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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
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R 151429Z JAN 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 1705
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UNCLAS SECTION 01 OF 03 PARIS 000082 
 
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E.O. 12958: N/A 
TAGS: ECON ETRD PGOV FR
SUBJECT:  FRENCH ECONOMIC PERFORMANCE AND REFORM IN 2007 
 
¶1. SUMMARY: The scope of Sarkozy's reform agenda remains ambitious, 
but despite much jawboning, progress is slow.  With weaker than 
predicated growth and considerable economic uncertainty, reform 
becomes both more important and more difficult.  This cable reviews 
France's 2007 economic performance and provides an update on 
Sarkozy's reforms for 2008.  End Summary. 
 
2007 ECONOMIC PERFORMANCE 
------------------------- 
 
¶2. (U) The Sarkozy government is pursuing its economic reform agenda 
at a time of softer growth and considerable uncertainty.  Initial 
estimates indicate that the French economy grew by 1.9 percent in 
2007, below the government's forecast of 2 - 2.5 percent.  GDP 
growth rebounded in the third quarter reaching an annual rate of 3.2 
percent (perhaps showing the "Sarko" effect,) but moderated in the 
fourth quarter. 
 
¶3. (U) Domestic demand contributed 2.2 percent to 2007's growth with 
household consumption increasing by 2.0 percent.   The French 
consumer drove the economy in 2007 with purchasing power rising by 
an estimated 3.3 percent (compared with a 2.4 percent increase in 
2006.)  Nominal household disposable income rose 4.8 percent, a half 
point boost over the year earlier, while inflation slowed by a tenth 
of a point to 1.5 percent.  Income tax cuts, and increases in wages, 
self-employed income and social benefits supported the rise in 
disposable income.  Government consumption increased 1.4 percent, 
equivalent to 2006. 
 
¶4. (U) Investment growth slowed (3.9 percent compared to 4.1 percent 
in 2006) mainly due to slower household investment (up 1.3 percent 
compared to 5.1 percent in 2006).  The French were in a wait-and-see 
attitude before the presidential elections, anticipating tax credits 
on mortgage interest.   Corporate investment did better, rising 5.1 
percent (est.) compared to 4.6 percent.  However, the national 
statistical agency, INSEE, detected some year-end weakening in 
corporate investment as companies reacted to a more uncertain 
environment by increasing capacity utilization in lieu of expansion. 
 
 
 
¶5. (U) The foreign trade contribution to GDP growth in 2007 is 
estimated at minus 0.3 percent as import growth (4.5 percent est.) 
slowed compared to 2006 (7.1 percent), but remained higher than 
export growth (3.6 percent est. compared with 6.3 percent.) 
Government analysts blame the weak dollar, soft world demand, 
financial market turbulence and oil prices for the 
weaker-than-expected performance.   France's trade-in-goods deficit 
was a record-setting 38 billion euros for the 12 months ending in 
November 2007.   Though the strong dollar is a favorite culprit, 
Trade Minister Novelli has admitted that structural problems in the 
French economy are also to blame. 
 
¶6. (U) Higher oil and agricultural prices pushed inflation to 2.4 
percent in December 2007 compared with December 2006, up from 1.5 
percent the year earlier.  Finance Minister Lagarde expects 
inflation to be higher in 2008.  Consumer confidence was at a 
19-month low in December, reflecting in part growing concerns over 
inflation. 
 
¶7. (U) Unemployment declined to 7.9 percent in the third quarter of 
2007 from 8.1 percent in the second quarter.   Unemployment has 
continued to decline by an average of 20,000 individuals per 
quarter, even as economic growth slowed.   INSEE estimated that 
348,000 jobs were created in 2007 (up from 282,000 in 2006) 
concentrated in the first half, and in the service and construction 
sectors.  INSEE attributes faster job creation to improved growth in 
2006 and 2007 combined with slower gains in productivity. 
 
Update on Reforms 
----------------- 
¶8. (SBU) Fiscal Reform:  The government's just-release estimate of 
its summer 2008 tax cut shows significant increases in gift-giving 
among relatives and in overtime hours worked (20 million more in 
October alone).  The impact of mortgage interest and small and 
medium-sized companies (SMEs) investment exemptions will be assessed 
in August.  Finance Minister Lagarde is again weighing tax system 
changes, including a possible "social" value-added tax increase to 
finance a payroll tax cut. 
 
¶9. (SBU) Budget Balancing:  The GOF started the year with a deficit 
target of 2.5 percent of GDP.  Stronger than expected performance 
pushed the deficit downward despite additional spending and tax cuts 
 
PARIS 00000082  002 OF 003 
 
 
by the incoming Sarkozy government, which were only partly offset on 
both the expenditure and revenues sides.  However, slower economic 
growth in 2008 may undermine efforts to cut the budget deficit 
further or even to hold the final estimated 2007 level of 2.3 
percent. 
 
¶10. (SBU) Shrinking the civil service:  The government plans to cut 
the size of France's civil service by not replacing one of three 
retirees in 2008, and one out of two by 2012.  Some 22,800 jobs will 
be eliminated in 2008.  Civil service unions are demanding wage 
increases and an increase in education sector positions, calling a 
strike for January 24.   Some leftist unions disagreed with the 
government on the new missions of the civil service and the payment 
of overtime work. 
 
¶11. (SBU) Rationalizing social security:  The government objective 
is to reduce the social security deficit to 8.9 billion euros in 
2008 from an expected 14 billion euro deficit if no measures are 
taken.  New limits on reimbursement rates for health procedures were 
implemented in January.  However, hospital practitioners have 
complained about lack of staff and non-payment of overtime and 
unused leave backlogs.  Health Minister Bachelot is negotiating with 
unions on payment of leave days or their transformation into pension 
contributions. 
 
¶12. (SBU) Pension Reform:  The government has to plug growing 
budgetary gaps in the pension system for private sector workers 
(estimated at 4.7 billion euros in 2007, 8 billion euros in 2010 and 
43 billion euros in 2020) by extending the length of service.  It 
also has made a commitment to increase public sector careers to 40 
years from 37.5 years starting in 2008.  The further lengthening of 
qualifying service from 40 years to 41 years in both sectors is on 
the government agenda, but not until after the March municipal 
elections.  The leftist CGT union has showed its opposition in 
principle to the extension of the pension contribution period. 
Negotiations on the so-called "special regimes" proceeded on a 
firm-by-firm and sector-by-sector basis following the strikes of 
November.  The RATP has finalized an agreement, but negotiations 
continue at the SNCF and a strike is likely on January 22.   The 
current pay-as-you go system for special regimes has a chronic 
shortfall (5 billion euros in 2006). 
 
¶13. (SBU) Labor market: Business initially welcomed the Sarkozy 
government's efforts to gut the 35-hour workweek, but have since 
complained that the measures are confusing and costly for French 
companies.  The president has also indicated frustration, but backed 
away from his January 8 statement that 2008 would see the end of the 
35 hour work week. 
 
 
¶14. (SBU) Talks between employers and unions on revising labor 
contracts to make hiring and firing easier, and to reform the role 
of unions in negotiating sector-wide agreements, have made some 
progress, though as of January 11 the CGT has indicated it would not 
support the existing compromise.  If talks break down, the 
government will introduce a draft law in the National Assembly by 
early February. 
 
¶15. (SBU) The president's proposal to streamline assistance to 
job-seekers by merging France's national job placement and 
unemployment agencies is now before parliament, with the government 
hoping the bill will be enacted before municipal elections.  Agency 
employees have announced a strike to protest the merger. 
 
¶16. (SBU) Retail Reform: Reform of France's retail market is off to 
a bad start.  A bill adopted by Parliament on December 20 did not 
liberalize price and margin-fixing rules that govern 
supplier/retailer relations in France.  This does not bode well for 
the government's other planned changes in the retail sector this 
year.  Planned reforms include lifting restrictions on shopping 
center construction, allowing retailers to sell at a loss, holding 
sales throughout the year (which Minister Lagarde has pushed), and 
opening on Sundays. 
 
¶17. (SBU) Deregulation of the retail sector is proving hard to 
achieve due to opposition from big name producers such as Danone, 
L'Oreal and other French "champions" determined to maintain the 
status quo.   In a tactic that has been repeatedly used by this 
government in the face of opposition, Prime Minister Fillon has 
asked the former head of France's competition authority, Marie 
Dominique Hagelsteen, to examine the issue and draft a bill for 
parliamentary debate in the spring. 
 
 
PARIS 00000082  003 OF 003 
 
 
STAPLETON