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DE RUEHFR #0493/01 0931050
ZNR UUUUU ZZH
R 031050Z APR 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5955
INFO RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 04 PARIS 000493 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB and EUR/WE 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN ETRD PREL FR
SUBJECT: FRANCE'S EVOLVING INDUSTRIAL POLICY 
 
NOT FOR INTERNET DISTRIBUTION 
 
REF: A) Paris 0287 B) Paris 212 C) Paris 0334 D) 
Paris 236 
 
¶1.  Summary:  President Sarkozy's domestic and 
European industrial policy objectives reflect a 
blend of political Gaullist traditionalism and 
results-oriented economic strategy.  Sarkozy defends 
"France's grandeur" through a vision of strategic 
sectors for which he shuns foreign capital at home 
but solicits competitive alliances abroad.  Evidence 
may weigh against the efficiency of interventionism, 
but the French have managed a sufficient number of 
successes (trains, nuclear plants) to embolden those 
who argue the point.  Still, a growing constituency, 
including in the Ministry of Finance, is working to 
focus government policy on boosting competitiveness 
rather than saving dinosaurs.    End summary. 
 
The Appeal of Industrial Policy During a Crisis 
--------------------------------------------- -- 
¶2.  (SBU) Per reftels, the economic crisis has 
sharpened French interventionist reflexes.  In 
November 2008 President Sarkozy established the 
Strategic Investment Fund (FSI), touted in some 
circles as a French Sovereign Wealth Fund. 
Representatives of the 20 billion euro venture 
capital fund tell us the FSI's public mission is 
accomplished solely through its goal of investing 
for the medium and long-term.  While they and other 
supporters downplay the defensive aspect of the 
Fund, initial investments in Daher, a family-held 
maker of equipment for the airplane, nuclear, 
defense, and auto industries, the car equipment 
manufacturer Valeo, and purchase of a blocking 
minority position in Korean-owned Chantiers de 
l'Atlantique shipyard, suggest expectations for 
medium to long-term returns track closely with the 
GOF's vision of maintaining France's industrial 
fabric. 
 
¶3. (U) Other GOF crisis measures designed to save 
French industry are potentially one-off affairs, but 
do little to force serious restructuring.  They 
include a 9 billion euro aid package for France's 
auto sector (ref B), trade financing for the 
aeronautic sector (ref C), and a variety of measures 
designed to boost financing to small and medium- 
sized enterprises.  The GOF did introduce re- 
training/job transition assistance in its auto 
industry package, though such measures have taken a 
back seat to more highly-visible calls for companies 
to maintain employment in the sector. 
 
Industry is Strategic 
--------------------- 
 
¶4.  (SBU) State intervention is frequently aimed at 
keeping the industrial base of "strategic sectors" 
the definition of which can be difficult to pin down 
-- in French hands.  "We are not talking about 
subsidizing failing companies, but of stabilizing 
companies that could become prey for predators," 
Sarkozy said in a December 4 speech on launching 
France's economic stimulus plan.  This argument is 
not new to the GOF.  In 2005, Prime Minister 
Dominique de Villepin quietly published a decree 
listing 11 industrial sectors to be protected on 
grounds of national security.  The list, which 
Sarkozy described earlier this year as 
"complicated," ranges from antiterrorist biometric 
technology to casinos.  The decree, known as 
Villepin's "Danone Law" was prompted by PepsiCo's 
reported bid for Danone.  At the time it was labeled 
"economic patriotism" and struck a deep national 
chord.  The "yogurt as strategic sector" vision is 
frequently ridiculed here as Gaullism gone awry, but 
in an era of liberalized capital flows, political 
sensitivities remain remarkably attuned to the flag 
of capital. 
 
¶5.  (SBU) Sarkozy often emphasizes that "France's 
industrial heritage is a strategic asset" which must 
be preserved and prevented from further erosion; he 
noted in a November 2008 speech at Daher that 
730,000 industrial jobs were destroyed between 1995 
and 2003.  Sarkozy has long advocated a forceful 
industrial policy on the grounds that "once the 
 
PARIS 00000493  002 OF 004 
 
 
factories go, everything goes" and that France 
should remain a global player and not become "a 
simple tourist reserve."  If France loses its 
industrial base Q cars, ships, trains, planes - it 
will be "ready to lose its services as well," he 
said at Daher. 
 
and innovative 
--------------- 
¶6.  (SBU) But in a 2007 speech shortly after his 
election Sarkozy also emphasized a less-Gaullist 
vision for how the State should pursue industrial 
policy.   Industrial policy is "mostly about 
promoting innovation, especially in the nuclear, 
aeronautics and space sectors," he said.  Strategic 
companies have skills, technology, and jobs that are 
"irreplaceable for France."  Laurent Cohen-Tanugi, 
French industrial policy expert and author of a 
recent GOF-commissioned report on France's progress 
on the EU's Lisbon Agenda, told us recently the 
economic crisis has given new impetus to promoting a 
knowledge-based economy.  In tune with the Lisbon 
strategy, the GOF has spurred efforts to boost 
France's competitiveness through regional networks 
of innovative PMEs.  President Sarkozy has placed an 
emphasis on tying support to performance with such 
policies.  And marching orders for the newly-minted 
Strategic Investment Fund underscore the priority 
given to targeting economically-viable SMEs in 
strategic industrial sectors that offer "future 
growth" opportunities. 
 
Promote R&D, SMEs and Cluster Development 
----------------------------------------- 
¶7.  (SBU) Sarkozy has tripled (to 30 percent) the 
so-called Research Tax Credit (CIR), which provides 
tax breaks to support corporate R&D investment. 
This tax incentive amounted to 1.5 billion euros in 
2007 and 4 billion euros in 2008.  As part of a 
French-style "Small Business Act," Sarkozy's major 
economic bill (the 2008 economic modernization law) 
reserved, on a five-year experimental basis, 15 
percent of all high-tech public procurement to SMEs. 
 
¶8.  (SBU) President Sarkozy has also renewed 
emphasis on France's three-year old system of 
"competitiveness clusters."  In a nice juxtaposition 
of Lisbon with Gaullism, the cluster strategy aims 
to strengthen technological expertise and bolster 
economic growth, while reducing outsourcing and 
combating "deindustrialization."  The cluster 
strategy is based on the now-common assumption that 
proximity can be an innovation multiplier among 
industry, public/private research centers, and 
training organizations who work as partners on a 
common domain.  The cluster strategy underscores 
local, rather than top-down, coordination; but it is 
the GOF that has orchestrated their formation and 
cooperation.  The GOF tool kit for cluster promotion 
includes state-sponsored venture capital funds, 
training programs, business advisory services, and 
research and development programs.  When President 
Sarkozy announced phase II of the cluster policy in 
2008, he stressed direct public financing to the 71 
clusters would be conditional upon efficiency 
requirements, including commercial viability. 
 
 
Sarkozy: The Deal Breaker, the Deal Maker 
----------------------------------------- 
¶9.  (SBU) President Sarkozy's occasionally- 
conflicting   industrial policy in part reflects his 
claim that his "only ideology is pragmatism." 
However, a remark to Alstom factory workers in 
February that he is an economic "nationalist", 
rightfully defending French industrial interests and 
jobs, may have been more revelatory.  Sarkozy will 
use whatever tools he believes most effective in 
pursuit of that goal.  And when he thinks the market 
has failed Q a fairly low-set bar here that the 
current crisis will bring down an additional notch 
or two -- he will not hesitate to wade into the 
fray. 
 
¶10. (SBU) Sarkozy has referred to his oft-cited 
battle with the EU Commission over a 2004 GOF 
bailout of Alstom as evidence of the positive role 
the State can play as a long-term investor. (Alstom 
recovered and the GOF later sold its stake for a 
 
PARIS 00000493  003 OF 004 
 
 
profit.)  In early 2008 Sarkozy again raised Alstom 
when he obtained from Lakshmi Mittal a commitment to 
invest 30 million euros in ArcelorMittal's Gandrange 
site, and 10 million euros for technological 
development and training programs.  And in 2007 
Sarkozy personally stepped in to prevent the planned 
merger between state-owned Gaz de France and the 
Franco-Belgian Suez group from collapsing.  The deal 
created the world's third-largest listed power and 
gas company and successfully kept Italian company 
Enel, which had expressed interest in Suez, at bay. 
 
Doing the President's Bidding 
----------------------------- 
¶11.  (SBU) Informed observers say the President and 
his immediate staff (to date primarily economic 
advisor, Francois Perol, who recently left to become 
the CEO of the newly-merged Banque Populaire/Groupe 
Caisse d'Epargne bank) keep a tight grip on major 
deals involving partially state-owned enterprises. 
A former member of Perol's team told the press that 
when Perol and his Elysee successor, Xavier Musca, 
worked together at the Finance Ministry, they 
delegated little and showed minimal professional 
trust beyond a small coterie of officials. 
Sarkozy's Gaullist instincts are undoubtedly 
reinforced by advisor/speechwriter Henri Guaino 
(septel), a former French government "Planning 
Commissioner" who by most accounts drafts the 
President's soaring rhetoric on the role of the 
State in industrial policy. 
 
¶12. (SBU) Sarkozy's industrial policy is not always 
supported by those it's designed to help.  Economist 
and occasional Sarkozy advisor Elie Cohen told us 
the President blocked Siemens' ambitions in state- 
owned nuclear energy giant Areva in favor of a 
potential merger with Alstom, something Areva CEO 
Anne Lauvergeon opposes.  Total was favorable to 
Sarkozy's move to give the company a stake in 
France's second EPR investment, the company tells 
us, but expressed some reservations about 
participation in a possible Areva recapitalization 
the President is pushing.  Sarkozy's memorandum of 
understanding with Libya on nuclear development also 
made industry somewhat "uncomfortable", said Pierre 
Randenne of the French Green Party's Energy 
Commission, because doing business there could 
compromise commercial strategy and security, he 
thought. 
 
Influencing Europe 
------------------ 
¶13.  (SBU) France's relations with the EU on 
industrial policy can be awkward.  Early in his 
presidency, Sarkozy took frequent aim at what he saw 
as overzealous enforcement of EU competition policy 
rules, indirectly blaming the EU's alleged liberal 
bias for France's "no" vote in the 2005 referendum 
on the EU constitutional treaty.  He proposed a 
system of "European preferences" to "protect 
(Europe's) products, its companies, and its markets" 
and advocated a European-wide industrial policy to 
strengthen the EUQs economic competitiveness. 
Citing the dramatic comeback of European steel, he 
has pressed for "grand European champions" in 
transportation, high-speed rail, nuclear energy, 
aeronautics/space, defense electronics, 
pharmaceuticals, agro-food, and shipbuilding, all 
areas in which France excels.  But despite the 
rhetoric, from Areva/Siemens to GDF/Enel it is clear 
the creation of European champions should not come 
at the expense of French control. 
 
¶14. (SBU) Comment: It would be a mistake to 
believe that Sarkozy wants to (or can) turn back the 
clock on the French model.  Current circumstances 
will reinforce interventionist instincts, but they 
will not undo decades of liberalization of the 
French economy (the GOF sold 87 billion euros in 
assets between 1986 and 2005).  And even in economic 
crisis, Sarkozy has been conspicuously absent at 
times, including with Airbus' decision on 
outsourcing to India, Continental and Sony French 
plant closures, or in response to Budget Minister 
Eric Woerth's call for Total S.A. to make a "social 
gesture" regarding its unprecedented 2008 profits. 
Interventionist rhetoric and occasional high-profile 
activism in "strategic" parts of the economy will 
 
PARIS 00000493  004 OF 004 
 
 
continue to capture headlines, but the long-term 
health of the French economy depends on the kind of 
structural reforms candidate Sarkozy promised.  That 
the government insists it will press forward with 
its reform agenda in the face of increasingly-vocal 
opposition from the French street, indicates that it 
knows this. 
 
PEKALA