Industrialist gives French govt list of prescriptions for economy, including lower payroll tax

PARIS – France needs a "competitiveness shock" to restart its economy, a respected businessman said Monday as he presented a list of reforms, including a €30 billion ($39 billion) cut to payroll taxes, that the government asked him to write.

Louis Gallois, who used to run defense and aerospace giant EADS, the parent company to Airbus, said France needs to cut red tape for businesses and improve labor relations to facilitate reforms.

But most importantly, France needs to raise the level of products it makes, if it's going to be able to maintain the standard of living that unions fiercely protect for workers.

"It's a sort of vise that French industry finds itself in," Gallois told reporters, after officially handing over the report, commissioned when Hollande took power this spring. "It's not achieving the profit margins of countries with high-value products. And it has to link itself to the margins of low-cost countries."

The report lists 22 measures to make it easier and less expensive for French industry to invest in innovation — and thus increase the quality of the products it makes. They range from lowering the payroll taxes to increasing the share of small businesses that win public contracts to researching ways of extracting shale gas.

"This is what I call, in my words, the competitiveness shock, which is really a confidence shock," said Gallois.

There are doubts, however, that President Francois Hollande will follow the suggestions, having for weeks called for a quite different strategy — a slow tinkering rather than a shock.

Economists agree the situation in France is urgent. The world's No. 5 economy has been fading for years — its share of global GDP has halved since 1990 to 2 percent — and the debt crisis and the global recession have exacerbated the problem.

A slew of companies — from retail giant Carrefour to drug maker Sanofi — have announced job cuts in recent months. The government, in turn, has been trying to block the layoffs. Carmaker Peugeot recently backtracked on plans to close a factory after the government extended a lifeline of loan guarantees.

While countries like Italy and Spain may be currently worse off and struggling with high government borrowing costs, experts say they're making the necessary spending cuts and changes to their labor markets to right their economies.

Not so in France, which has resisted grand reforms, in part because labor relations are so acrimonious that such changes are considered political suicide.

Gallois said Monday that had to change.

"The social dialogue ... has to find a new dynamism, a new momentum," he told reporters.

Jean-Christophe Caffet, an economist at investment firm Natixis, says the root of the problem is a collapse in profitability for French companies. Because the majority of French companies specialize in middle of the road products, they leave themselves wide open to competition from companies in countries where costs are far lower, like those in eastern Europe, Asia and even neighbor Spain.

"Since it competes with lower cost countries, French industry is doomed to lose market share, especially when the euro appreciates, unless it slashes its profit margins," he said. And low profits mean less to invest in making more innovative products that low-cost countries can't compete with.

"There is basically a vicious circle between market positioning, profitability and investment."

The key is to cut costs: The government can help by lowering taxes. Aside from the 35-hour week, one of the biggest complaints of employers in France is what they call the "cost of employment" — the payroll taxes they pay into social security for each employee. Gallois wants them to be slashed by €20 billion ($26 billion); employees would also get a boost with their share cut by €10 billion, under his plan.

Caffet notes that the other major cost for industry is that French salaries are high — and inflexible, meaning they march inexorably up, regardless of growth.

"We have to stop raising the minimum wage in an unreasonable manner," he said.

Industry and unions are currently involved in negotiations to improve France's competitiveness, and salaries may be addressed there. Gallois noted that German companies' strength doesn't just come from the lower payroll taxes there but also because they've done a better job of keeping salary hikes in check.

Still, many big issues — like the 35-hour workweek — have been called untouchable by the government. Introduced under a Socialist government a decade ago to create jobs, the shortened workweek is seen as one of the party's most durable accomplishments.

Gallois' report didn't touch that hot issue because he said thinks it's not the country's biggest problem. Instead, he said that the French need to get into the labor market earlier in life and stay longer.

The lobby for French business largely welcomed the report.

"The diagnostic put forward by the Gallois report is right," said Laurence Parisot, the head of the Medef lobby. "It remains to be seen when and how these propositions will be put in place."

The government has said it will outline its plans Tuesday, but it's still unclear how much the French people are prepared to sacrifice. Gallois indicated he knew how hard the fight might be, saying it required employers and workers to show patriotism.

"Team France has to work together," he said. "Team France has to take up this re-conquest."