French Economy Minister Presents Ambitious Reform Programme

The French government is accelerating its reform plans. As repeatedly stressed by the centre-right administration, the cabinet under Prime Minister François Fillon is continuing along the reform path promised by French President Nicolas Sarkozy during his 2007 election campaign. The latest development is the "Draft Text on the Modernisation of the Economy" (projet de loi de modernisation de l'économie; LME), which was presented by Economy Minister Christine Lagarde, Secretary of State for Small and Medium-Sized Enterprises Hervé Novelli, and Secretary of State for Consumption and Industry Luc Chatel to cabinet members yesterday. This timely document proposes a raft of measures to boost economic growth and purchasing power while curbing inflation and keeping state costs to a minimum. Lagarde estimates that the LME package would cost the state 300 million euro (US$467 million) per year, at most. Lagarde hopes that it will "offer concrete solutions to investors, savers, consumers and employers in SMEs and corporations alike". The economy minister further stated that the text would reduce red tape for distributors and retailers while increasing the number of supermarkets and competition among them, thereby ensuring lower prices for consumers. The Directorate-General of the Treasury and Political Economy (DGTPE) estimates that the measures would create 140,000 jobs in three years, 50,000 alone in the trade sector. The government hopes that the measures will enter into force from 2009 and increase economic growth by 0.3 percentage point each year. The text will be discussed in the lower house of parliament from mid-May onwards.

More Flexibility or Greater Regulation?

The LME contains 37 articles, addressing among other things competition, the current woes of entrepreneurs, and investment in and the funding of economic programmes.

Its major points are as follows:

• Entrepreneurs: The LME attempts to make it easier to become an entrepreneur, especially at small enterprises (microentrepreneur), by offering write-offs and allowing part-time entrepreneurs (such as employees, civil servants, and pensioners) to run businesses on the side. The text further foresees a reduction in payment delays, changes to the land purchase tax, less red tape for companies expanding from 10 to 20 or more employees, better protection of employers' assets, and income tax cuts for those who run debts to re-launch companies.
• Competition: The LME would revert to the system of price negotiations between distributors and retailers in place 10 years ago. This would mean that distributors would no longer have to justify to authorities their decision to agree to discounts with retailers. The text further aims to make it easier to establish shops by scrapping the need to obtain authorisation for the opening of retail units of more than 300 square metres (the law foresees a shift to 1,000 square metres). Sales periods will further be expanded from the current two per year by an additional two weeks.
• Competition Council: The text proposes the launch of a Competition Council (Haute Autorité de la concurrence) comprising members from the directorate-general on competition, consumption, and anti-fraud to investigate operations in the sector.
• Livret A: The government is determined to widen the scope of distributors of France's favourite savings scheme, the Livret A, from 1 January 2009 onwards. The government will set the preconditions for opening and running Livret As—including the level of provision—once the text is approved.

The reaction to the text has been mixed. According to newspaper reports, employers at small and medium-sized enterprises (SMEs) are cautiously optimistic about those parts of the LME that aim to facilitate negotiations with trade partners; yet they are concerned about the impact of price cuts on their competitiveness. The UFC-Que choisir (UFC-What to Choose?) association, which compares the prices and quality of products, is disappointed about the government’s response to its claims of dampened competition in purchasing areas. The president of the Alimentary Industry (Ania), Jean-René Buisson, claims that the LME will impinge on companies’ price-setting policies and increase cases of bankruptcy as firms are obliged to adapt to lower pricing structures they cannot compete with. Distributors are cautiously optimistic as well, with the president of the distribution group Système U, Serge Papin, announcing that the proposals will reduce food prices by 3% on average.

Outlook and Implications

The LME epitomises the French cabinet's approach to reform: aim high but settle low if need be. It is an ambitious plan that should make everyone better off and yet cost the state next to nothing. In political and economic terms, this is almost impossible, and already groups are preparing their counter-arguments in an effort to prevent the text from being adopted in this form. The main question is whether the LME will boost activity at a time when the economy is being hit by higher inflation, the ongoing international financial crisis, and an unfavourable external environment.

By introducing more competition into the retail market, the government is expecting to limit price increases and thus sustain household purchasing power. This is clearly a step in the right direction, as the lack of competition in internal markets has long been a problem in France. However, there is a risk that retailers, whose margins have already been hit by higher food and energy costs, will not pass the discounts onto consumers. Therefore, the measures may not have the intended effect in the short run.

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