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O 301655Z NOV 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7641
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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UNCLAS SECTION 01 OF 03 PARIS 001599 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL FR
SUBJECT:  FRANCE'S "GRAND EMPRUNT": STIMULATING LONG-TERM GROWTH 
 
Ref:  Paris 81 
 
PARIS 00001599  001.2 OF 003 
 
 
¶1. (U) Summary:  France is finalizing its second-round stimulus 
package, which emphasizes investment in research and innovation. 
President Sarkozy will consult with unions, business and other 
social partners before final approval in early December, and launch 
the program in January 2010.  The proposed 35 billion euro package 
(2 percent of GDP) is not expected to impact economic growth 
immediately but will leverage investment in areas key to France's 
long-term growth and competitiveness.  The broad consultations 
associated with the "Grand Emprunt" (literally: large debt offering) 
package are clearly intended to ensure support across the political 
spectrum for this effort to reorient France's economy.  End Summary. 
 
 
Stimulus Round Two - Investing in the Future 
-------------------------------------------- 
 
¶2. (U) On November 19, a 22-member blue ribbon commission headed by 
former Prime Ministers Michel Rocard (PS) and Alain Juppe (UMP) 
presented their recommendations for allocation of 35 billion euros 
to off-budget projects that promote innovation and investment in 
areas critical to the future of the French economy.   (French report 
at http://www.commission- 
investissement.fr/IMG/pdf/Rapport_191109.pdf )  This program is much 
more targeted than the 28 billion euro first-round package, which 
provided anticipatory tax refunds to businesses, funded public works 
projects and gave selective stimulus payments to low-income families 
(reftel).  Linked funding from private sources, matching funds from 
the European Commission and local government authorities' 
contributions are expected to effectively bring the scope of the 
program to some 60 billion euros.  Of the 35 billion euros in 
central government funds, over half (18 billion euros) will target 
generic innovation, either through university-based research or 
co-financing for innovative projects of small and medium-sized 
businesses.  The other half targets investments and innovation in 
specific areas of broad interest including redesigning the cities of 
tomorrow (co-financing for re-insulating public housing and for 
innovative urban planning demonstration projects), energy efficiency 
and renewable energies, transportation of the future, the digital 
economy and applications of biological sciences. (Details at para 
7.)  The Rocard-Juppe Commission held hearings and interviewed 
dozens of experts and economic groups before formulating its 
recommendations for the amount and use of funds.  President Sarkozy 
will cap this off, personally, with high-level meetings with 
business and labor leaders before sanctioning the program in early 
December. 
 
Impact on the French Economy 
---------------------------- 
 
¶3. (SBU) President Sarkozy has justified the investment program not 
so much by its immediate impact but its potential to put long-term 
growth back on track.  The Economics Ministry estimates that the 
economic crisis reduced France's non-inflationary growth potential 
from 2.1% in recent years to 1.7%, due to the drop in investment and 
the increase in structural unemployment.  The initial estimates are 
that the 35 billion euro innovation and investment program could 
boost GDP growth 0.5% per year, within five years (based on a simple 
GDP elasticity calculation).  Barclays Capital France chief 
economist Laurence Boone has similarly predicted that the economic 
growth impact may not be measurable until 2012 or even 2014. 
 
Growing Public Debt and Deficits a Major Concern 
--------------------------------------------- --- 
 
¶4. (SBU) With the government debt expected to rise to some 85% of 
GDP in 2010, Economics Minister Christine Lagarde has pushed to 
structure the program so as to minimize the increase in public debt. 
 At the same time, European Commissioner Joaquin Almunia has said 
that the 2010 budget deficit must take into account the underlying 
debt offering in budget estimates.  "I believe...that any structure 
that allows the association of a debt and identifiable assets would 
be the better project," Lagarde stressed.  Others, including Bank of 
France's deputy governor Jean-Pierre Landau have recommended 
public-private partnerships in investment projects, and use of 
 
PARIS 00001599  002.2 OF 003 
 
 
government-subsidized loans ("prets participatifs") as well as 
"reimbursable advances" to companies.  The government's plans to 
"recycle" 13 billion euros in government-provided capital recently 
reimbursed by banks, plus the heavy use of dedicated French Treasury 
accounts for the package's numerous endowments, will reduce the 
amount by which the package visibly increases the deficit.  Rating 
agencies have stopped short of projecting that raising another 20 
billion euros on the markets will downgrade French sovereign debt, 
but have said the launch of the program "weakens" France's AAA 
rating (Moody's) and highlights the need to "clean up" French public 
finance (Fitch). 
 
GOVERNANCE:  KEEPING THE PROGRAM ON TRACK 
----------------------------------------- 
 
¶5. (U) Virtually all the funds will be administered by 
special-purpose agencies (e.g., government-sponsored financial 
institutions such as the Caisse des Depots et Consignations and 
NSF-equivalent Agence National de Recherche), subject to contractual 
obligations.  These agencies will, in turn, establish contractual 
relationships with public and private entities specifying use of 
funds, matching requirements, performance requirements and, in some 
instances, provisions for reimbursement and/or assignment of 
proceeds.  For instance, the National Agency for Campus Excellence 
in charge of a 10 billion euro endowment will appoint an 
international panel to select innovative, interdisciplinary projects 
from five to ten universities that have a potential to raise the 
institution to international prominence in that area of work.  The 
universities must establish their own dedicated endowment for their 
project (to which funds from other sources should also be directed) 
as well as lay out a five-year work program and measurable 
objectives.  To help ensure overall oversight and evaluation of such 
operations, the Rocard-Juppe commission recommended the 
establishment of a special body specifically for that purpose, 
attached to the Prime Minister's office, with representation from 
the ministries concerned, the parliament and the private sector. 
 
¶6.  (SBU) COMMENT:  President Sarkozy launched this project in a 
first-of-a-kind address to a joint session of Parliament in June and 
no one doubts that he will see it through.  Most of the serious 
concerns regarding this innovation and investment program relate to 
execution and oversight.  One economic columnist asserted that 
application of three key Rocard-Juppe recommendations alone 
(systematic evaluation, deficit minimization and coordination with 
other policy reforms) would fulfill Sarkozy's campaign promise of a 
serious break with the past ("la rupture").  With almost none of the 
funds being used for government salaries or operations, adequate 
oversight -- which was sorely missing in similar special programs 
such as the Balladur debt offering (1993) -- will still be one of 
the biggest challenges.  As for parallel reforms needed to ensure 
future growth, Barclays Capital's Laurence Boone has highlighted 
further liberalization of the labor market.  Others have pointed to 
the need for greater university autonomy to encourage more 
public-private partnership in research.  The main questions of 
direct U.S. interest are the extent to which U.S. businesses may 
participate in special research and development projects in France, 
and the extent to which "reimbursable advances" in certain programs 
risk to become (non-reimbursed) subsidies.  End Comment. 
 
Seven Major Priorities, Seventeen Action Areas 
--------------------------------------------- 
 
¶7. (U) The report submitted to President Sarkozy on November 19 
includes seven major priorities, broken down into a total of 17 
"action" areas, as follows: 
 
¶I. Support higher education, research and innovation 
       16.0 billion euros 
 
1 Promote the emergence of 5-10 outstanding institutions of higher 
learning 10.0 Billion euros 
 
2 Invest in research equipment; make research in France more 
attractive     2.0 billion euros 
 
¶3. Create a few world-class innovation centers; better leverage 
 
PARIS 00001599  003.2 OF 003 
 
 
public research results and support joint public-private research 
3.5 billion euros 
 
4 Promote equality of access to higher education and raise the 
interest in science from an early age 
        0.5 billion euros 
 
II. promote the development of innovative SMEs 
        2.0 billion euros 
 
5 Encourage the creation of innovative enterprises and social 
innovation      0.5 billion euros 
 
6 Facilitate access to financing for innovative SMEs 
       1.5 billion euros 
 
III. Accelerate the development of the life sciences 
       2.0 billion euros 
 
7 Support innovation in agro-biotechnologies 
       1.0 billion euros 
 
8 Boost the search sub-contractor in the health sector 
and sciences life      1.0 billion euros 
 
IV. Develop the "non-carbon" energies and efficiency in the 
management of resources  3.5 billion euros 
 
9 Develop non-carbon energy technologies and recycling 
        1.5 billion euros 
 
10 Create institutes of technological research in the field of 
non-carbon energy    1.0 billion euros 
 
11 Prepare nuclear technologies of tomorrow 
        1.0 billion euros 
 
¶V. Promote emergence of the city of the future 
        4.5 billion euros 
 
12 Foster the development of sustainable cities 
         2.5 billion euros 
 
13 Accelerate the thermal renovation of social housing 
         2.0 billion euros 
 
VI. Invent transport/mobility of future 
        3.0 billion euros 
 
14 Prepare the vehicles of the future 
        1.0 billion euros 
 
15 Develop the air and space industry of the future 
         2.0 billion euros 
 
VII. Invest in the digital economy 
       4.0 billion euros 
 
16 Expedite the transition to super-broadband 
         2.0 billion euros 
 
17 Expand innovative digital content and applications 
         2.0 billion euros 
 
Grand Total     35 billion euros 
 
 
RIVKIN