliminated in 2008. Civil service unions are demanding wage
increases and an increase in education sector positions, calling a
strike for January 24. Some leftist unions disagreed with the
government on the new missions of the civil service and the payment
of overtime work.

11. (SBU) Rationalizing social security: The government objective
is to reduce the social security deficit to 8.9 billion euros in
2008 from an expected 14 billion euro deficit if no measures are
taken. New limits on reimbursement rates for health procedures were
implemented in January. However, hospital practitioners have
complained about lack of staff and non-payment of overtime and
unused leave backlogs. Health Minister Bachelot is negotiating with
unions on payment of leave days or their transformation into pension
contributions.

12. (SBU) Pension Reform: The government has to plug growing
budgetary gaps in the pension system for private sector workers
(estimated at 4.7 billion euros in 2007, 8 billion euros in 2010 and
43 billion euros in 2020) by extending the length of service. It
also has made a commitment to increase public sector careers to 40
years from 37.5 years starting in 2008. The further lengthening of
qualifying service from 40 years to 41 years in both sectors is on
the government agenda, but not until after the March municipal
elections. The leftist CGT union has showed its opposition in
principle to the extension of the pension contribution period.
Negotiations on the so-called "special regimes" proceeded on a
firm-by-firm and sector-by-sector basis following the strikes of
November. The RATP has finalized an agreement, but negotiations
continue at the SNCF and a strike is likely on January 22. The
current pay-as-you go system for special regimes has a chronic
shortfall (5 billion euros in 2006).

13. (SBU) Labor market: Business initially welcomed the Sarkozy
government's efforts to gut the 35-hour workweek, but have since
complained that the measures are confusing and costly for French
companies. The president has also indicated frustration, but backed
away from his January 8 statement that 2008 would see the end of the
35 hour work week.


14. (SBU) Talks between employers and unions on revising labor
contracts to make hiring and firing easier, and to reform the role
of unions in negotiating sector-wide agreements, have made some
progress, though as of January 11 the CGT has indicated it would not
support the existing compromise. If talks break down, the
government will introduce a draft law in the National Assembly by
early February.

15. (SBU) The president's proposal to streamline assistance to
job-seekers by merging France's national job placement and
unemployment agencies is now before parliament, with the government
hoping the bill will be enacted before municipal elections. Agency
employees have announced a strike to protest the merger.

16. (SBU) Retail Reform: Reform of France's retail market is off to
a bad start. A bill adopted by Parliament on December 20 did not
liberalize price and margin-fixing rules that govern
supplier/retailer relations in France. This does not bode well for
the government's other planned changes in the retail sector this
year. Planned reforms include lifting restrictions on shopping
center construction, allowing retailers to sell at a loss, holding
sales throughout the year (which Minister Lagarde has pushed), and
opening on Sundays.

17. (SBU) Deregulation of the retail sector is proving hard to
achieve due to opposition from big name producers such as Danone,
L'Oreal and other French "champions" determined to maintain the
status quo. In a tactic that has been repeatedly used by this
government in the face of opposition, Prime Minister Fillon has
asked the former head of France's competition authority, Marie
Dominique Hagelsteen, to examine the issue and draft a bill for
parliamentary debate in the spring.


PARIS 00000082 003 OF 003


STAPLETON

© Scoop Media

 
 
 
 
 
World Headlines

 

Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>

ALSO:

Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>

ALSO:

Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>

ALSO: