France Grapples With Competitiveness

The country’s Socialist government is sending out a message that will likely discourage entrepreneurs tempted to invest in the economy.

PARIS — France is in dire need of investment from companies that can create both jobs and wealth.

This story first appeared in the November 21, 2012 issue of WWD.  Subscribe Today.

But with its recent budget and surrounding antiwealth rhetoric, the country’s Socialist government is sending out the message that rich people are not welcome, and will likely discourage entrepreneurs tempted to invest in the country’s economy.

“[The government] must be faithful to what it was elected for, but without business being given the impression that it is the enemy,” said Pascal Morand, professor of economics at ESCP Europe and former director of the French Fashion Institute, or IFM.

“It is important that all French people, both individuals and entrepreneurs, understand that reducing the country’s deficit is not optional,” said Pierre-Antoine Gailly, president of the Paris Chamber of Commerce. “The budget is clear in this respect, as it proposes a significant reduction in France’s deficit. But we consider that the effort asked of business is too high in proportion to that asked of the state itself.”

France’s 2013 Finance Bill, which was passed by the National Assembly on Tuesday, must now go before the country’s senate on Thursday, and is expected to be ratified by parliament around Dec. 20. Observers suggest the essence of the bill will remain unchanged.

Despite the recent developments to boost France’s economy, international ratings agency Moody’s on Monday downgraded the country’s sovereign bond rating one notch to “Aa1,” from an “AAA” rating, and maintained its negative outlook for France, citing “persistent structural economic challenges,” including rigidities in the labor market and a lack of international competitiveness as causes for its lack of confidence in the country’s financial outlook.

Key elements of the September budget in the bill include the controversial 75 percent tax rate on individuals earning more than 1 million euros, or $1.3 million at current exchange, annually.

A controversial increase in capital gains tax, however, was amended after a group of entrepreneurs self-named “The Pigeons” protested against the measure, which they considered would penalize risk-taking in an economy that needs precisely that.

The amendment concedes that company founders, providing they own at least 10 percent of share capital for a minimum of two years and remain a shareholder for at least five, will not see their capital gains taxes increase when selling their shares. Other shareholders will still have to pay the higher amounts — up to around 60 percent, compared with 35 percent previously.

“We have observed that, having been called upon to do so, the government has come back to more reasonable measures, and has reduced the negative impact of certain measures,” said the chamber of commerce’s Gailly.

Beyond the budgetary measures, business leaders had high hopes for a competitiveness report earlier this month by investment commissioner Louis Gallois. The report’s key recommendation was a 30 billion euro, or $38.22 billion, reduction in employment costs, with two-thirds of that being reductions in costs to employers.

France’s employers pay some of the highest taxes on salaries in the world, approximately a third on top of a member of staff’s take-home pay, which is often prohibitive to combating unemployment, currently at a 13-year high of around 10 percent.

The subsequent pact signed by the government, issued Nov. 6, allows companies tax credits on the cost of employment, starting in 2013 for smaller companies. The allotment totals up to 20 billion euros, or $25.48 billion, annually.

In terms of income tax, while most international media have fixated on the 75 percent tax band, a second bracket, for salaries of more than 150,000 euros, or $193,364, is likely to have a more significant impact on how attractive France is to individuals.

“What is now being played out is an international competition for talent,” said Marc Ivaldi, professor of economics at the Toulouse School of Economics. “Applying a 45 percent tax bracket for salaries over 150,000 euros will penalize the French market for researchers, where innovation is created. The same problem applies to fashion, for creative talent. That is where the strength of a country to innovate lies.”

So far, French luxury and high-end fashion have largely defied the downturn, and are often held up as a best-in-class example of how a country can turn its industry around.

“We are very conscious that there is a crisis, and that difficult measures must be taken,” Didier Grumbach, president of the Chambre Syndicale, said of the budgetary measures. “But from our respect and that of our members, we are not suffering. We are in a period of growth despite the crisis.”

“French luxury is considered a reference by economists, as it has shown how it is possible to develop, from France, more high-end goods and to develop competitiveness that transcends price positioning,” said the professor Morand.

“Since the Eighties and Nineties, production capacity has been brought back to France and there has been an evolution toward more branding, more luxury and more design,” he added.

On global brand strategy and financial consultancy Millward Brown Optimor’s top 10 list of luxury names, six are French, with Louis Vuitton as number one.

Yet despite its strength in luxury goods, France’s relationship with wealth is an ambiguous one that goes back a long way. “French antirich sentiment is nothing new,” said Morand, suggesting that in some respects, it dates back as far as the 1789 French Revolution.

“This obsession with thinking the rich are evil is very French, and shows up France’s hypocrisy. Although ‘equality’ is written on the front of every town hall in the country, it only serves to hide inequalities,” Ivaldi added.

“We are very strong on making luxury goods, and we are a major exporter, but in France itself, there is this wariness about rich people, and we do not like showing that we spend a lot on luxury products,” said Marylène Bonny-Grandil, president of tax advisory firm Altexis.

Such an attitude can only be exacerbated by the government’s recent moves. While the popularity of President François Hollande dropped 11 percent in the polls in September, before the announcement of the budget, it remained stable in October, and fell 1 point to 41 percent in November, according to a survey by marketing firm Ifop for the Le Journal du Dimanche newspaper.

This suggests that, despite being unpopular with business, the general population to some respect approves of the government’s moves — perhaps testimony to such antiwealth sentiment.

But certain players in the luxury space have nevertheless begun speaking out against the government’s moves.

“The funny thing is that the luxury business is booming in France, but as it is for the ‘rich’ it cannot be talked about.…Nothing else does as well and also it’s not so exciting,” said Karl Lagerfeld, alluding to cars and other products. “Production and investment are important but you have to create the mood that people ‘desire’ what you produce.”

The chief executive officer of one major French luxury brand, who spoke on condition of anonymity, said: “We need people who take risks in order to change the world, and to encourage the wealthy to invest in order to take the world in the right direction. If we discourage risk-taking and stigmatize successful people, France will not be a very creative place.”

“At times of crisis, we need solidarity, and we need people who are creating jobs and value,” agreed Bonny-Grandil. “We forget that these people spend in France, live in France and pay taxes here. If we focus too much on these people, they will leave and go and create value elsewhere, and that is a shame for France.”

She cited significant growth in the number of people, particularly entrepreneurs and largely people earning less than the 1 million euro mark, consulting her about moving to more clement fiscal climes.

While LVMH Moët Hennessy Louis Vuitton chairman and ceo Bernard Arnault has denied any fiscal motive for his request in September for dual Belgian citizenship, it is also ironic that the man who is seen as the standard-bearer for French luxury on the international stage is so denigrated at home, as witnessed by left-leaning newspaper Libération’s front page in early September with the headline, “Casse-toi riche con!” — whose most polite translation is “Get Lost Rich Idiot!”

The ensuing outcry, which could reportedly cost the paper up to 700,000 euros, or approximately $913,000, in lost advertising revenues from LVMH and its sympathizers in the luxury space, has brought out peers in support of Arnault.

“Overall, I raise my hat to people who invest their own money and their own time in creating wealth, like Bernard Arnault,” the luxury executive said. “He is one of the French people who has made the most of France’s cultural capital, to bring France into the modern era.”

“We are the ones who do so well and will nearly be punished for it,” Lagerfeld opined. “Happy I am not French — as most of the designers in fashion in France. But it is an industry which mostly produces in France. People like Bernard Arnault should be ‘national treasures’ for the government.”

For wealthy French people, including in the fashion, luxury goods and retail industries, living abroad is nothing new: Chanel owners Alain and Gérard Wertheimer live in New York and Geneva, respectively; some of the controlling shareholders of Hermès live in Switzerland, Portugal and Morocco; part of the Mulliez family, which controls supermarket operator Auchan, lives in Belgium. Yet all have contributed significantly to the French economy over the years.

In today’s executive and creative world, place of residence is often a question of choice rather than obligation. In Europe, particularly, core transport links allow travel from Paris to London or Brussels —two of the leading choices of residence for French expatriates — in the same time it takes many workers to commute from distant suburbs.

As such, the French government’s moves are seen as a strong deterrent internationally, and, for some, they highlight a lack of awareness of the realities of today’s business world.

“I see all sorts of people from abroad, from all sorts of horizons, and it is clear that this does not incite them to come and live in France, despite the fact that France, in terms of its lifestyle, is considered as a nice place to live,” Bonny-Grandil said.

“Socio-politics only concern a single market, but the luxury business is global,” said Anne Raphaël, senior vice president and partner specializing in fashion, retail and luxury at headhunting firm Boyden. “At the moment, French companies are not recruiting people for their French business but for growth hubs elsewhere in the world.”

Overriding measures like those currently planned could push market players, beyond place of residence, into creating wealth in more clement fiscal climes.

“There is still the idea in France that the government, whether right or left, decides what will happen,” Morand said. “The reality is that the market imposes itself, and that companies decide where to produce according to what is best for them. From this point of view, the government may have its commitments, but it must take into account the imperatives of competition.”