US embassy cable - 05PARIS6614

UNCLAS SECTION 01 OF 02 PARIS 006614 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, FR 
SUBJECT:  FRENCH AUTHORITIES BOLSTER THE EURO, ENCOURAGE 
INVESTMENT IN FRENCH ASSETS 
 
Refs:  A. Paris 5667 
 
       B. Paris 5441 
       C. Paris 6311 
 
1. SUMMARY.  Key EU and French authorities are talking up 
the euro and the attractiveness of French financial markets 
in an effort to increase the attractiveness of France to 
foreigners .  At a recent event targeting Japanese 
investors, officials underlined progress already made by 
France, while calling for structural reforms to improve 
competitiveness.  Despite worries about resurgent French 
protectionism, officials know foreign direct investment in 
France remains crucial to combat sluggish economic growth 
and high unemployment.  END SUMMARY 
 
ECB Governor: Euro Has the Potential to Develop 
--------------------------------------------- -- 
2.  Four months after the "Non" vote in the referendum on 
the European Constitution, which raised questions over the 
future of the euro, the Paris Chamber of Commerce and 
Industry organized a forum with the French-Japanese Chamber 
of Commerce about "the Future of the Euro and the European 
Market" to convince potential Japanese investors.  In this 
forum, European Central Bank Governor (ECB) Jean-Claude 
Trichet stressed the euro was a new currency, not just an 
average of currencies.  He emphasized that the ECB is an 
independent institution that manages the euro.  It 
implements transparent policies, "which is not the case for 
all central banks."  Transparency and credibility, he 
explained, were key factors that "anchor inflation 
anticipations to favor a financial environment of low 
interest rates." 
 
3.  Trichet stressed that seven currencies (the Danish Krone 
and six currencies of the ten new EU members) currently 
revolve around the euro, a clear example of the euro's 
potential.  Twenty-seven countries including two observers, 
Bulgaria and Romania, are already participating to the ECB 
General Council to prepare the future of the euro.  He also 
reiterated the necessity for strict respect of the EU 
stability and growth pact by EU members. In final comments, 
Trichet remarked that although more needs to be done in 
terms of the euro currency, great progress has already been 
achieved. 
 
Treasury: Euro Has Improved the Management of Public Debt 
--------------------------------------------- ------------ 
4.  In the same forum, Bertrand de Mazieres, the Head of 
France's Treasury Agency ("Agence France Tresor") also 
extolled the benefits of the euro on the French economy. 
The introduction of the euro has given the French Treasury 
access to large, financial markets, which has caused 
interest rates to drop, allowing the cost of public debt to 
decrease as well.  De Mazieres dismissed doubts about the 
usefulness and future of the euro and said comments 
questioning the viability of the currency should not be 
taken seriously. 
 
Euronext:  Euro Has Helped the Development of Cross-border 
European Transactions 
--------------------------------------------- ------------- 
5.   Head of Euronext Jean-Francois Theodore emphasized the 
benefits of the euro and the subsequent abolition of 
exchange rate risks.  Euronext, "the first cross-border 
European exchange", resulted from the merger of the Paris, 
Amsterdam and Brussels stock exchanges, and has provided 
improved access to European funding.  Companies can issue 
financial assets at lower costs, making using Euronext a 
good alternative to banking credit.  Euronext has also 
offered international investors a large range of financial 
instruments products with harmonized regulations and unified 
information systems. 
 
6.  Theodore cited examples of Euronext's successes: the 
addition of the Lisbon stock exchange to Euronext in 2001, 
the agreement over becoming sharefolders by 460 Euronext 
members, and the acquisition of the LIFFE, the London-based 
derivatives market, in 2002.  He also mentioned the merger 
of Euronext's subsidiary Clearnet with the London Clearing 
House in 2003, which has improved efficiency throughout the 
European financial community.  Theodore indicated that 
Euronext had further development plans, but did not provide 
any details. 
 
Reforms are Necessary to Develop Potential Growth . . . 
--------------------------------------------- ---------- 
7.  In a special message to international investors, notably 
the large group of Japanese attending the meeting, Trichet 
acknowledged that good monetary policy was a necessary 
condition for economic growth and employment, but "of 
course, it's not sufficient."  Trichet asserted that 
structural reforms were necessary to jump-start growth in 
the Euro zone.  He highlighted the need for labor market 
reform and cited the lower rates of productivity in Europe 
compared with the United States. 
 
. . . but, France Claims It Has Already Started 
--------------------------------------------- -- 
8.  De Mazieres warned that, despite negative comments about 
the lack of reforms in France, "a lot has been done."  To 
support this assertion, he cited the pension reform in OECD 
countries, the forthcoming implementation of health 
insurance reform, and the increase in entrepreneurship. 
 
9.  Similarly, Clara Gaymard, the Chairman of the Invest in 
France Agency (Agence Francaise pour les Investissements 
Internationaux - AFII) remarked that comments about the lack 
of reforms in France continued despite real progress the 
Government has already made.  She listed corporate tax cuts, 
more flexible labor regulations to facilate lay-offs, and 
new hiring contracts which limit minimum lay-off procedures 
for companies of less than 20 employees as key reform 
measures that had already been undertaken.  Gaymard also 
called attention to the steps taken to enhance innovation 
and competitiveness, including the creation of 67 industrial 
poles of competitiveness. She also suggested new measures to 
encourage foreign study in France. 
 
10.  Gaymard disagreed with "generally accepted" criticisms 
of France, such as a shortage of engineers, low 
productivity, high cost of labor, high cost of living, and 
protectionism.  To respond to critics, she stressed the 
presence of a qualified labor force, higher productivity in 
France than in the U.S in 2004, and relatively low labor 
costs.  She praised the safety of foreign investment in 
France, which is proctected by effective patents and 
regulations.  She noted that many companies had made 
significant investments in France during 2004, notably: 
Astrazeneca, Atmel, General Motors, Kinnevic, LG Electronics 
inc, Philips Semiconductors and Siemens.  She dismissed 
notions of protectionist tendencies by stating that France 
is the second country after China to attract foreign direct 
investment. 
 
Comment 
------- 
11.  In this forum, French authorities sought to bolster 
confidence in the euro and its potential, in order to 
promote foreign investment in French financial assets.  The 
officials seem not to have noticed the contradictions in 
their pronouncements as the government seeks to both protect 
(ref B) strategic sectors and pretend it has a completely 
open investment regime.  Despite the inconsistency, all 
officials recognize that foreign investment in France 
remains absolutely necessary if France is to increase 
growth, combat unemployment(ref C), and reduce public debt. 
 
Stapelton