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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #1608/01 1101516
ZNR UUUUU ZZH
R 201516Z APR 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6658
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 001608 
 
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SENSITIVE 
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PASS FEDERAL RESERVE 
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STATE FOR EB and EUR/WE 
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TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV ELAB FR
SUBJECT: FRANCE: IMPACT OF PRESIDENTIAL CANDIDATES' ECONOMIC 
PROPOSALS ON EMPLOYMENT 
 
 
¶1. (U) SUMMARY.  According to an evaluation of the leading French 
presidential candidates' job-creation proposals by a prominent think 
tank aligned with French business groups, only center-right UMP 
candidate Nicolas Sarkozy's policy proposals would create jobs and 
add to GDP growth; centrist UDF candidate Francois Bayrou's and 
Socialist Party candidate Segolene Royal's proposals would have a 
net effect of destroying jobs and reducing GDP growth.  END OF 
SUMMARY 
 
Think Thank Evaluates Impact of Job-creation Proposals made by 
Leading Presidential Candidates 
--------------------------------------------- ---- 
¶2.  (U) COE-REXECODE, a prominent think tank and forecasting group 
aligned with French business groups, evaluated the short-term and 
medium-term impacts of job-creation proposals made by center-right 
UMP candidate Nicolas Sarkozy, centrist UDF candidate Francois 
Bayrou and Socialist Party candidate Segolene Royal. 
 
Sarkozy's Proposals Would Result in Job, GDP Growth 
--------------------------------------------- ----- 
¶3.  (U) According to COE-REXECODE, Sarkozy's proposals to allow 
over-time hours above the annual 220-hour maximum, and exempt 
overtime pay from taxes, would enhance wage-earners' purchasing 
power, especially in sectors with labor shortages.  The resulting 45 
percent increase in overtime pay to employees would be a "strong 
direct incentive" on labor supply, while the 26 percent decrease in 
the cost of overtime to employers would favor an increase in work 
hours and eventually labor demand thanks to a decrease in the 
average cost of labor.  The proposal would create 180,000 jobs 
(120,000 jobs and 60,000 "job equivalents" induced by the extension 
of worked hours) and in the short-term add 1.3 percent to the 
present 2.0 percent French GDP growth rate.  In the long term, the 
impacts of measures would be more significant as the elimination of 
the 35-hour work week would help restore France's competitiveness. 
 
 
Bayrou'S Proposals have a Mixed Effect 
-------------------------------------- 
¶4.  (U) According to the study, Bayrou's proposals would have a 
mixed effect.  His proposal to increase by 35 percent overtime pay 
(for hours 35 to 39 worked per week), and to reduce related social 
taxes by 17 percent, would initially increase GDP by 0.5 percent. 
His proposal to eliminate social taxes on two new jobs created per 
company ("emplois francs," targeting very small companies and 
individual entrepreneurs) would increase GDP by 0.6 percent and 
create 90,000 jobs - "a modest performance relative to its cost" 
(7.4 billion euros or 9.6 billion USD).  However, the proposal to 
limit payroll tax breaks on low wage jobs (up to 1.3 times the 
minimum wage versus 1.6 times currently) to small and medium sized 
companies (versus applying the tax breaks to all companies) would 
increase the business sector's overall tax burden, cut GDP by 
1.3-1.6 percent and result in the loss of 230,000 jobs.  The overall 
net result of Bayrou's proposals in the short term would be a 0.3 
percent decrease in GDP growth and a net loss of 60,000 jobs.  The 
long-term effect on economic growth and competitiveness would be 
relatively neutral as the measures would cancel each other out. 
 
 
Royal's Proposals Would Harm Competitiveness 
---------------------------------------- 
¶5.  (U) Royal's proposal to increase the monthly minimum wage (SMIC) 
to 1,500 euros by 2012 would cause an increase in the costs of 
production that would harm competitiveness.  The proposal would 
result in the elimination of 50,000 jobs and a 0.3 percent cut in 
GDP.  The elimination of the new hiring contract ("Contrat Nouvelle 
Embauche - CNE") by itself would destroy another 30,000 jobs and cut 
GDP growth by an additional 0.2 percent. Her proposal to impose the 
35-hour work week on all French companies would be even more 
detrimental, resulting in additional 0.9 percent cut in GDP and loss 
of  another 150,000 jobs.  Royal's proposal to increase local 
government-sponsored jobs ("emplois-tremplins") to 450,000 from 
50,000 currently would create some jobs in the short term, but would 
require financing by regions that would inevitably increase taxes 
and drag down economic growth.  That said, COE-REXECODE did not 
seriously expect the measure, which could sap up to 30 percent of 
the regions' budgets (7 billion euros or USD 9.1 billion), to reach 
its full potential given other existing government-subsidized 
contracts.  In the long-term, Royals' proposals would result in a 
decline in competitiveness and purchasing power. 
 
Economic Reform on a Short Wire 
------------------------------- 
 
PARIS 00001608  002 OF 002 
 
 
¶6.  (SBU) Rexecode Director Michel Didier told Emboffs on April 16 
that if Nicolas Sarkozy is elected he would have to push through 
economic reforms during an extraordinary summer session of 
parliament.  Waiting until fall would allow the opposition to 
coalesce and likely stall reform efforts.  (Note: Sarkozy has said 
he would act just after the June legislative elections, assuming UMP 
controls the National Assembly. End note.)  Didier thought Sarkozy's 
proposed measures, such as  eliminating taxes on overtime pay, would 
have  an important psychological effect that could lead to further 
reform of the labor market.   Didier expects that, if elected, 
socialist candidate Segolene Royal would impose further rigidities 
on the French economy.   Didier felt that none of the candidates had 
a long-term vision for the French economy, and instead were simply 
tinkering within the existing policy framework. 
 
The Usual Caveats 
----------------- 
¶7.  (U) COE-REXECODE warned it did not evaluate the impact of all 
factors, including possible changes in labor contracts (e.g. 
Sarkozy's proposal to create a single labor contract - replacing 
some that are highly protective and some that are highly flexible) 
or in union representation (e.g. Royal's proposal to encourage 
unionization of employees with tax incentives).  The evaluation also 
does not include "the very long term impact of support to higher 
education and research, although they are parts of the three 
candidates' programs."  COE-REXECODE's evaluation is limited to 
job-creation proposals of the candidates, and holds other variables 
constant. 
 
Comment 
------- 
¶8.  (SBU) The study should be taken with a grain of salt, given 
Didier's affinity with Sarkozy.  However, even in the most 
optimistic scenario the study shows that only 180,000 jobs would be 
created.  Whoever is elected President may well be tempted to 
continue the French tradition of resorting to government-subsidized 
contracts to create jobs, should real reform prove too difficult. 
In 2006, government contracts supported 370,000 new jobs. 
Employment in the private sector benefited from 
government-subsidized alternative training contracts (412,000), 
payroll tax exemptions (214,000), and government-subsidized 
contracts in favor of full-time jobs (150,000). 
 
STAPLETON