Sectors & markets

France Economic Policy Roundup 3 September

Growth: GDP rose by 1.1% in Q2 2021 according to the INSEE, 3.2% below its Q4 2019 level. This a revised forecast from +0.9% growth for the same period released at the end of July. In June, the INSEE estimated GDP growth for 2021 at 4.8%.

Household spending rose by 1% in Q2 2021 but remains 5.9% below pre-crisis levels. The INSEE registers a 0.8% increase in household gross disposable income over Q2 2021. Final domestic demand rose by 1.2% while gross fixed capital formation rose by 2.4%, exceeding its pre-crisis level for the first time. Consumption of goods fell by 2.2% in July compared to June. 

France’s Manufacturing Purchasing Managers' Index fell to a six-month low in August 2021 reaching 57.5 down from 58 in July. 

Short-Work Scheme: From 1 September onwards, employees in the most affected sectors (tourism, catering, sports, culture and events) will receive 72% of their net salary down from 84%. This decrease came into force for all other sectors on 1 July. For the most affected sectors, state coverage will decrease from 50% in August (60% in July) to 36% as of 1 September. Employees in businesses closed by law will continue to receive 70% of their gross salary until 31 October 2021 (100% state compensation).

More spending ahead despite the phasing out of economic support?

In light of optimistic growth forecasts for 2021 (+6% growth), Les Échos expects it will be easier for the government to draw up its 2022 budget. The budget is due to be presented on 22 September. As a result, the Ministry of Finance is counting on tax revenues to be higher than expected thereby allowing for additional budgetary leeway. The INSEE forecast of +1.1% growth in W2 2021 will affect income tax and VAT revenues. Together with a decrease in state support for businesses, this could contribute to shoring public deficit currently at 9.2% according to OECD calculations (9.4% according to the French government). The economist Patrick Artus points that 6.2% of this deficit is structural while 2.8% is cyclical, posing a major problem on the long-term. While the stability pact is suspended until 2023 and the ECB continues to purchase government debt, this level of deficit is untenable. The only solution is to reduce deficit is the pension reform, adds Artus.

According to Challenges, the state has spent €240 billion in business aid schemes since March 2020, two-thirds of which in loans and one-third in grants. The Ministry of Finance estimates the cost of the Solidarity Fund to fall to around €100 million in September, compared to €4 billion at the peak of the crisis, in March 2021, and further falling to around tens of millions of euros in October. The cost of the Solidarity Fund was estimated at €1.2bn in June. The Ministry for Employment estimates the cost of the short-work scheme, which rose to €8.5 billion in April 2020, should decrease significantly in September to around €200 million. A “tailored approach” will replace the “whatever the cost” policy in the form of a targeted compensation scheme for fixed costs not covered by companies with less than a million euros of monthly turnover. The Solidarity Fund will run until 30 September instead of 31 August albeit under stricter conditions. To be eligible for the Fund, it will be necessary to have made at least, 15% of turnover. The Solidarity Fund and other aids will remain in place in overseas territories. The Export Support package will also continue to run for French exporters looking to develop their business internationally. The sectors "structurally" affected by the crisis such as events, travel agencies and winter sports will be the subject of a specific action plan. Targeted funding to cover fixed costs is not expected to exceed €150 million per month.

Despite the gradual phasing out of the "whatever it takes" policy, Les Échos is not convinced that this signal the end of public spending as the government has a number of “costly measures” in the pipeline. These include an €1.5bn package for Marseille, security spending, and the much-awaited Investment Plan estimated at €30bn. The objective of this Plan, according to Minister Le Maire, is to develop industrial sectors of the future. Although announced for September, the paper notes that it may not be presented until mid-October. Similarly, L’Opinion, suspects the President “will continue to spend billions until the presidential elections [in April] and perhaps even beyond.” With less than a year to go before said elections, President Macron appears to be a taking a leaf from President Biden’s book – in reference to his infrastructure spending – despite attempts by the Ministry of Finance to assert control over spending, analyses the paper. Ministerial funding is on the rise with an increase in budget allocations for the Ministry of Justice (+€660 million) and the Interior Ministry (€990 million) in 2022Moreover, the government is due to present the revenu d’engagement announced by President Macron on July 12 – a monthly allowance of €497 paid to several hundred thousand dropouts aged 16 to 24, which will probably cost around €3 billion each year. “A new structural expenditure without any savings made in exchange and which will increase the level of expenditure of the world's biggest public spender,” concludes the paper.

“External trade to be a priority for the next presidency” says Minister Le Maire

Given France’s alarming trade deficit (€65.2bn in 2020m +8bn on 2019) – the highest in the Eurozone – Finance Minister Le Maire has called for “external trade to be a key priority of the next Presidency” regardless of the future government reports BFMTV.  In 2020, trade deficit rose to €65.2bn in 2020. France’s trade deficit in goods rose to €34.8bn between January and June, compared with €32.6bn in the last six months. In 2020, the trade deficit reached a staggering €65.2bn. Covid-19 PPE expenditure has weighed negatively on the French trade balance. France has imported €6 billion worth of masks since spring 2020. "Foreign trade is the blind spot in French economic policy," warned the Minister earlier this week. He also noted that external trade should be a key indicator of national wealth and the measure of its power. This will not be an easy feat, comments the media outlet because of France’s historical service orientation by contrast with other EU Member States, such as Germany, Italy, the Netherlands, which have managed to develop their industry and all have a positive trade balance.

Speaking to BFM Business on 1 September, Minister for External Trade Franck Riester blamed previous governments for France’s dismal trade performance, noting that “foreign trade is a the result of an economic policy.” Riester deplores the lack of a sufficiently ambitious competitiveness policy due to the wealth tax (Import sur la fortune) preventing the transmission of intermediate, family-owned industrial companies from year to year, from generation to generation as in Germany and Italy." In Italy, there are 220,000 exporting companies and 300,000 in Germany compared to 132,000 in France! During his interview, Minister Riester also regretted the difficulty for exporters, state agencies and embassies to work together in supporting exports. The extension of the export support package, designed to support French businesses in developing internationally, demonstrates the importance of foreign trade for the Ministry of Finance. While state aid is ending, tailored support will be maintained for businesses looking to develop internationally.

While Le Maire deems “a good foundation has been built with the 2017 labour law reforms and the Loi Pactea bill supporting business growth,” but that there still a lot to do to restore France’s trade balance, reports La Tribune. France’s “de-industrialisation” has been decried by many economists over the last decades. Over the years, many companies have outsourced industrial production abroad due to rising oil prices and competitive labour costs from developing countries. Isabelle Méjean, economist and a member of the Conseil d’Analyse Économique, a think-tank attached to the Prime Minister’s Office, doubts whether French companies will massively relocate their production lines to France – as the government aims to achieve through calls for tenders and funding. For Méjean, relocation only makes sense at an EU level. 

Government calls for a second windfarm on Norman shores

Several outlets reports on Prime Minister Jean Castex’s call to build a second windfarm on the coast of Normandy. Negotiations are underway between various contenders and the government for the construction of a 1000-megawatt offshore windfarm in Barfleur. As the site occupies approximately 200 square kilometres in a total area of 500km2, the Prime Minister considers that this leaves room for another windfarm. The development of offshore windfarms in France has a significant number of detractors, notably heritage preservation societies, some of which have launched legal proceedings to stop the development of windfarms. This is the case with the construction another windfarm off the coast of D-day landing beach Courseulles-sur-Mer (Calvados). With a production capacity of 448-megawatts, the offshore windfarm will occupy a total area of about 45 km2. The windfarm will be operational in 2024 and provide electricity to 90% of the population of the Calvados department (691,676 in 2019 according to INSEE). The 64-turbine windfarm is due to be operational in 2024. EDF Renewables, which is managing the site with RTE (equivalent of EirGrid), has faced opposition from local organisations calling for the site to be moved further out to sea to preserve local bio and marine diversity and the area’s visual and historical landscape. Legal proceedings have been launched and two appeals are currently under examination by the by the Conseil d’État (Supreme Court for administrative law). The project also poses an issue for the regional authorities of Normandy, which is working to include D-Day beaches on the UNESCO list of World Heritage Sites.

Although it France will invest €25bn in renewable energies over 5 years, France is still lagging in the development of renewable energy sources reports Les Échos. Renewable energy accounted for approximately 25% of national electricity production in 2020, including 13% for hydroelectricity, 8% for onshore wind, and 2.5% for photovoltaic energy. The windfarm in Saint-Nazaire (Loire-Atlantique) will be the first to operate by the end of 2022 with a view to helping France reach its target of 40% of electricity production from renewable sources by 2030. With its 80 turbines, the Saint-Nazaire windfarm aims to provide 20% of the region’s electricity consumption, notes Ouest France. Yet, solar power remains at the heart of the government’s strategy for renewable energy. Indeed, it accounts for two-thirds of investments dedicated towards renewable energy recalls Le Figaro. The government has launched seven new calls for tenders over the next five years for land-based renewable energy, for a capacity of about 25-gigawatts. In addition, the government will launch a €50 million research programme including a new national observatory on offshore wind power, to inform the public on the impact of offshore wind farms on biodiversity. 

 French Tech in top shape  

Les Échos features several articles on French Tech’s strong performance in 2021. In the first six months of the year, despite the pandemic, French start-ups raised €5.14 billion in venture capital funding, almost as much as last year, according to a study conducted by EY. The paper expects funding to reach €10 billion by the end of the year. Journalist Julie Chauveau defends President Macron’s vision of France as a “start-up nation” decried by many across the political spectrum. The author attributes this success to the creation of an ecosystem, fostered by public policy and financial support, innovation, and the resilience of French start-ups, such as OVH Cloud and Doctolib (e-healthcare). Doctolib supported the roll out of the vaccination campaign in France. The development of French Tech is linked to the mobilisation of several state entities, such as Bpifrance public investment bank, which provides various forms of support (equity, financing, and internationalisation). The bank is shareholder in a plethora of made-in-France start-ups. With €2.91 billion invested in 21 operations worth over €50 million between January and June 2021, this represents an increase of 166% in value and 75% in volume compared to the same period last year. This increase was also seen at the lower end of the market (deals ranging between €20 and 49 million), with a 118% increase in value (€984 million in 2021 vs. €452 million in 2020) and 106% in number (35 vs. 17). Despite this record-breaking success, France is far behind the UK – regardless of Brexit –, Germany and the United States. It is worth noting that the Ile-de-France region accounted for 81% of funding raised by start-ups in the first half of 2021, with no other region emerging as a serious contender.

Looking ahead, the paper foresees several challenges for French start-ups in Europe and internationally. One challenge will be to ensure the listing of French start-ups – the music label Believe is already leading the way while OVH is gearing up for listing. In addition, consolidating investments at a European level will be essential to support the growth of indigenous start-ups. Diversifying capital sources is also important, observes the paper. For instance, opting for long-term assets, unlike venture capitalists, which aim to recoup their investment in less than seven years. Another key issue for growth is talent acquisition. The paper observes that there is a shortage of developers, sales and middle management personnel, which raises the issue of training and skillset. However, the advent of remote working could be a solution as it enables start-ups to cast a wider net when looking for the talent they need and which they may not find locally or nationally. This is the case for Ankorstore (brand marketplace), which has hired people from across Europe, by allowing its tech teams to work remotely fulltime. In other departments, employees can alternate between the office and remote working. Luko (online home insurance) allows the recruitment of anyone living up to a maximum of three hours away from Paris. Other start-ups are using the French Tech Visa, a procedure that simplifies the installation of non-European employees and founders of start-ups in France. Valid for four years and renewable, it automatically extends to the spouse and dependent children under the age of 18. Since the beginning of the pandemic, the number of arrivals has fallen, but it could pick up again thanks to implementation of the EU sanitary pass. 


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