Last updated:July 5, 2012 9:59 am
France: Ready to jump ship
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Growing anxiety at moves to raise taxes on the rich reflects divisions over the Socialists’ response to the crisis
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Roger, a senior expatriate executive working for an international company in Paris, is thinking seriously of taking a walk down David Cameron’s “red carpet”.
The UK prime minister last month riled France’s new Socialist government when he declared he would lay on a five-star welcome for anyone moving to London to avoid the tax regime promised by President François Hollande – including his election pledge of a 75 per cent marginal rate on incomes above €1m a year.
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“I’m very happy in Paris. My wife and I love Paris. We came here by choice. But I’m reconsidering our situation given the changes in the pipeline,” says Roger, who declined to be identified by his real name.
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More than the 75 per cent rate, it is a move to higher wealth and inheritance taxes that worries him – and what he perceives as a cultural hostility to the rich. “The anti-wealth rhetoric is just not encouraging. I’d rather be in a country where I don’t have to deal with that,” he says.
It is not just expatriates who are concerned. Henri de Castries, head of Axa, the insurer, is one of France’s most respected business leaders. “I’ve listened to Mr Hollande. He wants to see more growth and lower unemployment. He wants to see business prospering. We want to see that, too,” he says.
“The question is how to achieve these goals? There is no example, in modern economic history, of a country that has succeeded in reducing its deficits by bringing taxes to a confiscatory level. On the contrary, it leads to a decline in activity, and an increase in the deficits.”
The anxieties of business reflect a broader question about the bold policy stance Mr Hollande has taken since ousting Nicolas Sarkozy in May. The leader of Europe’s second-biggest economy – the only leading EU state headed by a socialist – has made waves across the continent with his determination to shift the focus of the battle against the eurozone’s crippling sovereign debt crisis from German-led austerity to promoting growth.
At home, he has struck a new tone with his insistence on making the wealthy and big companies bear much of the brunt of fiscal adjustment.
The issue is whether his approach risks alienating the business community just at the moment when the country is in desperate need of investment and growth to rally a seriously weakened economy.
“France is not isolated from the rest of the world and Paris needs to be competitive,” says Guillaume Poitrinal, chief executive of Unibail-Rodamco, the European shopping mall group based in Paris.
“[Our] large companies provide business to small and medium-sized enterprises and are France’s best asset – they provide a large part of what’s left of economic growth today.
“I am sure that the government realises that if they are weakened vis a vis their competitors abroad, this would be a negative for employment, tax resources and economic growth.”
It was the banks that first felt the lash of Mr Hollande’s tongue when he declared that his “true adversary” was not Mr Sarkozy but “the world of finance”. The president, who has spent almost his entire career in the public sector or working for his party, once said: “I don’t like the rich.”
A few weeks after his attack on the bankers, he added the 75 per cent tax rate pledge, set to be introduced next year. On Wednesday, his government announced an increase in wealth and inheritance taxes, an extra tax on company dividends, a big rise in taxes on stock options, and surcharges on banks and petroleum stocks – worth a total of €7.2bn. Further measures, notably to align taxes on capital with income tax levels, are promised for next year.
Beyond taxes, a decree will limit the salaries of the chiefs of state-controlled companies such as SNCF railways, and nuclear energy groups EDF and Areva, to €450,000. For Henri Proglio of EDF, this will amount to a cut of nearly 85 per cent. Ministers are talking of restrictions on plant closures and tighter employment protection.
Strong appeals from Medef, the employers’ confederation, for relief from high social charges on employment have met the response that labour costs are not the primary cause of declining competitiveness. Alarmed by the trend at a time when the eurozone economy is in crisis and growth has stalled, Laurence Parisot, Medef boss, said last month: “We fear a systematic strangling.”
The chief finance officer of a big industrial company says the first question asked by investors – French and foreign – is now about the government’s policies and whether the tax rises will affect senior management. But he says the main effect will be to drive away owners of smaller businesses who fear not being able to cash in their wealth when they want to sell their companies. “It will be like the UK in the 1970s,” he says. “We will lose a generation and they won’t come back.”
Philippe Kenel, partner at Swiss-based tax lawyers Python & Peter, says that he relocated 12 people from France to Switzerland up to the end of April – just before Mr Hollande was elected. “I did in four months what I usually do in a year.”
Roger says another danger is that foreign managers will no longer be drawn to the country. “In the past five to 10 years, French companies have been attracting more international talent. But who would want to come to Paris to run a company in the current environment?”
So far, the government has shown little sympathy for these concerns. “The liberal and financial model has ravaged our industry. It also pushed the world into the worst crisis since 1929. All this must change,” said Arnaud Montebourg, the minister in charge of industry, in an interview in Le Parisien newspaper this week.
The tax hikes are a central part of the government’s political and fiscal strategy. Mr Hollande insists it is only fair that the wealthy and big companies shoulder a large part of the fiscal burden. It is an important argument if he is to retain support, particularly within strongly anti-austerity Socialist ranks, for the public spending cuts and broader tax increases needed to haul down France’s debt, which is set to exceed 90 per cent of gross domestic product this year.
The president has always been clear that the 75 per cent tax rate, which he says will affect only 3,000 households, is much more important as a symbol to deter excessive executive pay than as a revenue-raising measure. But James Johnston, private client lawyer and head of the French group at London-based Bircham Dyson Bell, expects the increase to lead to the departure of wealthy French citizens to the UK, Switzerland and Belgium.
“France already has one of the highest tax rates for high-net-worth individuals. A 75 per cent top rate of income tax would bring the total theoretical marginal rate of tax, with everything added in, up to 90 per cent. This is a rate that the rest of the world is not resorting to.”
François Pérol, chairman and chief of BPCE, one of France’s largest banks, and a former senior financial adviser to Mr Sarkozy, says: “We need to see what the details are before concluding it’s a catastrophe. If it’s a temporary measure, it will aim to create a consensus around other, more difficult reforms. If it’s structural, then I think there will be an impact on competitiveness because it will discourage people, such as young entrepreneurs, from setting up their own businesses.”
Government insiders insist Mr Hollande’s administration is far from the hotbed of radicals sometimes portrayed. They point out that plans to separate retail from speculative investment banking are no more than the Conservative-led UK government intends to introduce. A much-anticipated rise in the minimum wage was limited to just 0.6 percentage points above inflation, to the consternation of trade unions, taking it to €9.40.
Though Mr Hollande has avoided being seen in public with business leaders, senior figures known to be sympathetic to the government include Gérard Mestrallet, chief executive of GDF Suez, the big energy utility; Matthieu Pigasse, head of the French operations of Lazard bank; and Pierre Bergé, co-founder of fashion label Yves St Laurent. One of the president’s closest aides in the Elysée palace is Emmanuel Macron, a former Rothschild banker, who before the election was an enthusiastic adviser, particularly on financial issues.
Setting out his government’s programme to parliament on Tuesday, prime minister Jean-Marc Ayrault, said he recognised the importance of “creators, innovators and entrepreneurs”. He said: “I value business leaders and I know them. I salute their contribution to our economy. I do not confuse them with those who get golden parachutes or unscrupulous speculators.”
The administration’s industrial policy is focused on fostering small and medium-sized businesses, innovation, research and skills. It is introducing lower corporate tax rates for smaller companies and setting up savings vehicles to funnel private savings into industrial investment. Next year it launches a public investment bank with a brief to fund new and small businesses.
Despite the fears of Medef and others, Alexia de Monterno of the Montaigne institute, a Paris-based think-tank, says there are signs the government is prepared to address industry’s big concern about labour costs. As for its stress on “non-cost” causes of flagging competitiveness, she acknowledges: “There has been a lack of investment and innovation, which has been a particular issue in the car industry, and there is a problem of vocational training, with a big gap between skills available and those needed by industry.”
With a solid majority in parliament to underpin his five-year term, Mr Hollande is not about to make a lurch to appease rumblings of discontent from the business world. Tensions between the two sides are likely to continue. Disagreement looms over a spate of industrial closures and redundancies some large companies have begun to unveil. They are under government pressure to limit the damage.
But, while some executives may head for Zurich or Mr Cameron’s red carpet, the biggest groups seem likely to hunker down, albeit warily. “We want this business to remain competitive, and therefore we will watch very carefully all the steps that are going to be taken and we will behave accordingly,” says Mr De Castries.
Mr Poitrinal of Unibail-Rodamco commented: “At this stage, we have no plan to move our headquarters outside of France. And we hope that France will remain an attractive place in which to invest and to recruit and remunerate top people.”
The argument between French business and the new Socialist government about taxes and regulation reflects a shared concern over the serious erosion of France’s competitive edge during the past decade, which is compounding the effects of the current economic slowdown.
The signs are evident in a series of industrial redundancy programmes now emerging.
The government is braced for what trade unions predict will be the loss of some 45,000 jobs during the next few months, which comes on top of the disappearance of 350,000 manufacturing jobs over the past five years.
PSA Peugeot Citroën, which has struggled to match competition especially from German rivals, is one of the highest profile companies in trouble, with its unions predicting up to 10,000 job cuts. Last month Air France announced a restructuring plan to shed 5,000 jobs as it battles to overcome non-fuel running costs that are on average 30 per cent higher than those of its competitors.
The starkest illustration of France’s competitive problem lies in its trade deficit, which hit a record €70bn last year, while Germany ran a surplus of some €150bn.
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The International Monetary Fund says France lost about 2.5 percentage points of world export market share in the past decade – more severe than its peers. In the euro area it lost about 1.5 percentage points in the latter half of the decade, compared with a 0.25 percentage point loss for Germany. Industry’s share of gross domestic product shrank in the decade to 2010 to 16 per cent from 22 per cent.
The government stresses the lack of investment, innovation and skills as core issues, but French business blames high labour costs for much of the problem.
A big chunk of the country’s large social welfare programmes are financed by charges on employers and employees. A recent European Commission report said the implicit tax rate on French labour was 41 per cent, one of the highest in the EU.
Philippe Varin, Peugeot’s chief executive, has estimated that in 10 years the hourly cost of a worker has risen 31 per cent in France, compared with just 19 per cent in Germany.
Fitch, the rating agency, commented in May: “The room for manoeuvre for further increasing the tax burden is limited by the need to strengthen France’s international competitiveness.”
One effect has been a sharp decline in profitability, by 50 per cent since 2000 for industrial companies, according to the GFI, an industrial sector association. French companies tend to absorb slowdowns by cutting profit margins because restrictions on shedding labour and high charges on employment limit their ability to adjust costs.
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Copyright The Financial Times Limited 2012.
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