Hollande Takes Pro-Business Agenda to U.S.

By Gabriele Parussini And William Horobin , The Wall Street Journal

PARISFrench business leaders are flying with President Franois Hollande to the U.S.
on Monday. Many, however, wonder whether the Socialist's new pro-business agenda is
for the long haul.
Mr. Hollande has laid out a plan to reinvigorate France's struggling economy by making
it more like Germany's, the region's economic powerhouse. He pledged tax cuts to
companies to stimulate job creation and raise corporate profit margins. France's bloated
public spending would be pared to finance the measure, he said.

But participants in Mr. Hollande's state visit this week to the U.S.which will take him to
Washington and San Franciscoaren't sure how far the president is willing to go.
"We don't know if we're about to climb a mountain or a hill," said Pierre Gattaz , head
of France's main employers' lobby, who was slated to travel with the French president
along with the head of the telecom giant Orange SA, the chief of turbines-to-trains firm
Alstom SA, and a group of Web entrepreneurs.
Mr. Gattaz's concerns highlight a question posed by many across Europe: Can Mr.
Hollande refashion France's economy into a force potent enough to lead the euro zone
alongside Germany?
The president's new pro-business stance has won him plaudits from European capitals
and international institutions, including sovereign-ratings firms. But style aside, he
hasn't clearly defined the substance of his new pact and many observers fear it won't
be bold enough to revive France's economy as global growth looks uncertain.
Mr. Hollande's track record since coming to power highlights his cautious approach: The
French president has scrapped or delayed bills that met with widespread discontent,
from changing family law that irked the conservative opposition to a tax on truck
haulage that angered farmers in Brittany.
Despite the professed intention to go down the route of cutting labor costs, Mr.
Hollande's plan falls short of trimming the generosity of the welfare state and
deregulating low-wage jobs. And employers are worried that a pledge to slash 30
billion ($40.9 billion) in family welfare taxes may boil down to a net cut of only 10
billion in labor taxes by 2017.
Mr. Gattaz vowed to use his time on the presidential plane to the U.S. and back to push
Mr. Hollande to be as ambitious as possible.

Whether Mr. Hollande's approach works could have broad ramifications. The currency
bloc's second-largest economy, France is facing many of the same problems Germany
grappled with at the end of the 1990s, when it was branded "the sick man of Europe."
France has posted little to no growth for the past two years, and there are more people
out of work there now than at any point in modern history. The country is stuck with a
stubbornly high trade deficit, unlike Germany, which runs a sizable surplus.
The gap with its neighbor exposes a deeper malaise weighing on French companies:
sliding profitability. Gross profit sharea standardized measure of profit marginsfell to
an all-time low of 28% in France in 2012, almost 10 percentage points lower than the
euro-zone average and much weaker than the 40% in Germany. Foreign investment in
France is plummeting. Many chief executives warn it is no longer profitable to do
business here.
"The diagnosis in France is the same as Germany in the late 1990s: a marked decline in
competitiveness," said Xavier Timbeau , an analyst at French economic think tank
OFCE.
In the 21 months since he was elected, Mr. Hollande has relied largely on tax increases
to fix France's finances, with only marginal efforts to pare expenditures. His popularity is
skirting all-time lows.
To repair the situation, Mr. Hollande is drawing from the textbook of Gerhard
Schrder , the German Social Democrat who, as chancellor, overhauled the country's
labor market and curbed social spending, laying the groundwork for Germany to
become one of the world's most-powerful export machines.
Mr. Schroeder's government pushed through a series of abrupt and deep changes by
cutting taxes and reworking the country's expensive welfare state. Dubbed the "HartzKonzept" after a Volkswagen executive turned government consultant, the plan included
measures to encourage training, pare unemployment benefits and cut taxes on low-paid
"minijobs."
In a lengthy news conference on Jan. 14, Mr. Hollande acknowledged that the French
economy needs to converge with Germany and for the first time described himself as a
Social Democrat instead of a Socialistimmediately sparking comparisons with Mr.
Schrder.
In theory, Social Democrats accept capitalism while Socialist parties are still ostensibly
trying to overthrow it. These days in Europe, the difference is mostly cosmetic, if it
exists at all.

But the symbolism was noteworthy, and Mr. Hollande's sense of urgency won praise
from across the Rhine. Peter Hartz who met with Mr. Hollande at the end of last year
said France has "identified its problems very well, and will solve them." Vice
Chancellor Sigmar Gabriel , chairman of Germany's Social Democratic Party, said
Berlin was "enthusiastic" about Mr. Hollande's shift.
Still, other obstacles could also frustrate business leaders and economists calling for
bold policy from Mr. Hollande.
The global economy was growing steadily by the middle of the past decade when Mr.
Schrder's policies began to really bear fruit, but its pace has faltered. International
trade, which was breezing along at a healthy clip, slowed markedly during the economic
crisis, paring external demand from advanced economies. The euro-zone economic
recovery is modest.
Without an external growth engine, Mr. Hollande is worried about slicing expenditures
too hard because he needs to prop up consumer spending, the main driver of the French
economy.
"Repairing a country isn't a steeplechase; we're not at the Olympic Games," said Budget
Minister Bernard Cazeneuve .
Mr. Hollande is also moving slower than Mr. Schrder did because of a desire to avoid
the kind of conflict that scuttled previous attempts at change in France.
His plan to boost competitiveness has irked the left wing of his own party, which is
irritated by measures they say are too favorable to business. A revolt in the Socialist
ranks could imperil Mr. Hollande's thin majority in both chambers of Parliament.
Mr. Schrder paid the price for his overhaul shortly after it was adopted, losing the 2005
elections to the conservatives led by Angela Merkel .
To overcome the political resistance, Mr. Hollande is attempting to duplicate a different
aspect of Germany's economic culture: consensus building.
He is sounding out unions and giving them the opportunity to negotiate commitments
from businesses on investment and job creation, in return for tax cuts. Previous
negotiations with unions have been time consuming as Mr Hollande sought compromise
at all cost..
When Mr. Hollande asked unions to negotiate changes to labor laws after coming to
power in May 2012, he repeatedly extended the deadlineeventually to January 2013
before an agreement was reached. Talks over unemployment benefits have only just
begun after the initial October 2013 start date was pushed back.

Government officials are also wary of cloning the measures that have worked well in
Germany, arguing that France should create its own model and proceed at its own pace.
"The French are not Germans who speak French," said Mr. Cazeneuve.