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The French Dispatch: France’s attractiveness at a crossroads

Why France can still rank #1 most attractive country in Europe in the coming years​

The political and social turmoil triggered by the pension reform has brought into question French President Emmanuel Macron's capacity to further transform the country by the end of his second term in 2027. Yet his ambition remains intact. Far from wanting to reconsider the reforms already adopted and implemented, the economic and social line of the Executive has been resolute and remains fully focused on ensuring the economic attractiveness of France and ready to deliver on the up-coming planned reforms. Macron’s predictability is a factor of stability and above all of visibility for economic actors.​

Emmanuel Macron and his government's commitment to France's economic attractiveness has been at the core of their political agenda since 2017. More than ever, this commitment has become embedded in the government’s approach to tackling strategic issues such as decarbonization of the economy, strategic autonomy or the existence of a skilled workforce.​

Interview: External perspectives on France’s attractiveness​

Lisa Thomas-Darbois
Head of Economic Analysis and Public Policy at Institut Montaigne

How would you describe France’s attractiveness and its’ evolution over the last few years? What are the main driving forces?

France is an attractive investment location, as confirmed by EY's latest trend survey: France remained the number one location for foreign investment in Europe in 2022. For the fourth consecutive year, France takes the top spot, far ahead of the United Kingdom and Germany.

The many reforms undertaken by Emmanuel Macron since his re-election in 2017 - lowering taxes on companies, simplifying and removing labor laws - can account for a large part of France’s renewed attractiveness. 

France's competitive edge in attracting foreign investors includes the presence of a skilled workforce and the availability of low-carbon energy. 

More specifically, foreign investments are becoming increasingly industrial (43% in 2022 compared to 32% in 2013) and they also focus on innovation.  

This should drive further growth in France’s. Yet the actual jobs created by foreign investment remain relatively low compared to our European neighbors and between 2021 and 2022 saw a drop.  ​

This highlights once again the significantly high labor cost - France is ranked 5th in the EU country when it comes to the highest labor cost according to INSEE

In addition to this France’s social and fiscal legislation remains excessively complex and difficult to navigate for companies.

Finally, efforts are still required to strengthen French attractiveness. Simplifying regulations is a key issue, especially in terms of environmental and urban planning for industrial projects. 

When it comes to being an attractive investment location, taxation is also critical, particularly for production. While efforts have been made to reduce the tax burden - estimated at 3.8% of GDP according to the Institut Montaigne - budgetary constraints could slow the pace of their reduction.​

Is the national social and political context likely to worsen France’s attractiveness to foreign investors? (If so, would you say it is a temporary or permanent phenomenon?)

France has experienced waves of social protest over the past few years: the “Yellow Vest” grassroot movement in 2018, rallies against the government's vaccine strategy during the Covid-19 pandemic, and more recently, demonstrations against pension reform.

Yet at first glance, these social issues do not seem to have had a direct impact on foreign investment. Figures for French attractiveness in 2019, just a few months after the “Yellow Vest” period in 2018, are proof.

Foreign investors are much more interested in the government's commitment to deliver on its promises. On this matter, investors' confidence in maintaining the cuts to corporate taxation is crucial

Despite a challenging political context and the lack of a parliamentary majority for Macron’s government, the commitments made by the French President are secured by the application of Article 49.3 of the Constitution in budgetary debates

The expansive application of this constitutional tool last winter may - paradoxically – have reassured investors.

As for the financial markets, the government's transparency on its long-term objectives is one of the main drivers for investment decisions

Fitch's recent decision to downgrade France's credit rating from AA to AA- underlines the government's declining credibility to ensure public finance sustainability in a deteriorating social atmosphere. 

As governments' budget allocation is driven by social and political expectations of the moment, the only solution to ensure long-term attractiveness for investment lies in the famous economic dictum: "Rules rather than discretion".

The French government has been strongly committed to a European response to the US Inflation Reduction Act (IRA). Does the IRA represent a significant threat to the France’s and Europe’s attractiveness? Do you think the European response (Green Deal Industry Plan) measures up to the challenge?

At first, it is worth remembering that through the IRA, the United States is making an unprecedented commitment to combat climate change, a commitment that is undoubtedly beneficial for the rest of the world. But the IRA is also a very aggressive recovery plan with heavy implications for French and European attractiveness to investors. With massive investments of more than €350 billion in decarbonized industry - either through tax credits or tax incentives - the IRA poses a real challenge to the continent. Fears are justified.  

With potentially very heavy financial penalties for electric vehicles produced in Europe, the risk of certain industries relocating to the United States is real. This law marks the return of barely concealed American protectionism. It encourages a particularly harmful "subsidy race", even if the United States still authorize the sale of European electric vehicles on its domestic market,

In response to this potential economic threat, the European Commission presented in February 2023 the Green Deal Industry Plan and several pieces of legislation such as the Net Zero Industry Act and the Critical Raw Materials Act

This EU's response to the IRA includes a further transitional relaxation of the existing state aid framework – a framework that has been implemented since the Covid-19 crisis - to facilitate direct support for the production and deployment of renewable technologies. 

The plan also puts forward proposals to simplify the existing regulatory framework, including reducing the delays in obtaining the permits to set up production units on European soil.

Although this strategy has the political backing it needs to move forward and quickly, its execution is far from effective. 

The initiative to continue to make the use of more flexible state aid does not seem to be unanimously supported by Member States, nor does the idea of creating a sovereign wealth fund for European industry – an idea that not yet gained support in Germany or the Netherlands. 

So yes, Europe has a response to the IRA, but there is still a long way to go before the adoption of the legislative package, expected by the end of the year.

1. The grass is greener than you ​think

Driven by the aim of making France the European green economy leader, the “Green Industry” bill, which will be debated in Parliament this summer has a dual objective. Firstly, it seeks to provide a fast and efficient response to the proactive policy of the American IRA to avoid any loss in investment opportunities (and therefore a new industrial decline in the country).  Secondly, it aims to support innovation and disruptive technologies that contribute to achieve the European Green Deal’s objectives.​

To fulfil the target of enhancing France’s attractiveness, several initiatives will be brought forward on the government’s political agenda in the coming months. The Energy and Climate Programming Act (LPEC) is expected to complement the “Green Industry” bill by setting greenhouse gas reduction targets and national energy consumption for the 2028-2033 timeframe. The National Adaptation Plan for Climate Change will seek to harmonize the country’s socioeconomic performance with the impacts of global warming at national level.​

To strengthen the energy sovereignty of the country - ensuring energy supply and meeting commitments on the reduction of greenhouse gas emissions - the French Government has made energy sovereignty a priority. In early 2023, a law was adopted to ensure France accelerates its development of renewable energy. Introduced at the same time was a bill that sought to accelerate procedures for the construction of new nuclear facilities. Its purpose is to ease the process of building new EPR2-type reactors, for the first commissioning from 2035. The bill has been adopted by the Senate and will be voted on by the Assembly in June. Lastly, the French President announced the establishment of hypersimplified proceedings that will enable a net reduction in industrial set-up times in France.​

Fully aware of the necessity of having a qualified workforce to secure the long-term attractiveness and economic development of France, Emmanuel Macron and his government also intend to overhaul training and professional development. Several initiatives have been announced by the executive, including a reform on vocational training (vocational schools) and the ongoing reform of unemployment insurance.

2. Macron’s intangibles 

France's attractiveness

The upcoming reform programme is consistent with the policies pushed by Emmanuel Macron since his election as President of the Republic in 2017. Since his entry into office, the French government has introduced several reforms and initiatives that have contributed to the country's renewed economic attractiveness.​

France is now the leading destination in Europe in terms of the number of foreign direct investments (FDI). An EY study published in 2023 showed that 61% of investors surveyed planned to expand or establish operations in France over the next three year. , 49% of them concentrated in 5 strategic areas (business services, software and IS, automotive, aeronautics, industrial equipment and agribusiness​

Choose France, the place where deals are settled

With the twin ambition of fostering investments in France and repositioning France as being at the forefront of global competition, President Macron launched the Choose France Summit as soon as he was elected President. The first edition of the Summit was held in January 2018 in Versailles, and has continued an annual basis since, with the sixth edition held on May 15 of this year.​

The Choose France Summit has thus become THE must-attend event for France’s attractiveness. It aims to convince major international economic players to invest in France in all fields (health, agrifood, digital, automotive…) and in all regions of France. A unique and exclusive business forum, it is a key moment for the country’s attractiveness where high-level players – investors and public decision-makers, including most members of the government – meet.

The 6th edition of the Choose France Summit - held at the Château de Versailles - was exceptional, with numerous announcements and more than 250 CEOs attending, a record for the Summit.

Since its creation and despite the ever-increasing global competition, Choose France has proven itself to be an effective way of growing the attractiveness of the country. During the 2023 edition, €13 billion of investments were announced, promising to create over 8,000 jobs in strategic sectors.

Since its creation, FGS Global Paris’ office has helped many clients in the preparation of the Summit to make the most of the discussions and in understanding the investment opportunities in France - whether in the semiconductor or nuclear sectors or in supporting France secure its supply of critical raw materials. 

Source: AFP

3. But since the 2022 elections, the power has shifted, and this has not been without consequences for investor 

Macron retains some support within his political camp and within his government.  Yet, he is encountering lack of support from the public, which is quite unusual at this stage in a presidential term. Beyond his declining popularity, the absence of a stable majority in the National Assembly and the impossibility of standing for re-election in 2027 (the Constitution prohibits more than two consecutive terms) reduce his room for maneuver.  These factors also compromise his ability to influence certain key issues.

For companies and investors, this means that the support of the French Executive, while still an important element, can no longer be considered as sufficient for ensuring the success of an investment project in France. 

The spectrum of stakeholders must therefore be broadened, both geographically and politically. 

First of all, though running the risk of being caught up in the partisan rivalries that have punctuated political life in 2023, all the political forces and all the institutions matter - the Government, the National Assembly, but also the Senate controlled by the right-wing opposition.​

From a regional perspective, France has many decision-making levels, from the Commune to the “Région” and the “Département”. These levels should be taken into consideration.  Each level can become a voice and a decisive factor in enabling the successful implementation of a project.

4. Macron’s unpopularity is far from being an exception under the Vth Republic​

Nearly three out of four French people now say they are dissatisfied with the actions of the President of the Republic. Macron’s popularity is at its lowest, with only 26% positive opinions (Opinion poll conduced by Ifop in April 2023).

If we compare Emmanuel Macron's figures to his predecessors, other presidents have had much more difficult times. François Hollande (President of the Republic from 2012 to 2017), for example, had a popularity rating of only 13% in September 2014, in a context of fiscal frustration and mass unemployment.​

Despite Macron’s unpopularity linked to his government’s actions on the pension reform, his intention to deliver on this at the beginning of the mandate is largely assumed by Macron and his supporters. For the presidential majority, this reform aims to give muscle to the economy, boost economic activity and increase employment, after several decades of mass unemployment and important levels of public debt.

However, the pension reform and its wholehearted rejection by a large majority of French people have weakened Emmanuel Macron and his (relative) majority in the National Assembly. The subsequent political and social tensions have created an uncertain context around how Macron will continue his second term in office. Doubts have emerged around his ability to carry out new major reforms over the next four years. Macron’s actions and the public and political reaction will be important to watch over the coming months to accurately assess the real margins of maneuver available to Macron for the remainder of his mandate.

5. After Macron, are we there already? 

With political and social tensions running high and with the certainty that Emmanuel Macron cannot seek a third presidential term in 2027, the inevitable question emerges of what the post-Macron era will look like. And with it, the concern about the rise of political extremes.

An Ifop-Fiducial poll for Le Figaro Magazine and Sud Radio published at the beginning of April confirmed the strong support of Marine Le Pen (National Rally), who lost to Emmanuel Macron in 2017 and then in 2022. According to this poll, if the presidential election had been held this year, Marine Le Pen would have won the first round with 31% of the votes cast, 7.5 points more than in 2022. Emmanuel Macron, down nearly 3 points, would have won 25% of the vote. Other polls published in recent weeks confirm this momentum in favor of Marine Le Pen – an outcome that is consistent irrespective of who would take over from Macron or the leader that she would be up against. But 2027 is still far away. And though Marine Le Pen has never seemed so close to the gates of power, the obstacles in her path remain numerous

6. A new government plan that is causing a stir

President Emmanuel Macron's new sequence related to the country’s attractiveness and reindustrialization was well received by the media. Many editorialists point to the first results obtained and now speak of a trend reversal which must now be confirmed.

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