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Hollande Mittal Push Risks Hurting Economy by Spooking Investors

Hollande Mittal Push Risks Hurting Economy by Spooking Investors
An employee monitors the blast furnace at an ArcelorMittal steel plant. Photographer: Vladimir Weiss/Bloomberg

President Francois Hollande’s threat to nationalize an ArcelorMittal steel plant, while saving 600 jobs, may curb the creation of new employment by reinforcing France’s notoriety as a difficult place for business.

Hollande has given Lakshmi Mittal, the chief executive officer and biggest shareholder of the world’s largest steelmaker, until Dec. 1 to either keep jobs at the plant, sell all of it or face its nationalization. Industry Minister Arnaud Montebourg, who kicked off the week by saying Mittal is no longer wanted in France, says he’s found a buyer for the whole site, including the part Mittal would like to keep.

The tactics are the strongest yet by the French government in a long list of attempts to preserve jobs at home. They come as foreign direct investment inflows have halved in five years, local companies are holding off spending and jobless claims are at their highest in 14 years.

“The French do have a habit of shooting themselves in the foot in terms of international public relations,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “This is the sort of incident that does their reputation no good.”

Socialist President Hollande met with Mittal three days ago to discuss the company’s Florange site in northeastern France. The complex includes two blast furnaces, which Mittal wants to close, as well as a rolling mill producing steel, notably for the car industry, which he wants to keep. Across France, ArcelorMittal employs about 20,000 people.

‘Simply Scandalous’

The government’s pronouncements have had a disastrous impact on France’s image, said Laurence Parisot, the head of the French employers’ association, Medef.

“I was in Hong Kong this week and can tell you investors don’t understand France anymore,” she told RTL radio yesterday. “Planning to nationalize, starting a debate on it, is scandalous. One should remember that nationalization is expropriation.”

Mittal, who has faced hostility from politicians since he entered France with his 36 billion-euro ($47 billion) acquisition of Arcelor in 2006, is being held to his commitment at the time to protect jobs.

He is hardly alone in coming under such presidential pressure. Since taking office in May, Hollande has sought to limit job cuts at carmaker PSA Peugeot Citroen and has searched for a buyer for a Petroplus Holdings AG refinery in France.

Nicolas Sarkozy, Hollande’s predecessor, went to great lengths to find a buyer for a Lejaby SAS lingerie factory earlier this year, tussled with Mittal on ArcelorMittal’s French plants and made his economic reputation years earlier as finance minister by nationalizing train-maker Alstom SA.

Me, too

“The Mittal affair does France no favors and comes at a time when there are growing concerns about the French government’s attitude to business,” said Nicholas Spiro, of Spiro Sovereign Strategy in London. “This is a continuation of French governments’ ambivalent approach to foreign investment in politically and socially important sectors of the economy.”

France briefly nationalized Alstom between 2004 and 2006 with the European Commission’s agreement. It then sold its stake to Bouygues SA for a profit.

Talk of nationalizing the Florange plant has prompted another company to seek government aid. Shipyards firm STX, which had appealed to the state in September to raise its stake in the company to a majority from the current 33.33 percent, is reviving its call. The company lost two major contracts this year and has a thin order book, which may force it to cut some of its 2,100 jobs. France owns STX along with the South Korean ship-maker STX Group.

Still Attractive

To be sure, France remains attractive to foreign companies, drawing $41 billion in investment inflows last year, more than Germany and at 1.5 percent of gross domestic product, on par with the U.S., according to figures from the Paris-based Organization for Economic Cooperation and Development.

Serge Boscher, managing director of the finance ministry’s agency in charge of attracting investments, points out that 782 foreign investment projects in France in 2010 created 31,600 jobs and last year 698 such proposals added 28,000 jobs.

He also said Hollande’s push to improve French competitiveness is a positive sign.

“The competitiveness pact and the ongoing negotiations on labor rules may have an impact on France’s attractiveness,” he said in an interview. “There is room to make France more flexible, things more simple.”

Still, among the last big industrial investments made in France was Toyota Motor Corp.’s new car production facility, which created 2,000 jobs near Valenciennes in 1998, he said.

Increased Scrutiny

The furor over Mittal’s plant-closure plan comes at a time when France is under increasing scrutiny from investors and its international partners.

Moody’s Investors Service stripped France of its top credit rating last week and the European Commission said two days ago that it will conduct an in-depth probe of France, saying losses of export market share will continue unless “decisive” action is taken. German Finance Minister Wolfgang Schaeuble had to caution against calling France the “sick man” of Europe.

The value of France’s exports is up only 40 percent since 2000, compared with increases of 100 percent for Germany and 60 percent for Italy.

“France is being closely watched and that’s the problem right now,” said Antonio Barroso, an analyst at Eurasia Group in London. “A lot depends on how they will handle the issue in the end. Hollande himself is trying to be careful.”

Industrial Policy

With an economy that will barely grow this year, Hollande is trying to keep unions on board for an effort to make labor rules more flexible, suggesting he can’t afford to turn his back on steel workers.

In the longer term, rushing in to block factory closings to keep workers in jobs isn’t an industrial strategy, according to Ludovic Subran, chief economist at Euler Hermes in Paris.

Instead, the government should be identifying industries that France that can succeed in and back investments in technology and training.

“Good industrial policy is really about being pragmatic, looking at what’s going on internationally and doing what can work,” Subran said. It means “not focusing on a single company or a certain set of workers within a company” but backing “entire sectors,” he said, noting pharmaceuticals, food and aerospace as among France’s strengths.

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