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Zero-growth France woos foreign investment

But bloated public sector, restrictive labour laws stifling growth of economy

[SINGAPORE] France, the fifth largest economy in the world, is beset by structural issues of a bloated public sector and restrictive labour laws that stifle economic growth.

But amid widespread pessimism in the business and investment community, French government officials argue that now is as good a time as any for foreign investment. This includes businesses and funds from Singapore, its biggest trade partner in the Asean region.

"France is too big to ignore . . . there are more Fortune 500 companies headquartered in Paris than anywhere else in Europe," said Laurent Vigier, chairman and CEO of CDC International Capital, a subsidiary of French sovereign wealth fund Caisse des Depots Group.

"The French government is involved in budgetary consolidation, reduction in spending . . . all these reforms are going to increase the competitiveness of the country. The pricing of assets is going to be attractive," he added.

Mr Vigier was speaking during a trip organised for Singapore journalists to France by the French Ministry of Foreign Affairs in mid-May. He plans to come to Singapore in June to meet officials at Temasek Holdings and the sovereign wealth fund, the Government of Singapore Investment Corporation (GIC).

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France is partnering other sovereign wealth funds from Qatar, the UAE and Russia in a one billion euro (S$1.7 billion) investment fund aiming to take equity stakes in French company- involved projects in real estate and infrastructure. It is looking for a few more partners, including Singapore.

"In Asia, we think that Singapore would be a partner of choice . . . Singapore is more sophisticated and a hub of the Asian region," Mr Vigier said.

France continues to woo investments from abroad at a time when economic growth is stalling at home.

The French economy, the second most powerful in the eurozone after Germany, disappointed in mid-May by reporting first- quarter gross domestic product (GDP) growth over the previous quarter of exactly zero.

This was down from 0.2 per cent the previous quarter, and far off from the one per cent target the French government has set itself for 2014. If it misses the growth target, France might not meet debt and deficit reduction targets it has committed to.

Steady German growth of 0.8 per cent mitigated the weak economy in France and elsewhere in Europe. The eurozone eked out a 0.2 per cent expansion in the first quarter.

Serge Boscher, managing director of the Invest in France Agency responsible for promoting international investment in France, nevertheless laid out several arguments for foreign investment.

France has 65 million inhabitants, and 80 million tourists visit it every year, he noted. Demographics are in its favour with two children for every woman. This is Europe's second highest birth rate after Ireland and means France is able to replace its population to support future growth.

"For Singaporean brands in shops or services, if you want to be very well-known, you have to be in France. The people with the most important purchasing power come and visit France," he said.

France is also "more competitive than people imagine", Mr Boscher said, pointing to a study done by accounting firm KPMG. This is due to high productivity, low energy and utilities costs, and a well-educated population, he said.

Corporate taxes are also being cut from 33 per cent now to 28 per cent by 2020, he noted.

A key area of investment the government is trying to attract is research and development, design and engineering, Mr Boscher added.

Companies can get a tax credit of 30 per cent of their R&D expenses up to 100 million euros, and 5 per cent above, he said.

The business and investment community, however, point to a pressing need for France to trim its bloated public sector and reform a costly labour structure.

They are cynical of real change happening; as the French say, plus ca change, plus c'est la meme chose - the more things change, the more they stay the same.

French public expenditure is among the world's highest at 57 per cent of GDP.

Neil Dwane, chief investment officer for European equities at Allianz Global Investors, told BT: "History shows governments are a tax on the growth of the country, and growth is created by the private sector. The challenge in France is that the government is too big - but it thinks it knows all the answers. That makes restructuring harder."

Olivier Lafaye, senior vice-president, international development at Morpho, a security technology multinational, explained the French mindset thus: "The French are very engineer- minded. This is true in the industry but also true in the administration . . . the US wants the most advanced and cost-effective solutions . . . the French always want maximum complexity."

Michel Landel, CEO of French catering and facilities management giant Sodexo, said in a previous interview with BT that while France has a strong education system and infrastructure, its cost of labour is "very expensive".

"We need more stability in the fiscal environment, but also the government needs to act to reduce the cost of labour," he said.

"Another problem is unemployment. France needs to be attractive for investment. Job creation will come if companies invest."

A CEO who did not want to be identified so that he can maintain cordial relations with the French government told BT that the only reason why his company is still in France is because it is too costly to get out.

Once hired, workers are expensive to fire, he said.

Moreover, there are other limitations. A big French customer once told him that it cannot give his factory in France too many orders. If his factory is too reliant on the customer for business, and he has to close the factory down for whatever reason, the customer will also be responsible for compensating his workers.

"The customer is afraid, I'm also afraid . . . so how to do business?" he said.

Government officials in France, however, maintain the rest of the world is being too negative. The government is making reforms, they said. But they added that it moves conservatively.

The French welfare system - vaunted or derided for its generous pensions, and unemployment and healthcare benefits - plays an important role in preserving economic and social stability. In turn, France's cherished social compact between unions, workers and the government is upheld, they argue.

"You can say the government is too big if it is not efficient and doesn't contribute to growth. But if it can contribute to a predictable environment and country thanks to good services and healthcare, you can't say the public sector is too big," said Alexandre Giorgini, director of the press department at the Ministry of Foreign Affairs.

Ambroise Fayolle, chief executive of Agence France Tresor, a department tasked with public debt and treasury management, said French banks are not in trouble and business sentiment in the private sector is picking up.

Public spending will be cut by 50 billion euros from 2015-2017, he noted.

A conservative assumption for interest rates has been forecasted in the Budget Bill for 2014, including a 3.3 per cent yield for the 10-year maturity on average in 2014.

French 10-year bonds are currently trading at 1.8 per cent, Mr Fayolle said. "We need to consolidate and reduce our deficit because of the level of debt reached in the country, but we need to do that in a way that does not kill growth at a time when the recovery process has just started, and in a way that strengthens competitiveness."

France, influential in world affairs for much of the last few centuries, might yet maintain its leadership in areas like tourism, fashion, fine dining, and other areas like engineering, technology and the agri-food industries.

But in terms of its economy, it might just muddle along.

Threadneedle Investments' head of pan European equities, Dan Ison, thinks growth rates in France are likely to be "at the bottom end of the scale in the eurozone in the next few years".

"But I think France is going to do OK because of its link with Germany," he said.

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