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RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHFR #0081/01 0211711
ZNR UUUUU ZZH
R 211711Z JAN 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5275
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1033
RUEHBJ/AMEMBASSY BEIJING 1876
RUEHBR/AMEMBASSY BRASILIA 2148
RUEHBU/AMEMBASSY BUENOS AIRES 1640
RUEHBY/AMEMBASSY CANBERRA 1803
RUEHJA/AMEMBASSY JAKARTA 0689
RUEHME/AMEMBASSY MEXICO 0506
RUEHNE/AMEMBASSY NEW DELHI 1279
RUEHOT/AMEMBASSY OTTAWA 2285
RUEHSA/AMEMBASSY PRETORIA 1684
RUEHRH/AMEMBASSY RIYADH 0438
RUEHUL/AMEMBASSY SEOUL 1626
RUEHKO/AMEMBASSY TOKYO 2901

UNCLAS SECTION 01 OF 03 PARIS 000081 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB/IFD/OMA, EEB/EPPD AND EUR/WE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL FR
SUBJECT:  FRANCE AND THE ECONOMIC/FINANCIAL CRISIS 
 
REFS: A) STATE 0134459 B) PARIS 01951 
 
¶1.  (SBU) Summary:  France anticipates a steep but short-lived 
economic contraction in 2009, followed by a slow recovery, according 
to government and private sector economists.  Sharp slowdowns in key 
trading partners (Germany, Spain) as well as longstanding problems 
with international competitiveness are weighing on the economy.  A 
top French private sector economist tells us the downside risks 
include a smaller-than-expected U.S. stimulus package or another 
major bank failure (though she believes the latter unlikely). 
Outside of the financial sector, government policy initiatives focus 
on assisting small and medium-sized firms, the housing and 
automobile sectors, and very selective stimulus payments to 
households.  At the same time, the GOF insists on the necessity of 
new policy coordination mechanisms at the European and international 
levels given the extent of economic globalization, a view it 
believes the Obama administration will share.  End Summary 
 
Economic Situation and Outlook 
------------------------------ 
 
¶2. (SBU) The French economy contracted at an annual rate of 3.2 
percent in the fourth quarter, dragging growth for the year down to 
0.8 percent, estimates French statistics agency INSEE.  This 
followed growth of 2.4 percent in 2006 and 2.1 percent in 2007.  For 
the first half of 2009, INSEE forecasts a further contraction of 
over one percent.  Barclays Capital economist Laurence Boone told us 
she expects fourth quarter 2008 and first quarter 2009 to be the 
depth of recession for France, with data likely to show a bottom by 
the end of the second quarter.  Overall, she expects a 1.3 percent 
GDP contraction for 2009.  COE-Rexecode Director Denis Ferrand 
foresees a "square-root-shaped" downward spike and initial rebound, 
followed by almost flat growth in the medium-term.  Private sector 
projections for 2009 range from minus 0.5 to minus 2.1 percent, 
followed by slow recovery in 2010. 
 
¶3. (SBU) Economics Minister Christine Lagarde has promised growth of 
0.2-0.5 percent over 2009, once the effects of the GOF's economic 
stimulus package come through.  Budget Minister Eric Woerth said in 
early January that he expects no downward revision of the 
government's current 2009 GDP growth forecast, a prospect that even 
INSEE finds optimistic.  INSEE Chief Economist Eric Dubois explained 
to the press that for France to achieve zero growth in 2009, the 
economy would need to grow 1.4 percent (5.7 percent annualized) in 
each of the last two quarters of the year.  Dubois stressed that he 
thought this unlikely. 
 
Credit Hits Business, Consumers Pay Cash (mostly) 
--------------------------------------------- --- 
¶4. (SBU) The credit crunch has hit France largely through the 
corporate sector, where bank lending plays a critical role in 
balance sheets, particularly for SMEs.  Credit tightening started to 
hit in mid-September (post-Lehman), and the impact has yet to be 
fully felt, according to Boone.  Barclays' data indicate numerous 
corporate credit lines will expire at the end of the first quarter 
¶2009.  Boone expressed concern about renewal terms but does not 
foresee a "drastic collapse."  French household savings average 15 
percent of disposable income.  Consumer credit is modest and tightly 
correlated to disposable income, and thus to employment.  As a 
result, there is little wealth effect in consumer spending, and 
consumption has held up except in sectors like autos that are 
reliant on consumer credit. 
 
Unemployment 
------------ 
¶5. (SBU) Unemployment is rising slowly from the early 2008 25-year 
low of 7.2 percent.  INSEE expects 8 percent unemployment by June 
¶2009. "Partial unemployment" picked up in November, and Barclays' 
Boone expects a sharp rise in the December - January unemployment 
numbers, which will weigh on consumer spending.  Nevertheless the 
mood of the French consumer is not catastrophic, compared with the 
1993 recession which saw unemployment at 12.5%. 
 
¶6. (SBU) The increase in unemployment in 2008 is largely a result of 
 
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the more than 10 percent increase in bankruptcies, mostly from 
mid-year, and notably in the automobile, real estate and hospitality 
sectors.  Economists expect bankruptcies to extend to all industrial 
sectors in 2009.  However, Ferrand told us that the increase in 
unemployment may boost creation of new business, citing recent 
statistics showing that one third of start-ups are attributable to 
the unemployed as government measures to lighten bureaucratic and 
fiscal burden on very small firms encourage them to become 
entrepreneurs. 
 
Key Factors 
----------- 
 
¶7. (SBU) Key factors weighing on the French economy include the 
global economy as well as the slowdown of close trading partners 
such as Spain and Germany.  Experts all expect the drivers of the 
2008 contraction to continue in 2009 including:  contraction in the 
auto industry, reductions in inventories and a decline in exports 
(minus 9 percent, per INSEE).  One of the biggest challenges for 
France is competitiveness which is weighed down by high labor costs 
and the difficulty of "growing" small firms. 
 
French Policy Approaches 
------------------------ 
¶8. (U) In addition to its financial sector rescue programs (ref B), 
GOF measures focus on small and medium-sized firms, and the housing 
and automobile sectors.  Both government and private sector 
economists believe that payments to households tend to be saved 
rather than spent.  Instead, the government has focused its plans 
for direct payments on a recently-created negative income tax for 
households in the lowest income brackets.  On December 4, President 
Sarkozy announced 26 billion euros for economic stimulus measures 
including 4 billion euros in transportation and energy 
infrastructure, 4 billion euros in "strategic" areas (research and 
development, higher education, defense), 4 billion euros in 
additional support for small business, 2.5 billion euros in support 
for local government investment projects, and the purchase or 
construction of 100,000 housing units.  Employment-specific measures 
include waiving payroll taxes equivalent to minimum wage rates on 
new employees hired in 2009 by businesses with less than 10 
employees.  In addition, 500 million euros will be added to funding 
for incentive payments to those returning to the workforce who would 
otherwise experience a net drop in income due to lost unemployment 
benefits.  On the corporate side, advance tax payments will be 
reduced and reimbursement of tax overpayments will be accelerated to 
reduce the credit requirements of cash-strapped companies.  On 
January 20, Prime Minister Fillon announced state aid to the 
automobile sector "on the order of 5 to 6 billion euros" but did not 
provide details. 
 
Assessment of Government Measures 
--------------------------------- 
¶9. (SBU) The general assessment is that this stimulus package will 
add about 0.6 to 0.8 percent to GDP in 2009.  The GOF's detailed 
information on the stimulus package indicates that some 11.6 billion 
of the 26 billion euros consists of accelerated tax refunds. 
Ferrand highlighted the importance of this cash-flow assistance in 
what he expects to be a sharp but fairly short-lived downturn. 
Barclays' economist Boone believes that accelerating tax rebates 
will have limited impact on industrial activity.  She puts direct 
support to industrial activity from the stimulus package at 3 - 6 
billion euros. 
 
¶10. (SBU) Boone expressed concern that the GOF may move to extend 
bank guarantees for lending to the corporate sector in order to 
force lending to business by reluctant banks.  The State is "not 
good at (picking winners)," and if everything has a guarantee it's 
"impossible to discriminate between good and bad."  Business should 
not invest if it does not see demand.   She expects the GOF budget 
deficit to reach 5.5 percent of GDP in 2009 (compared with the 
latest GOF projection of 4.4percent,) with the lion's share 
resulting from automatic stabilizers. 
 
¶11. (SBU) SME's:  Small and medium-sized firms account for 
 
PARIS 00000081  003 OF 003 
 
 
two-thirds of employment, and are particularly hard hit by the 
credit crunch.  The GOF stimulus package provisions to reduce 
up-front tax payments or accelerate tax refunds are intended to 
allow more firms to remain solvent to grow again when the downturn 
ends.  The 2007 tax credits for investments in innovative technology 
are beginning to show results and accelerated amortization of new 
investments is also receiving some government consideration. 
 
¶12. (SBU) Autos:  According to Ferrand, residential property and 
consumer durables including autos have been hardest hit since these 
sectors rely on consumer credit.  Rising fuel prices through 
September and increasingly tight credit markets are responsible for 
a 20 percent decline in new car registration this year.  However, 
auto production in France is down almost 60 percent since June, 
reflecting inventory reduction and reduced production, with 
temporary plant shut-downs towards the end of the year.  With the 
auto sector accounting directly and indirectly for some 10 percent 
of employment in France, the government will complement demand-side 
measures (credits for trading in old vehicles for new, greener cars, 
plus 1 billion euros in low-interest loans to finance car purchases) 
with financial assistance to the industry, including PME component 
suppliers.  If fuel prices remain at current levels and the rest of 
the economy does not significantly worsen, Ferrand reasoned, demand 
will drive higher levels of production. 
 
¶13. (SBU) Comment:  The impact of the financial crisis on the real 
economy in France remains moderate at this point, outside of the 
automotive and residential construction sectors.  In part, this is 
due to the fact that French consumption is driven by current income, 
not wealth, and consumers rely little on consumer credit. 
Nonetheless, we expect to see a second-round deepening of recession 
as the crisis hits France's key trading partners in Europe and 
elsewhere as well as the travel, tourism and luxury goods sectors 
that are important to France.  The GOF has had a multi-layered 
policy response.  First, it has pressed for fuller European 
coordination on fiscal and monetary policy.  The GOF is particularly 
proud of its success in convening for the first time Eurogroup heads 
of state with the president of the European Central Bank, perhaps 
beginning a new era of consolidated economic governance in Europe. 
Second, the GOF is fixated on the need for global governance 
mechanisms to ensure supervision and regulation of global finance 
and the globalized economy, more generally.  There is a belief 
across the political mainstream that the interplay between finance 
and the real economy in the current downturn justifies a new 
international approach in these areas and an "activist" state role 
in the economy, whether one calls it Colbertist or Gaullist. 
Finally, the French have high expectation that the Obama 
Administration will see eye-to-eye with them on many of these 
issues. 
 
PEKALA