This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 PARIS 001231 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT: FINANCE MINISTER VISION FOR GOF MACRO-ECONOMIC 
POLICY 
 
REF:  PARIS 001050 
 
¶1. SUMMARY.  Just before turning in his resignation 
(septel), Finance Minister Herve Gaymard announced the 
details of GOF macro-economic policy in the run-up to 
presidential elections in 2007.  He planned a series of 
fiscal incentives and reforms aimed at restoring confidence, 
boosting economic growth and stimulating job creation.  Job 
creation has become particularly significant, as the latest 
statistics show French unemployment has reached the 
symbolically significant 10 percent mark.  The ambitious GOF 
policy direction is likely to continue, no matter who 
occupies the Minister's post in the future.  END SUMMARY. 
 
--------------------------------------------- -------- 
Confidence: Key to Economic Growth and Employment 
--------------------------------------------- -------- 
 
¶2.  Once comfortably settled in his job, Finance Minister 
Herve Gaymard decided to set out the GOF vision for 
macroeconomic policy for the rest of President Chirac's 
current term.  On February 8, Gaymard held a press 
conference with his entire team, Industry Minister Patrick 
Devedjian, Foreign Trade Minister Francois Loos and Budget 
Minister Jean-Francois Cope to explain the GOF policy 
direction.  Gaymard, faithful to "the positive attitude" so 
dear to Prime Minister Raffarin, deemed 2004 GDP growth 
performance as "excellent" (ref).  He spoke of the GOF's 
determination to achieve 2.5% GDP growth in 2005, although 
he affirmed that there could be "no employment without 
growth, no growth without confidence, and no confidence 
without employment."  He expressed dissatisfaction with 
French "inability to deal with a certain number of 
structural obstacles in our economy."  Thus, the two main 
features of GOF macroeconomic policy continue to be 
containing the deficit below 3 percent of GDP, and using 
fiscal measures to stimulate consumption, purchasing power, 
business activity, and reduce unemployment. 
 
------------------------------------------- 
GOF Policy Details: Stimulating Consumption 
------------------------------------------- 
 
¶5.  Gaymard was building upon initiatives introduced by his 
predecessor Nicolas Sarkozy, to boost consumer confidence, 
purchasing power and employment: 
 
¶A.  Resuming income tax cuts in 2006 and 2007 in line with 
President Chirac's promise to cut them by 30% by the end of 
his mandate in 2007.  Gaymard says he will make a number of 
proposals to Prime Minister Jean-Raffarin, focusing 
particularly on tax cuts for the middle-class and the 
working population, and an improvement in the tax deduction 
related to general expenses of the self-employed. 
 
¶B.  Extending the period for tax deductions on gifts to 
descendants to December 2005, and raising eligible amounts 
for deductions to 30,000 euros from 20,000 euros.  The idea 
is to recycle a portion of savings in consumption and 
investment. 
 
¶C.  Making Housing More Accessible by: 
 
--Liberalizing home loans to enable people to re-mortgage 
real estate and raise cash more easily.  Gaymard wants to 
reactivate by the end of 2005, two "Anglo-Saxon" schemes 
that former Budget Minister Dominique Bussereau planned to 
launch in early 2005: renewable mortgages ("hypotheque 
rechargeable") and loans associated with mortgages with a 
life annuity ("viager hypothecaire"). 
 
--Moderating rent increases by creating, by 2006, a new 
index ("indice de gestion locative") that will replace the 
cost of construction index (ICC) used since 1953 in the 
annual revision of rent increases.  Gaymard explained that 
using the ICC was unfair since it has increased 
significantly in the past few years (4.58% in Q-3 2004 
compared with Q-3 2003, one of the highest increases since 
1995), and has been significantly higher than the real 
estate maintenance cost. 
 
--Improving the housing market supply.  In a move to 
reassure landlords, the GOF wants to encourage insurance 
companies to propose real estate insurance contracts with 
options to cover the risk for unpaid rents.  Insurance 
premiums of these contracts could be topped up by a 
surcharge in case of unpaid rents. 
 
¶D.  Authorizing payment of interest on current banking 
accounts in line with the European Justice Court's decision, 
as early as March 2005.  Banks are requesting as counterpart 
that clients pay for all bank services (including the use of 
checks, which currently are provided free of charge). 
Gaymard promised to make sure that banks reinforce the 
transparency of their services costs. 
 
¶E.  Encouraging responsively the development of a consumer 
credit industry including credit to students, as "France has 
to catch up with other countries." 
 
¶F.  Liberalizing the retail market with an ambitious reform 
of the "Loi Galland" before the end of the year.  Sarkozy 
had made this reform a priority of his own program.  Many 
observers deem that the law that bans retailers from selling 
branded goods below suppliers' list prices is a cause for 
significant consumer price increases. 
 
--------------------------------------------- --------- 
Stimulating Purchasing Power and Activity of Companies 
--------------------------------------------- --------- 
 
¶6.  The GOF also wants to stimulate purchasing power and 
activity of companies by: 
 
¶A.  Cutting further payroll taxes paid by employers.  The 
"level zero" will be achieved on the minimum wage (SMIC) in 
2006 when employers benefit from payroll taxes cuts 
equivalent to 28% of gross payroll expenses (versus 26% 
currently). 
 
¶B.  Accelerating repayments of value added tax to companies. 
The GOF committed to return 80 percent of VAT repayments to 
companies within a month, by the end of 2005.  About 33 
billion euros will be re-injected in companies earlier-than- 
expected.  Electronic communication will help simplifying 
relations of companies with the tax administration, notably 
by allowing companies to deduct VAT repayments from tax 
bills they owe to administrations. 
 
¶C.  Facilitating the access of small- and medium-sized 
companies to bank credit by limiting banks' responsibility 
to loans. In the current system, banks may refuse to make 
loans when they deem, rightly or wrongly, it is risky 
because they may be accused of "excessive support." 
 
¶D.  Facilitating the access of small- and medium-sized 
companies to financial markets to have their plans funded. 
Without this access, corporate plans fail and result in less 
economic growth and fewer jobs for the French economy. The 
GOF plans to develop the "love money," (funds from 
affective, family, geographic or professional sources) by 
implementing new regulations.  Gaymard also asked banker 
Rene Barbier De La Serre to propose reforms to re-orientate 
savings towards "active" savings (in a "anglo-saxon" mode) 
by providing tax incentives to regular holders of equities 
(by opposition to speculators). 
 
--------------------------------------------- ------ 
Encouraging Exports and Adjusting Industrial Policy 
--------------------------------------------- ------ 
 
¶7.  Loos and Devedjian stressed that exports and industry 
were keys for economic growth and job creation. 
 
¶A.  Encouraging exports, by stimulating energy of "France's 
team" with the creation of Ubifrance, a new agency for 
international development of companies.  Notably, the GOF 
intends to involve small- and medium-sized companies in the 
expansion of exports.  Regional councils ("Conseils 
Regionaux") can associate with that expansion, on an 
experimental basis.  Candidates to the experiment will 
benefit from Paris-based foreign trade specialists' 
expertise and government funds they manage.  The second axis 
of the GOF strategy is to encourage canvassing of business 
abroad by enhancing tax relief on professional expenses of 
commercial executives working abroad, having a 
sector/country approach, encouraging canvassing in Germany 
(France's first trading partner) and China (emerging 
economic power), increasing guarantee insurances, and 
providing financial aid through export credit agency COFACE 
to French firms established abroad when they promote French 
goods. 
 
¶B.  Improving France's attractiveness by attracting decision 
and research centers along with their staff in France, 
notably though favorable tax treatment. 
 
¶C.  Adjusting industrial policy by defining the impact of 
macro-economic policy on industrial sectors, taking into 
account criteria such as exposure of sectors to competition, 
labor shortage, and sensitivity to regulatory schemes. 
Around 10 industrial sector clusters will be created with 
the purpose to coordinate action between industry and 
administration.  Devedjian emphasized that the GOF has a 
real industrial policy in relation with company and consumer 
interests. 
 
¶D.  Stimulating further innovation, a key factor of France's 
competitiveness.  A new Agency for Industrial Innovation 
will analyze forces and weaknesses of the French industry, 
and will attribute repayable advances in support of 
federative projects under control of large industrial 
groups. 
 
--------------------------------------------- -- 
Tackling Unemployment through Specific Measures 
--------------------------------------------- -- 
 
¶8.  Gaymard stated that "what really matters", is the fight 
against "scandalously high" jobless rate (9.9% on average 
corresponding to 9% for the elderly and 21.8% for the 
youth).  "We can't behave as if we didn't have twice the 
unemployment of some other European countries.  We must 
question ourselves about the success of the U.K., Denmark or 
Sweden.  We must be pragmatic and have no taboos."  Gaymard 
hopes that the Council of Job Orientation, which is in the 
process to be created, will allow politicians, experts, 
employees and employers representatives to speak the same 
language about unemployment.  Implicitly acknowledging that 
economic growth and further cuts in payroll taxes will not 
be sufficient to stimulate job creation, Gaymard pledged to: 
 
¶A.  Increase the earned income tax credit in 2006 "to have 
work pay better than welfare."  The income tax credit will 
be increased for part-time employees.  An exceptional tax 
credit will reward the unemployed who will accept to work in 
sectors with labor shortage. 
 
¶B.  Improve labor flexibility by going beyond a reform now 
passed by the Parliament to soften the 35-hour workweek. 
 
¶9.  Gaymard repeated that he has been working closely with 
Labor and Social Cohesion Minister Jean-Louis Borloo to 
achieve Prime Minister Jean-Pierre Raffarin's objective to 
cut unemployment by 10% by the end of 2006.  Economic growth 
and measures to spur job creation including the Social 
Cohesion Plan are expected to create 250,000 jobs in 2005, 
and more in 2006.  In a new more flexible approach to 
encourage employment of part-time and lower-skilled 
employees, Borloo recently unveiled a plan to create up to 
500,000 new jobs in the services sector in the next three 
years.  Under this plan, tax cuts will encourage households 
to employ care workers and domestic staff.  The GOF is also 
working on plans to simplify the French complex labor code. 
 
--------------------------------------------- ------ 
Restoring Confidence by Reducing the Budget Deficit 
--------------------------------------------- ------ 
 
¶10.  Budget Minister Cope confirmed that the 2004 budget 
deficit was expected to amount to 3.6% of GDP, reiterating 
with Gaymard that the 2005 budget deficit would fall below 
3% of GDP as promised to the European Commission.  "The need 
to control public finances is not an obsession of 
accountancy imposed by Europe.  It is straightforward common 
sense, when one considers that a French child, when born, 
arrives in the world with 17,000 euros of debt, and that 
since 1981, our public debt has risen 22% to 65% of GDP." 
Increasing debt also means anticipations for repayments and 
needs for budget receipts, thus increased taxes, a process 
that harms confidence in the future.  Gaymard indicated 
that, in 2006, the rule was still no growth in central 
government budget spending (excluding inflation), "in line 
with decision made by Raffarin" to reduce the budget 
deficit.  Regarding the social security system, Gaymard said 
that the health insurance reform will help, but it was up to 
the French to preserve "an extremely precious asset."  He 
also made clear that the GOF would pay for transfer of 
expenditures from the central government to local 
authorities, estimating expenditures related to 
decentralization at 3% of local authorities' expenditures. 
 
--------------------- 
Privatizing Companies 
--------------------- 
 
¶11.  Gaymard also vowed to press ahead with the partial 
privatization of three major energy firms (power and gas 
utilities EDF and GDF, and the nuclear group Areva) and a 
road operator SANEF ("Societe des Autouroutes du Nord et de 
l'Est").  Plans include privatizaton of SANEF by April 2005, 
GDF by the summer, Areva by the end of the summer, and EDF 
by the end of the year. 
 
------- 
Comment 
------- 
 
¶12.  The GOF macro-economic policy, announced just after the 
G7 Finance Ministers meeting, is an ambitious plan to 
address France's economic problems.  However, many measures 
still would have had to be discussed with Ministers for 
Education, Labor, and Small- and Medium-Sized Companies or 
with sector representatives (banks or businesses), examined 
by the Parliament as part of the central government budget, 
or introduced as separate regulations.  Gaymard's 
resignation (septel) will make that discussion problematic, 
but will also make it difficult for any successor to 
significantly change France's economic policy direction. 
WOLFF