Analyses & Studies

France Economic Policy Roundup 20 June

France Economic Policy Roundup 14 – 20 June

Macroeconomic Outlook

  • Growth: The French Central Bank slightly raised its growth forecast for France in the second quarter to 0.25%, up from 0.2% previously (14.6). After a downturn in Q1-22 (-0.2%), activity in Q2 should remain strong, meaning that the French economy would not go into recession, according to the French Central Bank. In its current scenario, dating from mid-March, the French Central Bank expected growth of between 2.8 and 3.4% this year, depending on the evolution of oil prices.
  • Inflation: Over one year, inflation rose by 5.2% in May, after +4.8% in April 2022, according to INSEE. This rise in inflation is the result of rising prices in energy, services, food, housing and manufactured goods. In detail, many sectors are seeing price increases. Some sectors, such as electricity, air and road transport, healthcare, and communications experienced a slower rise in prices over the month of May. The price of fresh food has fallen, leading to a net slowdown in inflation affecting fresh products. Yet, the price of meat, poultry, milk, cheese, eggs, oils, fats, coffee and bread as well as cereals has risen.
  • Business Climate: In its monthly business survey (8500 participating companies); the French Central Bank found industry was operating at 79% of its production capacity in industry in May. In services, hotel and catering continue to drive economic activity with the return of foreign tourists to France. Supply challenges in industry and construction caused by the post-Covid recovery and the rise in raw material prices remain high, but are easing. For June, fewer companies plan to increase sale prices compared to May, due to a smaller increase in the price of raw materials. Recruitment difficulties increased again in May, probably in connection with the recovery of activity.
  • Tourism: Tourism in Paris remains 30% below pre-Covid levels, despite a rise in longer stays. European tourists drive activity (hotels, luxury and longer stays), even in the absence of Asian tourists notably the Chinese, which is likely to weigh on the sector for a long time. According to the Paris tourist office, Greater Paris welcomed 12.1 million visitors (60% foreign) between January and the end of May 2022. This is 30% less than two years ago. Air arrivals expected this summer are down 21.7% compared to 2019 (North America, -13.7%; South East Asia, -79.4%) despite growth in certain markets (+20% for Italy and Spain). 

French Tech sets its sights on “Decacorns” Papers continue to report on the VivaTech summit last week (15-18 June). After having succeeded in creating more than 25 unicorns before 2025 (original target 25 unicorns by 2025 set by the President), President Macron wants 100 unicorns in France by 2030 is possible of which 25 green unicorns by 2030. French Tech also has another mission set by Finance Minister Le Maire: “5 decacorns by 2025 and 10 by 2030” as reported by Le Figaro and Usine DigitaleDecacorns are unlisted private companies with a valuation of over $10 billion USD as opposed to unicorns valued at $1 billion USD. The latter notes that the appointment of a Secretary of State for Digital Affairs, who will take over from Cédric O, is expected with the reshuffle following the legislative elections (19 June).

Usine Digitale recalls that France currently has 27 unicorns, although this figure is challenged. The list of 25 unicorns released by the government in January raised questions, particularly because of the presence of OVHcloud, which has already completed its IPO, or Veepee (online shopping), which has not raised funds for years. There is no record to date of any decacorn in France. Doctolib and Back Market seem to be the start-ups with the highest valuation, since they raised more than 5 billion US dollars in their latest fundraising round, observes the paper. In its "Titans of Tech" report, GP Bullhound lists 29 unicorns in France with an average valuation of $2.4 billion, less than their European counterparts ($3.8 billion USD). The same report counts 283 unicorns across Europe, of which 37 decacorns, including Swedish fintech Klarna (45 billion USD) and the British neobank Revolut (33 billion USD). The paper mentions the “centaur”, which refers to start-ups who generate at 100 million USD in annual recurring revenue (ARR), the key indicator for start-ups that charge subscription fees (SaaS). It is difficult to know the exact number of centaurs since start-ups rarely communicate their financial results.

In France, marketplace operator Mirakl was the first to announce that it had exceeded 100 million USD in ARR. The latest (27th) French unicorn, EcoVadis, which does CSR performance and evaluation, has raised 500 million USD (pending approval by HSR, the American antitrust authority). Behind the ARR indicator is the question of profitability. "The more mature the company, the more growth-oriented the investors are, and the more central monetisation issues become," explains William Kunter, CFO of Swile, an employee benefits specialist, in the latest Roland Berger report on the structuring of start-ups in Europe. The paper lists other markers that show that European start-ups have changed scale. Indeed, fundraising figures, which often make headlines, are not always be best measure of a company’s performance. Investors need companies to prove their profitability before agreeing to support them. This is crucial as fundraising is declining worldwide, both in number and in value, notes the paper.

Indeed, the relevance of criteria used to determine the valuation of start-ups face some criticism especially in light of economic uncertainty, inflation and lower valuation, observes Les EchosA change that leads to "a change in the balance of power between entrepreneurs and investors, since a few months ago it was the entrepreneurs who set the price" for fundraising, says Franck Sebag, partner at EY & Associés in charge of the Fast Growing Companies sector, to L'Usine Digitale. However, many investment funds have already raised money and that the drop in the valuation of start-ups bring opportunities. With sky-high inflation. The number of unicorns is slowing down and growing start-ups will probably be the most affected, as investors are now favouring profitability over growth," notes Guillaume Bonneton, Partner France at GP Bullhound. In this uncertain economic context, the paper wonders if France will succeed in bringing out another unicorn or even a decacorn. In view of this context, Minister Le Maire has reiterated France’s responsibility in continuing to guarantee solid financing for start-ups by other means such as financing from Bpifrance, the France 2030 Plan and the Scale-Up Europe initiative. 

General Elections: The Inflation Conundrum In the aftermath of the second round of the general elections on 19 June, Les Echos and Le Monde analyse the impact of the changed political landscape at the National Assembly on the Inflation Bill. The Inflation Bill, containing a series of measures (previously reported on) and the amended Budget Bill should be discussed at the Council of Ministers on 29 June, but its presentation could be postponed by a week (6 July), as indicated by government spokesperson, Olivia Grégoire, on 14 June, as reported last week by Les Échos. Olivia Grégoire nevertheless stressed that this would not change the fact that the French could benefit from these support measures as of August. It is not year clear how different groups will vote on the issue given that yesterday’s vote now deprives the government of an absolute majority, forcing it form alliances to pass laws, observes Le Monde. The paper wonders how different political groups will vote: the left wing, which proposes to raise minimum wages and freeze prices, Les Républicains, who could play a pivotal role in the new Assembly, and the Rassemblement National (ex-Front National) which has made a spectacular breakthrough? Until Sunday, the future bill was due for presentation before the Council of Ministers on July as reported by Les Echos last week, before its examination by the new National Assembly. In this “extremely fragmented political context,” the Conseil national de la refondation (CNR) announced by President Macron during the legislative campaign could help bring about a consensus. A first meeting of the CNR - which should bring together social partners but also environmental associations, parliamentary groups, associations of local elected representatives - was scheduled for 22 June.

This new “legislative conundrum” comes at a time when Government must also deal with a stricter budgetary room for manoeuvre, noted Les Echos this morning. Crucially, the Nupes (with 131 members up from 30 in the previous legislature), will be able to stake its claims for several key positions, including the Presidency of the National Assembly’s Finance Committee, notes the paper elsewhere. Moreover, “new billions of expenses” are due, in addition to the €26 billion spent since the first of inflation measures in autumn 2021. Reaching 5% public deficit at the end of 2022 seems “out of reach” (OFCE estimates 5.6% public deficit in 2022). The paper wonders how the Government will adapt its new timeline for the bill in light of the new National Assembly, as inflation continues to erode purchasing power. Inflation is now forcing some consumers to give up “pleasure purchases,” observes Le FigaroINSEE recorded a rise in the price of food in May (+4.3% after +3.8% in April). Nevertheless, French inflation remains lower than in neighbouring European countries, attributable to the government's decision to freeze gas and electricity prices, analyses La Tribune. The harmonised consumer price index (HICP) rose by 5.8% in May over one year, after 5.4% in April, noted INSEE. The rate of inflation in France is falling compared to April thanks to the drop in fresh fruit prices. However, the rate of inflation is still accelerating for meat, poultry, cereals and oil. To maintain their customer base, many retailers, like Leclerc, are introducing targeted offers or keeping the price down of 100 products, such as butter, bacon, pasta and other goods. For some customers, their shopping list is getting shorter and shorter. A study assessing consumer behaviour in the face of inflation by NielsenIQ, finds that half of the 6000 respondents are cutting back their spending on fuel, three-quarters on clothing, eating out and going to the cinema. According to the study, 63% of households surveyed consider their purchasing power to have weakened. In retail, this has resulted in a drop of “pleasure goods”, notes the paper, such as whisky or chocolate, and a tendency to fall back on lower range or store brand products. Some consumers are even switching to “hard discount stores”, such as Lidl notes the paper. Dominique Schelcher, The CEO of distribution group Système U, warns of “durable inflation” in France, as inflation has “not yet reached its peak” according to Schelcher. This “durable” inflation is compounded by rising energy prices and the cost of the green transition that will continue to weigh on food prices. Minister Le Maire estimated that France should "come out of the inflation peak at the end of 2023", before returning to an inflation level of around 2%, "structurally higher" than during the last decade. The European Central Bank estimates inflation will return to 2.1% by 2024. 

For Olivier Klein, CEO of BRED bank, maintaining purchasing power in the face of declining growth is to increase productivity, i.e. “working more to be paid more”. According to Klein, households could better protect their purchasing power if productivity gains were to progress sufficiently (no detail on the level of sufficient progress) or if the wage-productivity ratio were to remain stable overall following wage increases. This would allow companies to avoid increasing prices; protect their competitiveness and employment and investment capacities. Furthermore, an increase in activity would result in an increase in taxes and payroll charges without raising taxes thereby maintaining a high level of social protection while ensuring better control of public spending and debt. Naturally, this increase would depend on the type of job (level of hardship, working conditions) but should be subject to company negotiations between employers and employees. France in fact has a “gigantic supply issue” rather than a spending power issues, argues Christian Saint-Etienne, Economics Professor and member of the Cercle des Economistes. France has a “huge a production problem” (notably high production costs), a low level of skills in working population, a low employment rate, an early retirement age and governance issues. To strengthen purchasing power, Saint-Etienne argues that France needs to produce, invest, innovate, reduce the cost of overtime, authorise the payment of bonuses in several instalments so as not to exhaust companies burdened by payroll charges in the face of rising energy and input costs.

Looking at inflation from a tax perspective, Dominique Seux raises the issue of reviewing taxation tranches to account for inflation and wage rises. He also argues that is hard to estimate how long inflation will last as there are currently three types of inflation: Covid-19 inflation, inflation linked to changes in globalisation (towards greater regionalisation), and “lasting” energy inflation. In an interview with Journal du Dimanche (11 June), economist Thomas Piketty calls inflation "Macron's tax in disguise". "By claiming that no one will pay quoi qu’il en coute, Macron is lying to the French. Because the poorest are already financing it through inflation", declares Piketty, signatory of an op-ed in support of the Nupes' economic programme. L’Opinion responds that the “quoi qu’il en coute” at least the measures taken by the government during Covid-19 actually preserved spending power. Moreover, recent household support measures, by virtue of their temporary and targeted nature, are actually supporting households without fuelling inflation themselves. The paper notes that those in the botton 20% of the income scale save an average of 3%, who tend to save little to none of their income, will not see their savings impacted by inflation in the same way as those who are better off and save nearly 30% of their income each year. While inflation could encourage the indebtedness of modest households, the issue is less the rise in prices than the comparative evolution of their income and their repayment burden. What matters in times of inflation is the extent to which income is indexed. The paper concludes that the Nupes proposal to raise the minimum wage to €1500 would be a first step towards the “deleterious effects of an inflationary price-wage spiral.”

 Global minimum corporate tax: Europe's obstacle course Le Figaro and Les Echos report on Hungary’s veto of the draft directive that France hoped would reach unanimity before the end of its EU Presidency. The last Council of European Finance Ministers of the French Presidency on 17 June was supposed to be a moment of triumph. This was Le Maire’s last chance to announce a unanimous agreement on the EU directive on the minimum taxation of multinationals. This "pillar 2" of the reform negotiated for years at the OECD, is “very dear” to France, notes the paper. After intense diplomatic efforts on the part of France, recalls Le Figaro, EU-27 managed to align their positions at the OECD, but this apparent unity cracked in April, as Poland, in a political maneuver to obtain the recovery plan funding, raised new difficulties. For Le Figaro, this new “political tug of war” between Hungary and casts doubt on the whole of this international tax reform, described as "historic" when it was signed in October 2021. Moreover, “the complexity of pillar 1 means that the stated objective of an entry into force in early 2023 will not be met,” writes the paper. Once approved, the multilateral convention will still have to be ratified by all the parliaments of the 136 states concerned, which will take “months”. The paper recalls Minister Le Maire’s efforts and intense diplomatic negotiations to find a consensus with the initial blocking Member States: Ireland, Hungary, Estonia and Cyprus. Ireland, whose reform calls into question the economic model of a minimum tax rate (12.5%) on companies, has come to terms with this decision (l’Irlande a pris son parti), notes the paper.  BFMTV emphasizes the “political and financial stakes for France” of Hungary’s veto as President Macron “is playing hardball on the issue” and was planning to launch his second term with the final implementation of the minimum corporate tax in the EU. According to the Conseil d'Analyse Economique (English here), the minimum tax would bring in €6 billion per year for France, reports BFMTV.

 These obstacles (in reference to Polish and Hungarian vetoes) have not helped as the idea was for Europe to adopt it as a precursor, in order to lead the way for the United States, argues Le Figaro. The European hesitations are likely to demobilise an already divided Congress, suggests the paper. As reported by Politico Pro Finance, Hungary’s veto has won it some U.S friends. National tax officials in Europe fear that failure to get a deal in July under the Czech EU presidency will make it impossible for Biden to get the package deal through Washington’s legislative machine before midterms, when Republicans will likely take Congress. Les Echos suspects that Hungary is attempting to use its veto to push through its own recovery plan, also blocked for other violations of the rule of law, and to protect its oil interests (Hungarian opt-outs from the EU Russian oil embargo and its demand not to sanction the head of the Russian Orthodox Church). For the paper, this creates “a toxic atmosphere within the European Council at a key moment.” It is also fuelling demands from MEPs to end the unanimity principle, as well as doubts of the most reserved Member States (unnamed) regarding enlargement. On the weekly Friday morning France Inter radio debate (17 June) between Thomas Piketty and Dominique Seux, Piketty argued that the OECD agreement has achieved nothing as the 15% rate is only just above the 12.5% rate which previously applied in Ireland and there are also very broad exceptions. “This agreement only applies to companies that have zero activity in Ireland but once a company has the lowest level of activity they can be taxed at 10%, 5% or event 0%”. Piketty also claimed there is a possibility for unfair competition if multinational producers based in Ireland wish to export to France but do not have to pay 25% or 30% tax rates paid by French companies.

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