France to get what it voted for

For decades now, ever since Margaret Thatcher broke the power of Britain’s
unions, business leaders have tended to thank their lucky stars that they
operate on this side of the Channel rather than the French side.

For French right-wing thinkers with an eye to finding ways of dragging France
out of stagnation, Britain’s way of doing things has become a model – a
benchmark to aspire to.

Nicholas Sarkozy, the new French President and his (reappointed) Prime
Minister, Francois Fillon, have stated in the clearest possible terms that they
intend to transform the French way of doing things. Two of the central planks in
Sarkozy’s reform platform are to attack the French institution of the 35-hour
working week and bring in tax breaks. In fact, Sarkozy has already tabled
tax-cutting measures worth (euro) 11bn (£7.4bn), to be introduced in a special
summer session of the French parliament.

This is not quite the same thing as the Thatcher mantra of encouraging the
wealth creators, since it is more populist in scope, appealing to every French
worker. But Sarkozy is also committed to introducing a 50% cap on personal
taxation, which will favour the wealthy, just as Britain’s slashing of the top
tax band to 40% favoured high earners.

The present top personal tax band in France is 49.48% on income over (euro)
47,131, but there is also an annual wealth tax based on an annual assessment of
the value of one’s personal assets (business assets are exempt, but the house
counts). This rises progressively from 0.55% of total assets over (euro)
720,000, to 1.8% on assets over (euro) 15,000,000.

In the face of this, Sarkozy’s 50% total cap looks like allowing wealthy
French business folk to hang on to a lot more of their own money each year and
may well stimulate a wave of further investment in business (on the basis that
the personal rewards from doing so – yachts, third homes, etc – won’t be taxed).

Hire today, gone tomorrow
Sarkozy has also said he wants a more liberal corporate regime that makes it
easier for companies to hire and fire as the market dictates. This, too, will
require legislative change, and while Sarkozy has sufficient political control
to push his tax cuts through, weakening employee rights in the teeth of union
opposition is going to be a very tough assignment.

Throwing out the 35-hour working week could well be as hard an act to pull
off, or harder. Sarkozy has gone out of his way to emphasise that he will be
taking a “balanced” approach. He has found places in his cabinet for a number of
leftist politicians. Whether this will make it easier for him to push his
reforms is unclear.

Andrew Nolan, a solicitor with Maclay Murray & Spens, points out that
Sarkozy’s approach to dismantling the worst effects of the 35-hour week will be
by making overtime beyond 35 hours tax-free.

That will not offend anyone, not even the unions. There will be a problem
with the EU Working Time directive, which puts a cap at 48 hours maximum, but
that has a huge loophole in it. Employees can simply choose to opt out of the
Directive.

The tax cuts will also be popular with industry and with French private
equity houses. “I expect that one result will be a lot more activity from French
PE houses, since these measures will add up to an incentive to invest,
particularly when he abolishes the wealth tax,” Nolan says.

France has the slowest-growing large economy in the EU, and the French have
been looking at Nordic countries and Britain as a model. They have seen that
more flexibility in employment law has produced a rise in these countries’
growth rates.

Strong beau
Sarkozy’s reforms should be good news for France, if he can effect his changes
without enflaming one or another group against him. French governments have a
tendency to bow to the inevitable when they see tractors chugging down the
Champs-Élysées, or when the poor suburbs of French cities go up in flames. “Many
thought after the riots of 2005, when Sarkozy was interior minister, that his
reputation would be tarnished, but he has bounced back stronger than ever,”
Nolan says. “His reforms have a good chance of succeeding.”