Hollande Told by Executives to Act as France Lags Behind Peers

French business leaders say they’re frustrated.

With France’s economic recovery lagging behind its neighbors in Europe, executives are blaming President Francois Hollande’s policy zig-zags for undermining confidence and are asking him to follow through on his pledges to make the country more business friendly.

Top executives of companies including oil producer Total SA, tire company Michelin & Cie., chemicals maker Solvay and plane builder Airbus expressed concern over the past three days at a conference in Aix-en-Provence about France’s relative decline. While a year ago the gathering was marked by anger and the jeering of the French finance minister, the mood now is one of lament and concern that Hollande won’t deliver on promised cuts in business charges and a 50 billion-euro ($68 billion) reduction in public spending.

“We’re seeing a return of confidence in Spain, somewhat in Italy, and Germany remains very confident,” Jean-Pierre Clamadieu, chief executive officer of Solvay, said in an interview. “In France there are still a lot of uncertainties and concerns. A lot of what we’re hearing from the president and the prime minister on the significance of competitiveness, simplification, a mid-term vision must now be implemented.”

The International Monetary Fund slashed its 2014 French growth forecast to 0.7 percent last week from 1 percent previously as surveys of executive sentiment show the recovery in Europe’s second-largest economy is struggling to gain traction. The IMF expects expansions of at least 1.7 percent in Germany and 2.9 percent in the U.K. this year, as well as growth of 0.9 percent and 0.6 percent in Spain and Italy.

‘Significant De-coupling’

“Other countries have reformed either willingly or unwillingly,” Geoffroy Roux de Bezieux, vice president of the Medef employers association and head of Virgin Mobile France, said in an interview. “What the French government is trying to do is laudable but the politicians as a whole don’t necessarily share the diagnosis of a significant de-coupling. We have a political class of the 20th century, not the 21st.”

Hollande faces opposition within his Socialist Party to implement what the president has labeled the “responsibility pact,” in which the government reduces corporate and payroll taxes and finances the reduction with government spending cuts. Forty-one Socialists voted against the plan in the National Assembly at the end of April, forcing the government to rely on opposition support for approval.

“The government’s plans are very promising,” Airbus Chief Strategy Officer Marwan Lahoud told journalists at the annual Cercle des Economistes conference in Aix. “If they happen, it’s a chance for France to catch up as France is clearly lagging behind the rest of Europe and the rest of the world.”

Inconsistent Policy

Hollande is paying the economic price for taking an inconsistent policy direction, economists and executives say.

His first steps after winning power in May 2012 were to push through a tax of 75 percent on annual incomes of more than 1 million euros, to raise capital gains taxes and give a fillip to the minimum wage.

Those measures were intended to appease the Socialist base that put him in office. The consequence -- even if some plans were adjusted and the spending cuts were announced -- was ebbing business optimism and falling investment.

National statistics office Insee’s business confidence index unexpectedly fell to a 10-month low of 92 in June, the Markit Economics Purchasing Managers Index has declined for three straight months. The Bank of France publishes its latest estimate of sentiment in the service and manufacturing industries tomorrow.

Falling Investment

Investment by non-financial corporations fell 0.5 percent in the first quarter after declining 0.6 percent in all of 2013, according to Insee. Household investment has declined in every quarter since the beginning of 2012 and fell 2.6 percent in the first quarter.

While Insee expects corporate spending to recover in coming months, its growth prediction is in line with that of the IMF at 0.7 percent for the full-year, less than the 1 percent the government is looking to help reduce the deficit.

The sheer level of taxation, which at 46 percent of gross domestic product is the highest in the euro zone, is deterring entrepreneurs, said Total CEO Christophe de Margerie.

“No one should be surprised that when taxation is excessive people are reluctant to undertake new projects,” de Margerie said.

After 70 billion euros in tax increases over three years, including hikes by the previous government, Hollande is now trimming the tax burden. For now, the damage is done.

Labor Laws

Michelin CEO Jean-Dominique Senard and Solvay’s Clamadieu blamed French labor laws for keeping unemployment above 10 percent.

Labor laws are “complicated,” Clamadieu said. “Flexibility is very important even if it’s tough to make progress on that issue when unemployment is high.”

Finance Minister Michel Sapin asked the business leaders for patience and cooperation, saying his No. 1 priority is implementing the tax and spending cuts and that turning the economy around takes time. The “social conference” that Hollande has organized for business and labor organizations today is intended as the next step, he said.

“Confidence is crucial, restoring it is at the core of what we’re trying to do,” Sapin said in an interview with Bloomberg Television. “Companies say: there’s the pact but will you really do it? I can only point out that it has passed into law. Everyone needs to listen, to have faith. Confidence will come back eventually.”

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