Analyses & Studies

France Economic Policy Roundup 21 March

Macroeconomic outlook

·      Growth: In its latest growth forecast on 14 March, the second since the outbreak of war in Ukraine, the French Central Bank presents two possible growth scenarii. The first “conventional scenario” maintains the 3.4% growth presented on 28 February 2022, followed by 2% growth in 2023 and 1.4% in 2024. Growth could fall by 0.5 to 1.1 points of GDP in 2022. The second “degraded scenario”, taking into account gas, oil and wheat inflation, estimates 2.8% growth in 2022, followed by 1.3% in 2023 and 1.1% in 2024. The latter forecast is based on the assumption of a significantly higher price for fossil fuels, on which France depends in part with regard to Russia: $119 per barrel of oil on average over the year 2022 (compared to $93 in the conventional scenario) and €181 per megawatt/hour for gas.

·      The last forecast on 28 February estimated annual growth at 3.4% in 2022. This is less than the +3.6% growth forecast in December 2021. Without the war, the French Central Bank would have raised its growth forecast from 3.6% to 3.9% for 2022 The French Central Bank estimates growth at +2.9% at the end of Q1-22 thanks to a strong economic rebound in 2021.

·      Inflation: In February 2022, the Consumer Price Index (CPI) rose by 0.8% over one month, after +0.3% in January, according to the INSEE. Energy prices rose (+3.6% after +2.9%) in the wake of petroleum product prices (+5.6% after +4.9%). The price of services rose (+0.5% after +0.3%) as well as those of manufactured goods (+0.6% after −1%). The prices of food (+0.3% after +0.6%) slowed. Year on year, consumer prices grew by 3.6% in February after +2.9% in January. The INSEE expects inflation to continue to rise in April, driven by a rise in the price of food. The rate of increase in consumer prices "could be around 4.5% in the second quarter", due to rising energy prices.

·      The French Central Bank estimates inflation reach between 3.7% and 4.4% in 2022 (14.03) due to rising energy and food prices. The Harmonised Index of Consumer Prices (HICP) stood at 4.1% over one year in France in February 2022. The pre-war HICP estimate by the French Central Bank stood at 2% before the end of 2022. Current calculations by the French Central Bank do not account for the possibility of cutting off Russian oil and gas supplies. Without taking into account inflationary shocks (rising cost of energy and raw materials such as wheat), the French Central Bank forecasts inflation to rise by 2.5% and 2.7% in 2022.

War in Ukraine: Government presents resilience plan On 16 March, Prime Minister Jean Castex presented the Government’s "resilience plan" to deal with the consequences of the war in Ukraine, which is causing energy and commodity prices to soar. The double objective of the plan is to reduce businesses’ energy bill in the short term and make the economy less dependent on Russia. The plan, estimated at around €7bn, includes subsidies, loans, tax rebates, and extending the short-work scheme, increasing LNG import capacities (as well as of renewable energy), increasing support for decarbonising heating networks, supporting exporting companies, and subsidising projects reducing dependence on raw materials from Russia. It is partially financed by provisions under the 2021 Budget Bill. Key measures include a 15-cent rebate on the price of fuel from 1 April for households and businesses for four months, €25 million in state aid for businesses in energy-intensive sectors, and 15-cent rebate for farmers on off-road diesel fuel and an energy (TIPCE) tax refund from 2021. For Le Figarothe plan puts sovereignty back in the foreground, stressing the need to limit national dependence on Russia but also to accelerate the energy transition in order “to move away from fossil fuels as quickly as possible” and to "get off Russian oil and gas completely by 2027", according to the Prime Minister. In the run-up to the presidential election, the government wants to avoid social tensions (i.e. renewed gilets jaunes protests), observes France Info. The public media outlet is concerned that these measures may not be enough to quell the anger of farmers and fishers. 

The rebates on fuel and fuel tax amount to approximately €2.8bn, according to Le Monde and Les Echos. Companies whose electricity and gas expenses represent "at least 3% of their turnover, and which could make losses over 2022", such as those in the metallurgy, chemical or cardboard industries, will receive compensation for surplus energy expenses up to €25 million. To be eligible for this aid, companies must face a 40% (or higher) increase in gas or electricity bills since the outbreak of war in Ukraine, gas and electricity expenditure representing more than 3% of turnover, and face operating losses. In addition, the government will increase by €1000 subsidies to fund the cost of replacing fuel or gas heating systems from 15 April onwards. Sectors highly dependent on the import of raw materials from Russia (e.g. titanium, palladium), will receive state subsidies covering their import costs for up to 15% for large companies and 35% for SMEs. Companies will be able to take out state-guaranteed loans (PGE) up to a limit of 35% of company turnover (previously 25%). In addition, a new PGE set at 10% of turnover will be available on 1 July. Companies will also benefit from deferred tax and social security payments. The long-term short-work scheme will remain open to eligible businesses for an additional 12 months. The Prime Minister also announced specific aid for French exporters, which includes reactivating the export voucher (launched during the pandemic) and provide support to orient companies towards new markets. The construction sector, also facing supply shortages and the rising cost of energy, will benefit from a 15-cent rebate on fuel. The government has asked the public sector to review clauses in contracts to account for soaring energy prices and not to sanction delays in the context of the crisis.

Specific measures targeting the fishing and agricultural sectors – following protests and strikes by farmers and fishers across France – include a 35-cent subsidy for every litre purchased by fishers up until 31 July 2022. Farmers will receive an early refund TICPE tax for 2021 and an advance payment of 25% of the TICPE for 2022, to support cash flow. Farms are exposed to the risk of shortages, as well as to the rising price of fertilisers and livestock feed, with Russia and Ukraine being major suppliers. To support the livestock sector, which is facing rising feed costs due to soaring grain and protein prices, the State will provide €400 million over four months. Commercial negotiations between manufacturers and distributors to take account of the rise in raw materials and energy are underway. Minister Denormandie is determined to bring to the European level a request to use fallow land for protein crops, taking up a demand from the French Federation of Farmers' Unions. However, this measure is not in line with the agri-environmental approach designed to preserve water and soil quality, as well as biodiversity, highlights Le Monde.

 War in Ukraine: Energy Finance Minister Le Maire deems this measure (fuel rebate) to be “the most efficient” and the “fastest way” to help millions of citizens in the face of rising petrol prices. Le Monde estimates the total cost of energy support measures (resilience plan + electricity and gas price caps and freezes, inflation allowance) at €24 billion while Dominique Seux puts forward €30 billion. The inflation allowance (€100 voucher distributed to 38 million people) is estimated to cost the State €4 billion, recalls Le Monde. “If the State is prepared to spend so much money,” argues Seux, “it should at least do so for another good reason, by reducing our imports of Russian oil so that this massive spending makes sense.” Russia only accounts for about 13% of French oil imports, compared to an average of 30% for the EU. France is not at risk of a short-term shortage of oil supplies, reports Les Echos. Russian diesel continues to arrive in France for the time being. France imports about 25% of its diesel from Russia. Unlike many other French flagships, French energy provider Total Energies does not intend to withdraw from Russia for the time being, notes BFMTV. In fact, nothing is forcing it to do so, not even the Western sanctions against Moscow. Minister Le Maire stated on 14 March that Total is not infringing upon current sanctions. However, it is possible that sanctions will be tightened, warned Le Maire, and that French companies will have to respect them. This comes after Le Maire’s statement, a few weeks earlier, that in his opinion, “working in any political or economic figures close to the Russian Government raises an important matter of principle”. A growing number of importers no longer want to buy Russian products, notes Les Echos. This is the case for Total Energies. According to Patrick Pouyanné, CEO of Total Energies on 14 March, traders are not taking Russian oil since the beginning of the crisis. Due to corrosion problems of its nuclear fleet and the sale of cheap electricity, EDF estimates its annual loses at €26 billion in 2022, reports Le Figaro. The group estimates the cost of selling nuclear electricity to suppliers at low prices, an obligation imposed by the State, at €10.2 billion, compared to the €8.4 billion initially estimated. The remainder of the costs (€16bn approx.) are related to corrosion issues and renewing its fleet of nuclear reactors.

War in Ukraine: Trade and economy The entire French industrial fabric is weakened by cost increases and the prospect of shortages of certain raw materials exported in particular from Russia, observes Le Monde. In Normandy, the nitrogen fertiliser factory of the Norwegian company Yara has decided to reduce its production by 45%, especially of ammonia, as gas represents three quarters of the manufacturing costs of this chemical compound. Similarly in the Chemical Valley, near Lyon, where aspirin manufacturer Seqens partially suspended its operations due to energy price rises. Aluminium Dunkerque, Europe's largest aluminium production unit, located in northern France, had already taken cost-saving measures before the conflict broke out. Despite the high price of aluminium, the company has suffered from the high price of electricity, most of which comes from the Gravelines nuclear power plant, and has decided to shut down 31 of its 264 pots from autumn 2021, a 15% reduction in production. As for the supply of raw materials such as alumina, the Aluminium Dunkerque site is currently coping. The Aughinish Alumina refinery in Ireland, owned by the Rusal conglomerate of oligarch Oleg Deripaska, is still able to operate and is not, for the time being, subject to EU sanctions. ArcelorMittal, present in Fos-sur-Mer (Bouches-du-Rhône) is not “significantly affected” by sanctions and the war in Ukraine as it imports less than 10% of its iron ore from Russia and Ukraine. With the rise in energy and metal prices, downstream manufacturers, especially in the aeronautics sector, are particularly affected. Airbus is facing a break in part of its titanium supply, which it purchases from Russian supplier VSMPO-Avisma to manufacture structural parts and engine masts for the A350. For the time being, Airbus says it has sufficient stocks and other sources of supply. Michelin apparently did not see the crisis coming it only has two weeks' worth of stocks of carbon black, used in the manufacture of its tyres, reports the paper. On 3 March, the group decided to temporarily close its factories in Cholet (Maine-et-Loire), Montceau-les-Mines (Saône-et-Loire), Le Puy-en-Velay and Troyes. Michelin’s main source of supply is Russia (Omsk, Volgograd), which the war has made hard to transport. Internal sources tell Le Monde that Michelin is looking for sources in China, the other major world producer of carbon black.

The war is also expected to affect the French tourism industry, notes Le Monde. The number of Russian tourists to France have been on a steady decline since 2014. Some 583,000 Russian tourists came to France in 2019 (Euromonitor). The volume of Russian tourists is significantly higher in Cyprus, Italy, Spain and Greece. In France, the Alps (2% of overnight stays in winter), Paris, and the Côte d'Azur will be the most affected, especially the latter. The share of Russian and former Soviet republics tourists represented, in 2019, 6% of the Côte d'Azur's tourist stays, mainly in the summer and on the coast between Cannes and Monaco. Russia is well connected to the region with ten daily flights between Moscow and St Petersburg and Nice, which is also home to the largest Orthodox Church outside of Russia. Russian tourism in France is often that of the economic elite of Moscow and Saint Petersburg, with long stays and high incomes. Russian tourism in France generated €695 million in revenue in 2019, according to the French Central Bank, equivalent to 1.2% of total national tourism revenue.

War in Ukraine: Agriculture and Food Security The war in Ukraine has also raised concerns for the agricultural sector, as well as for businesses in the agri-food and machinery subsectors operating in Russia and Ukraine. It is worth recalling that thanks to the Beauce region (between Seine and Loire rivers); France is the largest wheat producer in the EU with over 13.4 million tonnes sold abroad each year. France exports 50% of its wheat production to North Africa and China. North Africa (30 million tonnes per year) is the largest importer of wheat in the world. Egypt (12.7 million per year), Morocco (4.3 million per year) and Algeria (12.7 million per year) are the most dependent (2019 figures) with imports coming mainly from Russia. In Algeria, which imported 7.4 million tonnes of wheat in 2020, France faces intense competition from Russia. France has been losing 60% of its market share (5.6 million tonnes imported in 2019 to 1.85 million tonnes in 2020) to Russian wheat, which is reportedly cheaper and of good quality. However, the blockage of the Black Sea exports is forcing clients of both countries to call upon new suppliers. Of the 14 million tons of wheat available, 500,000 tons were to be loaded for Egypt. Cairo launched a call for tenders, only to give up because the price offered was too high, especially by France. Algeria had originally placed an order for 1.5 million tons of wheat from Russia and Ukraine, and is now turning to France. Les Échos expects France’s 3.4 million tonne carryover stock to disappear quickly. According to the paper, the EU cereal industry has acquired power and will remain strong if it is united. If competition between France, Germany or Lithuania dominates, Europe loses its geostrategic capacity, even though it produces large, high quality and highly diversified cereal volumes.

As part of the G7, France has expressed concerns about the consequences of the war in Ukraine for food security in the poorest countries, particularly in North Africa. President Macron said on 9 March that the EU must "redefine a food strategy for Africa; otherwise several countries will be affected by famines in the next 12 to 18 months". According to the French Ministry, "the G7 is determined to ensure food security, particularly in North Africa, an area that depends on the arrival of ships from the Black Sea, which are no longer sailing," reports Les Échos. Ukraine has banned grain exports, intended for its own population while Russia has banned the sale of grain and fertiliser to foreign countries have taken sanctions against, as well as to many other countries, in order to secure Russian food supplies.

The rising price of commodities, such as steel for agri-manufacturers and fertilisers for farmers is a cause for concern. The 500 French tractor manufacturers present in Ukraine and Russia who fear the increase of steel prices. According to Axema, the French agro-machinery manufacturers' union, businesses [Axema members] make from 5% to 20% of their turnover in Ukraine and Russia. Exel Industries, which markets Berthoud sprayers and Holmer beet harvesters, generates 4% of its turnover (€877 million) in the region. Dangreville, specialist in agricultural trailers, makes a little over 5% of its turnover in both countries. Companies in the sector, 86% of which are SMEs, are concerned about the rise in the price of cereals or fertilisers, which will put farmers in difficulty and reduce their investment capacity.

War in Ukraine: Sanctions France wants to sanction an additional ten individuals close to Russian President Vladimir Putin, reports Le Figaro. Finance Minister Le Maire announced that France would submit these names to the EU this week. These individual are either present in France or have assets in France, which the French government aims to freeze. Minister Le Maire has described French and EU sanctions as “robust blows dealt to the Russian economy" by the EU and other partners. “All options are on the table” to strengthen sanctions already place, according to Minister Le Maire (14.03). La Tribune remarks that sanctions are already taking effect in France, with the seizure of property and yachts in Southern France. Moreover, the Eurochem group, owned by Russian billionaire Andrey Melnichenko, had made an offer to buy the fertiliser division of Austrian chemical company Borealis, which owns three French plants. Negotiations fell through after Melnichenko, sixth largest fortune in Russia, was subject to the latest EU sanctions. As sanctions fall on Russian companies, key French figures are resigning from their board positions in Russian banks and manufacturers. Former Prime minister François Fillon (Sibur, Zarubezhneft bank), former Finance Minister Dominque Strauss-Kahn (Direct Investment Fund Russia), and Yves-Thibault de Silguy, VP of the Executive Committee of Vinci and former EU commissioner (VTB bank) have all resigned from their board positions in Russian companies targeted by Western sanctions. Henri Proglio, former CEO of EDF and Veolia, has not resigned from his position as board member of Rosatom.

FDI: Bercy to tighten screenings as FDI levels skyrocket Papers report on the high number of FDI projects in France in 2021. According to Business France, 1,607 investment projects (1,468 in 2019) set up in France last year, confirming the country’s position as top FDI destination in Europe. Over the past year, France has proven to be a particularly attractive location for health and medical research projects, from R&D in the pharmaceutical industry (Merck KGaA, Biogen, Recipharm) or for the manufacture of medical equipment (Medicom; Getinge, Tokibo,), notes Business France. Another area is agri-food, which represents 77 projects and 1,500 jobs (Mars and VickyFood). In total, 460 industrial projects (343 in 2017) were set up in 2021. FDI has maintained around 45,000 jobs, a third of which are industrial. It is worth noting that half of these projects are new investments with the rest counting as expansions. Germany is the number one source of FDI in France (300 projects) followed the United States (247 projects, largest foreign employer in France) and the UK. With regard to Brexit, UK FDI in France accounted for 9% of the total in 2021, compared to 7% in 2017 - but this is mainly to take into account investors who would have chosen the UK and are now coming to France because of Brexit, notes External Trade Minister Franck Riester in an interview with Les Echos. According to Riester, 2021 foreign investment levels were up 32% on 2020, and higher than 2019. For Ministers Le Maire and Riester, these results are the fruit of economic policies of the last five years, notably in terms of competitiveness. For example, the reduction of corporate tax from 33% to 27.5%. Riester notes that there are still efforts needed in training, improving skills and the fiscal and regulatory framework for companies. Emmanuel Macron will present his proposals, and has already spoken in favour of a further reduction in production and payroll taxes. While the war in Ukraine will have serious and lasting consequences, it reinforces France’s efforts to strengthen Europe's strategic autonomy in terms of trade, energy, defence, industry, notes Riester. Access to low-carbon and cheap energy will become strategic, and France has solid assets thanks to its nuclear power stations and the investments announced in new power stations, and investments in renewable energy.

Turning to FDI screening, which the Ministry of Finance plans to tighten according to Les EchosRiester argues that no previous government has gone this far in controlling potentially harmful investments. In 2021, Finance Minister Le Maire had expanded the list of targeted sectors (food safety, biotech, renewable energy, semiconductors, cybersecurity, AI, robotics) and lowered the control threshold for listed companies (from 25% to 10%), until the end of 2022, in the context of the pandemic. This triggered the rejection of the Photonis purchase (defence) and Carrefour-Couche Tard take over. According to Thomas Courbe, Head of Enterprise at the Ministry of Finance and Head of Sisse, (Strategic Information and Economic Security Service), there have been 700 risky alerts since January 2020, of which 40% concerned technology transfer risks and the takeover of foreign entities. The Ministry of Finance could further widen the list of sectors, to include critical technologies, on a case-by-case basis. Moreover, Bercy has set up several contact points for companies facing tensions related to the war in Ukraine and the implementation of sanctions, the management of their supplies, including for energy. Bercy has also mapped out Russian investments in the country.


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