Hollande Robbed of Growth Engine as Companies Cut Investment

Hollande Robbed of Growth Driver as Companies Curb Investments
The Arc de Triomphe is seen in Paris, France. Photographer: Alastair Miller/Bloomberg

French companies aren’t investing much at home these days.

A no-growth economy had already damped spending when President Francois Hollande’s government late last month unveiled a budget that slaps companies with 10 billion euros ($13.1 billion) of tax increases for next year. Executives are returning the favor by suspending investments.

“On investment, the word right now is caution,” Stanislas de Bentzmann, co-chief executive officer of Devoteam SA, a telecommunications services company based on the outskirts of Paris, said in an interview. “September was a terrible month, growth came to a halt. Now the government is pouring oil on the fire. The tax increases aren’t encouraging for business.”

Hollande, who was elected on an anti-austerity platform, is banking on higher taxes for two-thirds of the 30 billion euros he needs to raise to meet his budget-deficit target for next year and avoid the soaring borrowing costs in countries such as Spain and Italy. His government is trimming tax relief on interest charges and raising corporate taxes in addition to increased levies on top earners.

Combined with a stalled economy, that’s discouraging the kind of corporate expansion that helped pull Europe’s second-largest economy out of recession in 2009 and 2010.

The Numbers

The national statistics office Insee predicts that investments by non-financial companies will fall 0.2 percent this year, the first drop since the 2009 crisis provoked by the collapse of Lehman Brothers Holdings Inc. Investments rose 5.1 percent and 5.9 percent in 2011 and 2010 respectively.

Granted, French investment figures look better when stacked up against euro-area countries such as Italy and Spain. Earlier this year, the European Commission estimated that investment in equipment in France would grow 0.5 percent this year compared with declines of more than 6 percent in Italy and Spain.

Still, investments have helped the French economy grow or hold steady even as Italy and Spain dipped into recession. With new corporate taxes aimed at fulfilling Socialist President Hollande’s pledge of bringing greater “social justice” in France, that engine of growth may dry up.

Even before the tax increase, Carrefour SA, Europe’s largest retailer, had put on hold a planned 1.5 billion-euro refurbishment of some of its largest stores in the region. For its part, PSA Peugeot Citroen SA, France’s largest carmaker, has been seeking to stop burning cash by shrinking operations.

Sin Tax

Tax increases are giving other businesses cause for concern. Producers of beer in France, for instance, say any development plans they had have been “nipped in the bud” by Hollande’s plan to boost the tax on the drink next year. The move will translate into levies for their 2 billion-euro industry of more than 800 million euros from 337 million euros currently, they say.

“It’s a catastrophe for the sector,” Pascal Chevremont, the deputy director of the French Brewers’ Association, said in a statement this month. The body counts the local units of Anheuser-Busch InBev NV and Heineken NV among its members.

The industry that directly employs 3,000 people and accounts for 65,000 other associated jobs is looking at possible reorganizations and closures, the body said, adding that the tax puts at risk the survival of about 450 small companies.

‘Extra Brake’

Large French companies, including Carrefour, Peugeot and Air France-KLM Group are reducing thousands of jobs in France. The cuts helped propel the country’s unemployment rate to a 13-year high of 10.2 percent at the end of the second quarter. It may reach 10.6 percent at the end of 2012, Insee predicts.

“The budget is going in the opposite direction from encouraging growth,” Patrick Sayer, CEO of investment firm Eurazeo, said today on Europe 1 radio. “It’s perfectly legitimate to aim for a 3 percent deficit and for executives to share the burden. The problem is with any measure that in the end -- in five or ten years -- discourages investment.”

The government’s policies are cooling interest in investing in France, Pierre Gattaz, chairman of the GFI, the largest federation of French manufacturers, said at a press conference in Paris on Oct. 4.

“This all-out, anti-economic fiscal pressure leads people to adopt a wait-and-see attitude as it comes on top of the economic slowdown,” he said. “The worrying information and recent news on the budget bill has added an extra brake.”

Public Spending

The dearth of investment coincides with a drop in consumer spending and stalled exports, all of which add up to bad news for a president who won office in May on a campaign for growth.

France’s economy has been on a no-growth path for the past three quarters, a streak that Insee expects to continue in the third and fourth quarters this year.

Only government spending, in the form of social services and general outlays, is helping France avoid recession, Insee figures show.

That explains why taxes must increase if Hollande is to meet France’s promise to bondholders and his European partners to reduce the budget deficit. His insistence France will meet its deficit-cutting targets have helped the country sell debt at record-low borrowing costs.

The total tax burden will climb by 1.4 percentage point to a record 46.3 percent of gross domestic product next year, when public spending will represent 56.3 percent of GDP, unchanged from this year.

‘Targeted Punishment’

“Investment in capital goods such as machine tools has entered a phase of hesitation, with more unfavorable signs in the past six months,” said Denis Ferrand, head of Paris-based research institute COE-Rexecode.

Manufacturers have signaled investment will contract in the second half, he said, citing an Insee survey held in July.

Ferrand expects corporate investment to fall 1.9 percent next year after dropping 0.5 percent in 2012, contrary to French government forecasts that companies’ capital expenditure will climb by 1.5 percent in 2013.

Corporate leaders, who are calling for cuts in labor costs and more flexible rules, were particularly incensed by a government plan to tax capital gains on asset sales by as much as 60 percent up from a previous rate of about 35 percent.

“This is targeted punishment,” leaders of Croissance Plus, a federation of so-called fast-growing companies, said in a statement. “Entrepreneurs who take the risk of failing today will refuse to take the risk of succeeding tomorrow.”

Economic Warriors

While Finance Minister Pierre Moscovici responded to critics of the capital-gains tax by saying the levy’s terms and conditions would be amended, 12 groups representing companies both big and small said in a joint statement on Oct. 9 that the government’s pledge doesn’t go far enough.

“The measures, taken without consultation, will have ill-fated consequences in terms of economic development, investment and jobs,” the groups said in the statement.

For businesses, the government’s proposals show a lack of understanding of how fiscal incentives work.

“We’re the foot soldiers of an economic war, and our chief of staff, who’s asking us to export, invest and hire, is shooting at us,” said Gattaz of the manufacturers lobby.

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