France Economic Policy Roundup 09-19 May 2023

Macroeconomic outlook:

• Trade deficit: In March, France's trade deficit "continued to improve significantly, by +1.5 billion euros after +2.4 billion in February, to stand at -8.4 billion euros, its least deteriorated level “for more than a year and a half", according to Customs. Over a sliding 12-month period, the French trade balance "recovered" to reach 159.7 billion euros. Imports continued to fall to reach 59.3 billion euros, while at the same time, exports are on the rise and stand at 50.9 billion euros. Exports also fell, but by only 1.6% to 151.2 billion in the first quarter. Customs stressed in particular that the sharp decline in energy prices created a welcome boost to French foreign trade, contributing to a drop in imports.?The Banque de France reported on Tuesday May 9th that in March, the current account deficit had become "in surplus by 1.4 billion euros, an improvement of nearly 3 billion compared to February". In terms of services, in the first quarter, France’s surplus amounted to 10.2 billion, after 9.4 billion in the last three months of 2022, according to the Banque de France.
• Unemployment: In Q4 2022, the number of unemployed people as defined by the International Labour Office (ILO) decreased by 45,000 over the quarter, and reached 2.2 million people. The ILO unemployment rate in France (excluding Mayotte) was thus virtually stable (?0.1 points) at 7.2% of the labour force. Over the year, it decreased by 0.3 points and stood 1.0 point below its pre-crisis level (at the end of 2019). It is its lowest level since the Q1 2008, except for the sharp fall in Q2 2020 during the first lockdown.
• Consumer Price Index: In April 2023, consumer prices increased by 0.6% over one month and by 5.9% over one year. The prices of energy fell back slightly (?0.7% after +0.2%), due to a decrease in the prices of gas (?3.8% after ?0.4%) and petroleum products (?0.6% after ?0.4%). The prices of food slowed down (+0.6% after +1.8%), linked with a decline of those of fresh products (?2.9% after +3.2%). Prices of manufactured goods decelerated also (+0.3% after +1.5%). On the contrary, the prices of services accelerated (+1.0% after +0.1%), due to the rebound in transport service prices (+8.1% after ?1.0%) and to the acceleration of “other services” (+0.8% after +0.2%).

President Macron announces a record number of foreign direct investment in France amounting €13 billion euros, at the Choose France summit in Versailles

Choose France , the sixth edition of a day dedicated to France’s economic attractiveness took place on Monday 17th May at Versailles, with over 200 multinational CEOs present, half of whom were attending the summit for the first time . A record number of foreign investments were announced by President Emmanuel Macron, worth a total of 13 billion euros. Recorded by the French state agency in charge of promoting foreign exports and international investments, Business France, FDI announcements include 28 projects, new or extended, worth 13 billion euros, an increase from 2022 (10.6 billion) and 2021 (3.6 billion) that will lead to 8,000 direct job creations, in particular in medium-sized cities in France.

Ahead of the summit, in an op-ed for the Financial Times , Emmanuel Macron outlined his drive for reindustrialisation efforts for France, deeming it pivotal for European sovereignty following the Covid-19 crisis and war in Ukraine; “We have to take back control of our supply chains, energy and innovation. We?need more factories and fewer dependencies. ‘Made in Europe’ should?be our motto. We have no choice, as sovereignty is intertwined with the strength of our democracies.”, he wrote. He concluded that “For decades, the backbone of Europe’s economy was a middle class with well-paid industrial jobs confident that the next generation would be more prosperous than the last. In Versailles next week, and in the coming months, we Europeans can prove that our continent, the cradle of the Industrial Revolution, can once?again be the home of flourishing industry and shared progress.”

More than 50% of the projects announced at Choose France are in line with the government’s objective of "green reindustrialisation”. Flagship projects include 5.2 billion euros for a new-generation battery gigafactory by Taiwanese company ProLogium, with 3,000 jobs in Dunkirk (Nord). In the same town, the Chinese company XTC will build a battery components and recycling plant with the French company Orano for 1.5 billion euros. A photovoltaic panel production plant by Holosolis, an offshoot of the European group InnoEnergy, for 710 million euros will be built in Sarreguemines (Moselle), representing 1,700 jobs.

The announcements come after Business France published their 2022 Foreign Investment Projects report on May 11th announcing that 1,725 FDI projects that have created or maintained 58,810 jobs in France in 2022. While the number of job-creating investment projects recorded has increased by 7% compared to 2021, the increase in the number of jobs created or maintained is historic, +31% compared to 2021. Additionally, The EY European Attractiveness Survey published on 11 May, recorded in the EY Barometer of Attractiveness of France 2023 report found that France remains the most attractive country in Europe for the fourth year, with an increase from 1,222 to 1,259 FDI projects with 38,100 jobs. In total, the number of jobs created by foreign investors fell by 15% between 2021 and 2022, while the number of projects increased by 3%.

To note, Business France’s methodology is based on validated project announcements and includes the number of jobs created and maintained for the next three years, corresponding approximately to the timeframe for programming investments by companies. In contrast, the Ernst and Young’s (EY) methodology is based on the EY European Investment Monitor, tracking investment announcements, number of new jobs created from the outset and the associated capital investment. ?It also analyses both the reality and perception of FDI in the country or region, with the latest report’s findings based on the views of a recent survey of 204 executives of foreign-owned companies.

EY notes however that site extensions represent two thirds (65%) of investment decisions (35% in Germany and 30% in the UK), demonstrating that France is retaining existing companies, but is having more difficulty attracting new investors. Moreover, EY reports that foreign investment creates fewer jobs in France than in other European countries. In 2022, only 38,100 jobs were created by foreign companies, i.e. 15% less than in 2021 according to EY. On average, EY reports that foreign investment results in 33 new jobs in France (58 in Germany, 59 in the UK and 326 in Spain). Rexecode stresses that the hourly cost of labour remains higher than that of main European competitors, at 41.8 euros per hour in France at the end of 2022 in industry and services, compared to the euro zone average of 34.2 euros.

Moreover, France attracts R&D centres more easily than large decision-making or production centres and that “there is a great deal of caution in creating projects with more than a hundred jobs.”, according to Marc Lhermitte, Associate from EY in charge of the barometer. EY also reports that the willingness to invest in France in 2023 remains strong with nearly two thirds of executives having immediate plans to invest in France in 2023. However, the three-year outlook shows that executives are concerned about political and social tensions and the government's ability to pursue reforms to improve competitiveness, reduce the debt and trade deficit and support "made in France" investment.

Minister of Economy, Bruno Le Maire, presents the Green Industry Bill, aiming to make France the leader in green industry in Europe and drive reindustrialisation

The Minister of Economy and Finance, Bruno Le Maire, unveiled the government’s Green Industry Bill on May 16th. The bill is part of an ambitious plan to revitalise?French industry, aiming to increase the share of industry in GDP from its current 10% to 15%, with the government hoping to invest 20 billion euros by 2030 and create tens of thousands of jobs.?It also aims to position France as the European leader of green industry and transition, while also facilitating the decarbonisation and greening of existing industries and sites in France. The bill should make it possible for France to reduce its carbon footprint by 41 million tonnes of CO2 by 2030, or 1% of the total.

The press release from the Ministry of Economy notes how over the last few decades, France has experienced massive deindustrialisation, marked by the destruction of 2.5 million industrial jobs and a halving of industry's share of national GDP from 22% to 11%. It highlights that France is one of the first European countries to offer a strategy that responds to the Inflation Reduction Bill (IRA) introduced in the United States in February 2023. It notes that the proposed Green Industry Bill is thus “urgent” in order to make France, and more widely Europe, the leader in green technologies, while highlighting that France has the unique advantages of decarbonised electricity and strong attractiveness for foreign investment. Moreover, on May 17th, the theme of the Choose France Summit was "investing for a sustainable future", with the French government announcing that more than 50% of the 28 new FDI projects announced in France were in line with the government’s objective of "green reindustrialisation”, such as the ProLogium battery factory to be developed in Dunkirk.

In detail, five green technology areas will be promoted for the creation of new industries (green hydrogen, batteries, wind power, heat pumps, photovoltaics), while greening existing industry. The creation of new industrial sites will be facilitated by cutting authorisation procedures in half, to a maximum of nine months. €1 billion is earmarked for cleaning up brownfield sites, with the aim of preparing 50 pre-developed turnkey sites. For projects of major national interest such as gigafactories, the government will take control of all procedures by decree.

A "green industry tax credit" will be created to attract foreign industrial investment in sectors such as batteries, heat pumps, wind turbines or solar panels. This tax credit, estimated at around 500 million euros, will vary from 20% to 45% of the amount invested and will be decided project by project. In return, the government estimates that this will generate 20 billion euros in investment and create 40,000 new jobs by 2030. The cost of the credit is estimated at 500 million euros annually, offset in particular by a removal of the cap on the penalty on polluting vehicles, the greening of company fleets or a limitation of so-called "brown" spending in favour of fossil fuels – a limitation that will be debated as part of the next finance law in the autumn.

The “greenest” and sustainable companies will be favoured, with the government aiming to better channel commissions and public aid to them. In order to guarantee better access to public procurement, some aid will be directed towards companies that benefit from the "Triple E" green label (European Environmental Excellence). In addition to subsidies from the Public Investment Bank (BPI France) at 2.3 billion euros in direct loans or guarantees, the government also wants to support the greening and decarbonisation of existing companies, by conditioning on carbon footprint criteria.

The current “ecological bonus” aid for buying an electric car will be reformed to take into account the carbon footprint of their production, to favour the purchase of vehicles manufactured in France and Europe, against those imported from China and the United States. President Macron commented that this measure “does not mean that we are doing protectionism, but we do not want to use French taxpayers' money to accelerate non-European industrialisation." Finally, the bill wishes to facilitate the training of young people in green industry careers, with €700 million earmarked for training.

The government also intends to mobilise private savings with a new "future climate savings plan ", towards investments in green industry, modelled on the popular simple savings account, the Livret A, but for minors. The account can be opened by parents from the birth of their child but blocked from withdrawals until the young person turns 18. The remuneration will be higher than that of the Livret A (at 3% today), and exempt from taxation and contributions.?This savings plan should make it possible to mobilise up to 1 billion euros, with allocation of funds monitored by the Caisse des dép?ts, to ensure that savings, once released, are allocated to "strictly and rigorously green" investments.

In a published letter , The National Council for the Ecological Transition – which brings together associations, unions, employers and elected officials – questioned the notion of “green industry” which is not defined in the bill, commenting that "without a clear definition, aid schemes and tax incentives could apply to any company", leaving the door open to?greenwashing. In Reporterre , Thomas Uthayakumar of the Foundation for Nature and Mankind (FNH) commented on the absence of the terms "biodiversity" or "?water” in the bill, and said the risk would be that to?support "carbon-neutral"?activities – notably through offsetting – but which are also polluting or water-intensive.

The bill will be presented to the National Assembly on July 17th. As Le Monde notes, the government wants measures in favour of green industry to be "at zero cost"?to public finances, to keep the promise to restore public accounts by the end of Macron’s five-year term. The bill will be discussed in mid-June in the Senate and mid-July in the National Assembly.

French government’s plan against tax-fraud announced by Minister for Public Accounts, Gabriel Attal.

The Minister for Public Accounts, Gabriel Attal, unveiled the government’s plan to fight fraud on Tuesday May 9th."Our priority is to make the ultra-rich and the multinationals who commit fraud pay what they owe," said Attal in an interview on Tuesday May 9th with Le Monde . Attal also stated that "over the period 2017-2021, in five years, €9 billion was collected on average each year as a result of tax audits, that is to say, €45 billion collected in total over the first five years."

The government is promising to target the most affluent with a 25% increase in the number of tax audits over the next four years of the "largest assets" by the end of the five-year period and to inspect "every two years" the hundred largest stock market capitalisations. Attal indicated that there would be a 15% increase in the number of staff dedicated to tax control, i.e.?1,500 additional staff by the end of the five-year period. Also announced were reinforced sanctions against tax evaders in France, notably "for the most serious offences" with the possibility of imposing community service on those found guilty of fraud, or even in the most serious cases, of pronouncing their fiscal indignity and depriving them of the right to vote. A specific offence of "incitement to tax fraud" will also be created to punish “the provision of fraud schemes”.

Attal announced the creation of an intelligence unit of 100 specialists in the National Directorate of Customs Intelligence and Investigation, capable of detecting complex and serious tax frauds, such as offshore arrangements and tax havens of the "Panama Papers" type. This unit will be authorised to carry out wiretaps, capture data and place beacons. With Le Monde , Attal said "These means will be directed against situations in which the current tools of tax control are hampered, in particular the concealment of assets abroad in tax havens and opaque entities such as trusts, the use of tax avoidance firms and the abusive optimisation of large multinationals." Also announced was 100 million euros to be invested in tools to enable greater use of datamining, electronic data mining or, for customs, the ability to scan all postal parcels from non-EU countries. This "major investment plan" in "economic and financial intelligence resources will make the fight against fraud an operational priority for the intelligence community", said Attal.

Sophie Carey

Embassy Paris