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Cablegate: France's "Grand Emprunt": Stimulating Long-Term Growth

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TO RUEHC/SECSTATE WASHDC IMMEDIATE 7641
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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UNCLAS SECTION 01 OF 03 PARIS 001599

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON PREL FR
SUBJECT: FRANCE'S "GRAND EMPRUNT": STIMULATING LONG-TERM GROWTH

Ref: Paris 81

PARIS 00001599 001.2 OF 003


1. (U) Summary: France is finalizing its second-round stimulus
package, which emphasizes investment in research and innovation.
President Sarkozy will consult with unions, business and other
social partners before final approval in early December, and launch
the program in January 2010. The proposed 35 billion euro package
(2 percent of GDP) is not expected to impact economic growth
immediately but will leverage investment in areas key to France's
long-term growth and competitiveness. The broad consultations
associated with the "Grand Emprunt" (literally: large debt offering)
package are clearly intended to ensure support across the political
spectrum for this effort to reorient France's economy. End Summary.


Stimulus Round Two - Investing in the Future
--------------------------------------------

2. (U) On November 19, a 22-member blue ribbon commission headed by
former Prime Ministers Michel Rocard (PS) and Alain Juppe (UMP)
presented their recommendations for allocation of 35 billion euros
to off-budget projects that promote innovation and investment in
areas critical to the future of the French economy. (French report
at http://www.commission-
investissement.fr/IMG/pdf/Rapport_191109.pdf ) This program is much
more targeted than the 28 billion euro first-round package, which
provided anticipatory tax refunds to businesses, funded public works
projects and gave selective stimulus payments to low-income families
(reftel). Linked funding from private sources, matching funds from
the European Commission and local government authorities'
contributions are expected to effectively bring the scope of the
program to some 60 billion euros. Of the 35 billion euros in
central government funds, over half (18 billion euros) will target
generic innovation, either through university-based research or
co-financing for innovative projects of small and medium-sized
businesses. The other half targets investments and innovation in
specific areas of broad interest including redesigning the cities of
tomorrow (co-financing for re-insulating public housing and for
innovative urban planning demonstration projects), energy efficiency
and renewable energies, transportation of the future, the digital
economy and applications of biological sciences. (Details at para
7.) The Rocard-Juppe Commission held hearings and interviewed
dozens of experts and economic groups before formulating its
recommendations for the amount and use of funds. President Sarkozy
will cap this off, personally, with high-level meetings with
business and labor leaders before sanctioning the program in early
December.

Impact on the French Economy
----------------------------

3. (SBU) President Sarkozy has justified the investment program not
so much by its immediate impact but its potential to put long-term
growth back on track. The Economics Ministry estimates that the
economic crisis reduced France's non-inflationary growth potential
from 2.1% in recent years to 1.7%, due to the drop in investment and
the increase in structural unemployment. The initial estimates are
that the 35 billion euro innovation and investment program could
boost GDP growth 0.5% per year, within five years (based on a simple
GDP elasticity calculation). Barclays Capital France chief
economist Laurence Boone has similarly predicted that the economic
growth impact may not be measurable until 2012 or even 2014.

Growing Public Debt and Deficits a Major Concern
--------------------------------------------- ---

4. (SBU) With the government debt expected to rise to some 85% of
GDP in 2010, Economics Minister Christine Lagarde has pushed to
structure the program so as to minimize the increase in public debt.
At the same time, European Commissioner Joaquin Almunia has said
that the 2010 budget deficit must take into account the underlying
debt offering in budget estimates. "I believe...that any structure
that allows the association of a debt and identifiable assets would
be the better project," Lagarde stressed. Others, including Bank of
France's deputy governor Jean-Pierre Landau have recommended
public-private partnerships in investment projects, and use of

PARIS 00001599 002.2 OF 003


government-subsidized loans ("prets participatifs") as well as
"reimbursable advances" to companies. The government's plans to
"recycle" 13 billion euros in government-provided capital recently
reimbursed by banks, plus the heavy use of dedicated French Treasury
accounts for the package's numerous endowments, will reduce the
amount by which the package visibly increases the deficit. Rating
agencies have stopped short of projecting that raising another 20
billion euros on the markets will downgrade French sovereign debt,
but have said the launch of the program "weakens" France's AAA
rating (Moody's) and highlights the need to "clean up" French public
finance (Fitch).

GOVERNANCE: KEEPING THE PROGRAM ON TRACK
-----------------------------------------

5. (U) Virtually all the funds will be administered by
special-purpose agencies (e.g., government-sponsored financial
institutions such as the Caisse des Depots et Consignations and
NSF-equivalent Agence National de Recherche), subject to contractual
obligations. These agencies will, in turn, establish contractual
relationships with public and private entities specifying use of
funds, matching requirements, performance requirements and, in some
instances, provisions for reimbursement and/or assignment of
proceeds. For instance, the National Agency for Campus Excellence
in charge of a 10 billion euro endowment will appoint an
international panel to select innovative, interdisciplinary projects
from five to ten universities that have a potential to raise the
institution to international prominence in that area of work. The
universities must establish their own dedicated endowment for their
project (to which funds from other sources should also be directed)
as well as lay out a five-year work program and measurable
objectives. To help ensure overall oversight and evaluation of such
operations, the Rocard-Juppe commission recommended the
establishment of a special body specifically for that purpose,
attached to the Prime Minister's office, with representation from
the ministries concerned, the parliament and the private sector.

6. (SBU) COMMENT: President Sarkozy launched this project in a
first-of-a-kind address to a joint session of Parliament in June and
no one doubts that he will see it through. Most of the serious
concerns regarding this innovation and investment program relate to
execution and oversight. One economic columnist asserted that
application of three key Rocard-Juppe recommendations alone
(systematic evaluation, deficit minimization and coordination with
other policy reforms) would fulfill Sarkozy's campaign promise of a
serious break with the past ("la rupture"). With almost none of the
funds being used for government salaries or operations, adequate
oversight -- which was sorely missing in similar special programs
such as the Balladur debt offering (1993) -- will still be one of
the biggest challenges. As for parallel reforms needed to ensure
future growth, Barclays Capital's Laurence Boone has highlighted
further liberalization of the labor market. Others have pointed to
the need for greater university autonomy to encourage more
public-private partnership in research. The main questions of
direct U.S. interest are the extent to which U.S. businesses may
participate in special research and development projects in France,
and the extent to which "reimbursable advances" in certain programs
risk to become (non-reimbursed) subsidies. End Comment.

Seven Major Priorities, Seventeen Action Areas
---------------------------------------------

7. (U) The report submitted to President Sarkozy on November 19
includes seven major priorities, broken down into a total of 17
"action" areas, as follows:

I. Support higher education, research and innovation
16.0 billion euros

1 Promote the emergence of 5-10 outstanding institutions of higher
learning 10.0 Billion euros

2 Invest in research equipment; make research in France more
attractive 2.0 billion euros

3. Create a few world-class innovation centers; better leverage

PARIS 00001599 003.2 OF 003


public research results and support joint public-private research
3.5 billion euros

4 Promote equality of access to higher education and raise the
interest in science from an early age
0.5 billion euros

II. promote the development of innovative SMEs
2.0 billion euros

5 Encourage the creation of innovative enterprises and social
innovation 0.5 billion euros

6 Facilitate access to financing for innovative SMEs
1.5 billion euros

III. Accelerate the development of the life sciences
2.0 billion euros

7 Support innovation in agro-biotechnologies
1.0 billion euros

8 Boost the search sub-contractor in the health sector
and sciences life 1.0 billion euros

IV. Develop the "non-carbon" energies and efficiency in the
management of resources 3.5 billion euros

9 Develop non-carbon energy technologies and recycling
1.5 billion euros

10 Create institutes of technological research in the field of
non-carbon energy 1.0 billion euros

11 Prepare nuclear technologies of tomorrow
1.0 billion euros

V. Promote emergence of the city of the future
4.5 billion euros

12 Foster the development of sustainable cities
2.5 billion euros

13 Accelerate the thermal renovation of social housing
2.0 billion euros

VI. Invent transport/mobility of future
3.0 billion euros

14 Prepare the vehicles of the future
1.0 billion euros

15 Develop the air and space industry of the future
2.0 billion euros

VII. Invest in the digital economy
4.0 billion euros

16 Expedite the transition to super-broadband
2.0 billion euros

17 Expand innovative digital content and applications
2.0 billion euros

Grand Total 35 billion euros


RIVKIN

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