French Companies Wait to See Benefits of Hollande's Tax Incentives
AIX-EN-PROVENCE, France--More than 18 months after French President François Hollande unveiled tax incentives to help the country's struggling businesses, Jérôme Frantz is still waiting to reap the benefits.
The French entrepreneur needs the money to help restore the fortunes of his metal coating company, Frantz Electrolyse. Since demand from car makers collapsed five years ago, revenue has failed to rebound sustainably, margins have shrunk and Mr. Frantz has cut staff numbers from 300 in 2009 to around 100 today.
"As far as the tax credit is concerned, we haven't got anything yet," Mr. Frantz said.
The tax incentive–which is paid in two tranches this year and will cost the state €20 billion annually from 2015–isn't the only thing Mr. Frantz is waiting for. At the start of this year, Mr. Hollande made further promises to switch from raising taxes to cutting taxes on business, but his so-called Responsibility Pact won't come into force until next year.
"The government hasn't changed policy; it's announced that it will change policy," Mr. Frantz said.
The delays and uncertainty over Mr. Hollande's attempts to stimulate growth have eroded the confidence of French business leaders at a time when the euro zone's second-largest economy desperately needs it. That confidence crisis was front and center at an annual meeting of French business leaders and policy makers in Aix-en-Provence this weekend.
"France is the country in the world where there is the least confidence and the most pessimism," said Louis Gallois, former head of European plane maker Airbus who authored a report that laid the groundwork for Mr. Hollande's tax credit initiative.
The European Commission's measure of economic sentiment, which covers sectors from industry to consumers, shows French confidence has been stuck below the long term average throughout Mr. Hollande's two years in office, and the reading dropped to a nine month low in June. Meanwhile, comparable levels in Germany have been rising above the long-term average for almost a year.
Lacking in confidence, French businesses have held back on investment, dealing a blow to the economy. Economic growth registered no improvement in 2013 from a meager 0.4% in 2012. And in the first quarter of this year, growth ground to a halt as consumer spending fell and businesses reduced their investment back below the level when Mr. Hollande was elected.
France is beginning to stand out as the weak point in the euro-zone's recovery, analysts say. While business activity in the currency bloc as a whole expanded in June, French activity contracted, according to a Market survey of manufacturing and services last week.
Sluggish economic growth has taken a hefty toll: figures at the end of June showed there are 3.39 million fully unemployed job seekers in France, the highest number on record.
Mr. Hollande's government says things will turn around when it convinces entrepreneurs it will deliver on tax cuts. To that end, the tax cuts for next year will be voted into law this month to send an early signal.
"It's a crucial subject: if people go on saying 'I don't believe you so I won't do anything', nothing will happen in France and there won't be the necessary acceleration in growth," said Finance Minister Michel Sapin, speaking at the conference in Aix-en-Provence.
But entrepreneurs also have reasons to be wary. Mr. Hollande's plans have already run into opposition from fringes of his Socialist Party, who object to the public spending cuts needed to finance future tax cuts for business.
Business leaders are also concerned about tensions between labor unions and employer groups, which threaten new talks on government policy due to begin Monday.
"I'm worried about this," said Stéphane Richard, chief executive of French telecommunications group Orange SA ORA.FR -0.78% . "All that is going as if there was no crisis, as if unions and business leaders can continue talking for months. But all sides have to realize the situation is urgent,"
Mr. Frantz is frustrated by the to-and-fro by the government and criticism from unions that the tax cuts are a gift for business. "Nobody understands anything anymore," he said.
Even if Mr. Frantz gets the €100,000 he's due this year under Mr. Hollande's tax credit plan, it will only have a marginal impact on a wage bill of between €2.5 million and €3 million, he says. That won't be enough for him to start making permanent new hires.
"We've been keeping a spare machine in storage," he said. "But after three years it's clear that we won't be needing it so I'm selling it to a Spanish competitor."