Cablegate: Gof Puts Growth Front and Center

DE RUEHFR #3741/01 2530606
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E.O. 12958: N/A

1. (SBU) The Sarkozy government has spent the political rentree
talking up proposals to stimulate economic growth. Despite the
OECD's September 5 downward revision of French growth estimates to
1.8%, the government is maintaining its 2.25% projection. In an
August 30 keynote speech to the annual summer conference of the
French business organization, MEDEF, Sarkozy said it was incumbent
on the GOF to "find" an additional percentage point of growth.
Separately, Sarkozy inaugurated a commission chaired by socialist
Jacques Attali to look at impediments to growth. So far, there is
more form than substance: Sarkozy was the first sitting president to
address MEDEF. The forty member Attali commission may not reach
agreement on the causes of slow growth but it fits with Sarkozy's
broad approach to co-opting the smartest voices of the opposition to
his reform agenda. End summary.

Sarkozy at the MEDEF
2. (U) In an August 30 speech before 4,000 French business leaders,
President Sarkozy said he wasn't afraid of making a clean break with
the past ("rupture") and pledged to continue with measures to
encourage work and create wealth. It was incumbent on the
government to pursue policies that could extract an additional point
of GDP growth above current estimates to solve France's problems, he
said. Sarkozy said he would pursue fiscal reform, including cutting
payroll taxes. In what was interpreted as an allusion to continuing
debate over replacing some payroll taxes and "social charges" with a
VAT hike (the "social VAT"), Sarkozy noted that continually
increasing taxes on factors of production was harmful to growth.
3. (U) Hitting back at critics who say his program is little more
than demand-side stimulus, Sarkozy underscored his intention to
focus on supply-side measures, including broadening a previously
announced R&D tax credit, and measures to encourage investment in
small and medium-sized enterprises. Sarkozy emphasized digital,
biotech and clean energy as priority sectors for France. In a
general call for labor market reform Sarkozy asked why in France a
husband and wife can have an amicable divorce, but an employer and
employee cannot. He also confirmed that the separate French
agencies dealing with unemployment insurance and job
placement/training would merge before the end of the year to improve
functioning of the labor market. And he touched on product market
reform, suggesting that stores be allowed to open on Sundays.
4. (U) In vintage form, Sarkozy mixed his pro-business message with
a dose of populism. He supports a capitalism of entrepreneurship,
he said, not of finance and speculation. Drawing almost word for
word from earlier speeches, Sarkozy said "reciprocity" should guide
the EU's foreign economic relations. France could not abide
"social, monetary and environmental dumping." The EU was created to
protect, not to leave Europeans more vulnerable. Sarkozy also
stepped up his criticism of exchange rate policy, saying the euro
"should serve the economy." To much applause, he said he would
fight in Brussels and at the WTO for "an American-style Small
Business Act" for Europe. (Note: In a subsequent panel discussion
EU Trade Commissioner Peter Mandelson pushed back forcefully against
Sarkozy's suggestion that Europe had suffered from openness, noting
that the EU's position on world markets was stronger than ever.)

Impediments to Growth

5. (U) Sarkozy's intervention at the MEDEF followed his August 30
inauguration of a 40 member commission to look at how best to remove
hurdles to growth. Headed by socialist Jacques Attali, the
commission includes a wide array of French and EU personalities
ranging from former EU Competition Commissioner Mario Monti (much
decried by Sarkozy during the negotiations over French state aid to
engineering firm Alstom) to neurologist Boris Cyrulnik. The new
commission will focus on the growth of very small and small
businesses and will make proposals to allow Sarkozy to "go out and
get" the point of growth France needs. The proposals will help
inform a law on the modernization of the economy, to be presented to
the National Assembly in spring 2008 and tipped to address
competitiveness and product market reform issues.

Reducing Government

6. (U) Sarkozy, PM Francois Fillon and Finance Minister Christine
Lagarde have been equally active in priming plans for reform of the
state and cuts to the civil service. PM Fillon told the annual
gathering of French Ambassadors that France's 2008 budget would be
marked by an "unshakeable will" to hold the line on public
expenditures. Finance Minister Lagarde subsequently called the
GOF's plans for public sector reform an "austerity program,"
comments which were pounced upon by the opposition and unions and
"clarified" by the Elysee. PM Fillon subsequently said the
government had no choice but to reduce expenditures, that the GOF
would do so by introducing a plan to improve the efficiency of state
institutions and cut the number of civil servants progressively.

PARIS 00003741 002 OF 002

7. (SBU) The Sarkozy government got off to a quick start in pursuing
its economic policy agenda with passage of a "fiscal package" of tax
measures in July. The demand-side stimulus of those measures may
well give a kick to French growth in the near-term. But the harder
reforms lie ahead. Reigning in state spending, loosening the labor
market and opening product markets will offend entrenched
constituencies. For now much of the action on these issues has been
turned over to "social partners" (in the case of labor market reform
negotiations), or to broad-based commissions. Crunch time will come
when those efforts come to a term and it's up to the government to
take the hard decisions.

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