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Cablegate: French Authorities Bolster the Euro, Encourage

This record is a partial extract of the original cable. The full text of the original cable is not available.

271401Z Sep 05

UNCLAS SECTION 01 OF 02 PARIS 006614

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
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: EFIN ECON PGOV FR
SUBJECT: FRENCH AUTHORITIES BOLSTER THE EURO, ENCOURAGE
INVESTMENT IN FRENCH ASSETS

Refs: A. Paris 5667

B. Paris 5441
C. Paris 6311

1. SUMMARY. Key EU and French authorities are talking up
the euro and the attractiveness of French financial markets
in an effort to increase the attractiveness of France to
foreigners . At a recent event targeting Japanese
investors, officials underlined progress already made by
France, while calling for structural reforms to improve
competitiveness. Despite worries about resurgent French
protectionism, officials know foreign direct investment in
France remains crucial to combat sluggish economic growth
and high unemployment. END SUMMARY

ECB Governor: Euro Has the Potential to Develop
--------------------------------------------- --
2. Four months after the "Non" vote in the referendum on
the European Constitution, which raised questions over the
future of the euro, the Paris Chamber of Commerce and
Industry organized a forum with the French-Japanese Chamber
of Commerce about "the Future of the Euro and the European
Market" to convince potential Japanese investors. In this
forum, European Central Bank Governor (ECB) Jean-Claude
Trichet stressed the euro was a new currency, not just an
average of currencies. He emphasized that the ECB is an
independent institution that manages the euro. It
implements transparent policies, "which is not the case for
all central banks." Transparency and credibility, he
explained, were key factors that "anchor inflation
anticipations to favor a financial environment of low
interest rates."

3. Trichet stressed that seven currencies (the Danish Krone
and six currencies of the ten new EU members) currently
revolve around the euro, a clear example of the euro's
potential. Twenty-seven countries including two observers,
Bulgaria and Romania, are already participating to the ECB
General Council to prepare the future of the euro. He also
reiterated the necessity for strict respect of the EU
stability and growth pact by EU members. In final comments,
Trichet remarked that although more needs to be done in
terms of the euro currency, great progress has already been
achieved.

Treasury: Euro Has Improved the Management of Public Debt
--------------------------------------------- ------------
4. In the same forum, Bertrand de Mazieres, the Head of
France's Treasury Agency ("Agence France Tresor") also
extolled the benefits of the euro on the French economy.
The introduction of the euro has given the French Treasury
access to large, financial markets, which has caused
interest rates to drop, allowing the cost of public debt to
decrease as well. De Mazieres dismissed doubts about the
usefulness and future of the euro and said comments
questioning the viability of the currency should not be
taken seriously.

Euronext: Euro Has Helped the Development of Cross-border
European Transactions
--------------------------------------------- -------------
5. Head of Euronext Jean-Francois Theodore emphasized the
benefits of the euro and the subsequent abolition of
exchange rate risks. Euronext, "the first cross-border
European exchange", resulted from the merger of the Paris,
Amsterdam and Brussels stock exchanges, and has provided
improved access to European funding. Companies can issue
financial assets at lower costs, making using Euronext a
good alternative to banking credit. Euronext has also
offered international investors a large range of financial
instruments products with harmonized regulations and unified
information systems.

6. Theodore cited examples of Euronext's successes: the
addition of the Lisbon stock exchange to Euronext in 2001,
the agreement over becoming sharefolders by 460 Euronext
members, and the acquisition of the LIFFE, the London-based
derivatives market, in 2002. He also mentioned the merger
of Euronext's subsidiary Clearnet with the London Clearing
House in 2003, which has improved efficiency throughout the
European financial community. Theodore indicated that
Euronext had further development plans, but did not provide
any details.

Reforms are Necessary to Develop Potential Growth . . .
--------------------------------------------- ----------
7. In a special message to international investors, notably
the large group of Japanese attending the meeting, Trichet
acknowledged that good monetary policy was a necessary
condition for economic growth and employment, but "of
course, it's not sufficient." Trichet asserted that
structural reforms were necessary to jump-start growth in
the Euro zone. He highlighted the need for labor market
reform and cited the lower rates of productivity in Europe
compared with the United States.

. . . but, France Claims It Has Already Started
--------------------------------------------- --
8. De Mazieres warned that, despite negative comments about
the lack of reforms in France, "a lot has been done." To
support this assertion, he cited the pension reform in OECD
countries, the forthcoming implementation of health
insurance reform, and the increase in entrepreneurship.

9. Similarly, Clara Gaymard, the Chairman of the Invest in
France Agency (Agence Francaise pour les Investissements
Internationaux - AFII) remarked that comments about the lack
of reforms in France continued despite real progress the
Government has already made. She listed corporate tax cuts,
more flexible labor regulations to facilate lay-offs, and
new hiring contracts which limit minimum lay-off procedures
for companies of less than 20 employees as key reform
measures that had already been undertaken. Gaymard also
called attention to the steps taken to enhance innovation
and competitiveness, including the creation of 67 industrial
poles of competitiveness. She also suggested new measures to
encourage foreign study in France.

10. Gaymard disagreed with "generally accepted" criticisms
of France, such as a shortage of engineers, low
productivity, high cost of labor, high cost of living, and
protectionism. To respond to critics, she stressed the
presence of a qualified labor force, higher productivity in
France than in the U.S in 2004, and relatively low labor
costs. She praised the safety of foreign investment in
France, which is proctected by effective patents and
regulations. She noted that many companies had made
significant investments in France during 2004, notably:
Astrazeneca, Atmel, General Motors, Kinnevic, LG Electronics
inc, Philips Semiconductors and Siemens. She dismissed
notions of protectionist tendencies by stating that France
is the second country after China to attract foreign direct
investment.

Comment
-------
11. In this forum, French authorities sought to bolster
confidence in the euro and its potential, in order to
promote foreign investment in French financial assets. The
officials seem not to have noticed the contradictions in
their pronouncements as the government seeks to both protect
(ref B) strategic sectors and pretend it has a completely
open investment regime. Despite the inconsistency, all
officials recognize that foreign investment in France
remains absolutely necessary if France is to increase
growth, combat unemployment(ref C), and reduce public debt.

Stapelton

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