Cablegate: The Sarkozy Economic Agenda - Reform of Goods and Services

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P 191049Z OCT 07
FM AMEMBASSY PARIS
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UNCLAS SECTION 01 OF 02 PARIS 004315

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EINV ETRD ELAB PGOV FR
SUBJECT: THE SARKOZY ECONOMIC AGENDA - REFORM OF GOODS AND SERVICES
MARKETS: "WORK MORE TO EARN MORE"

REF: PARIS 3741

Summary
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1. (SBU) French President Nicolas Sarkozy has made goods and
services market reform an important element of his plans to boost
purchasing power and create a more dynamic French economy. He has
announced a series of proposals to liberalize retail distribution,
open up competition in goods and services markets, and deregulate a
number of professions. Currently the French pay up to 13 percent
more than other Europeans for the same goods. Large retailers and
consumers welcome such changes; France's cherished neighborhood
storekeepers and other protected sectors may be reluctant to "work
more to earn more." The support of a presidential commission on
economic growth headed by socialist Jacques Attali helps provide
political cover for Sarkozy's agenda. This cable is one of three on
the President's economic initiatives. Septels will cover fiscal and
labor reform. End summary.

Greater flexibility in the retail sector
----------------------------------------
2. (U) The Sarkozy government plans to present a bill to the
National Assembly by the end of 2007 to liberalize the relationship
between retailers and suppliers, and a related bill to expand Sunday
store openings. To further open the retail sector, the GOF will put
forward another bill after municipal elections next spring to lift
restrictions on opening or expanding supermarkets. Small
shopkeepers have fought the opening of "discount stores" in France
since the 1930's. French laws introduced in the 1990's ( Raffarin
Laws) restrict opening large scale retail outlets (partly by setting
an economic needs test as determined by local officials). Current
restrictions limit supermarket size and expansion to 3000 square
feet which affects "big box" discount retailers.

3. (U) Under practices that date back decades, retailers are
prohibited from selling below invoice in the name of protecting
small shops. Large retailers secure below-invoice prices from
suppliers through volume rebates or fees for shelf space. But these
savings cannot be passed on to customers under existing "Galland"
retail laws passed in 1996. The GOF proposal would incorporate the
"back margins" into pricing calculations but does not go as far as
laws elsewhere in Europe that ban predatory pricing but not all
sales below cost. According to the Attali commission, the Raffarin
and Galland laws cost French consumers 9.6 billion euros annually.

4. (U) Any reform that lowers prices will be welcomed by consumers.
France's biggest retailers are eager to be able to set prices on
brand name products. In recent years, they have been hurt by
customers moving from outlets that sell a range of brand-name
products, to deep discounters offering little-known brands. In
response, they have expanded stocking of both store-brand and
deep-discount goods. Analysts believe that reform of the Galland
law will improve stores' operating margins in the near term, but
will also stimulate competition and reduce prices.

Work more to earn more, including Sundays
-----------------------------------------
5. (U) Breaking with a French taboo, Sarkozy is proposing to allow
stores to remain open on Sundays. He illustrates the issue by
pointing to the Champs Elysee - where stores in a "tourist zone" on
one side of the street are open on Sunday while those on the
"non-tourist" side are not. Employers and workers from a variety of
retailers regard the case for Sunday openings as a bellwether of
Sarkozy's "work more to earn more" policy.

6. (SBU) Jerome Bedier, president of the French retail federation,
told us that while he welcomes Sarkozy's reform agenda, the issue is
a "nightmare" for retailers. Due to the panoply of sometimes
conflicting laws and regulations affecting working hours and
conditions, Bedier predicted that Sunday openings, while good for
business, will initially be a headache for business owners.
Nevertheless he believes the reform will be included in legislation
this year. The Attali Commission's interim report should help
improve the political environment for adoption of the measure, he
said.

Opening up regulated professions?
---------------------------------
7. (U) Sarkozy has not yet detailed proposals to liberalize laws
governing professions in France, such as pharmacists, taxi drivers,
nurses and notaries. Future policy in this area may be guided in
part by the final recommendations of the Attali Commission. In its
October 15 interim report, the Commission focused on deregulation in
the real estate professions to boost property ownership rates in
France. But the Commission has also taken up more controversial
issues, such as the monopoly of independent pharmacies. The
Commission's conclusions appear to be closely aligned with Sarkozy's

PARIS 00004315 002 OF 002

drive for deregulation. A report commissioned by the President in
2004 when he was Minister of Finance, called for abolishing the
quota system for taxi drivers, veterinarians, physiotherapists and
other professions and for scrapping of "excessive" qualification
requirements for accountants and other white collar professions, as
well as for hairdressers, butchers, and similar trades. The
report's authors continue as Sarkozy economic advisors.

8. (SBU) France has been among the staunchest opponents of EU
proposals to deregulate service professions. Opposition to the
so-called Bolkenstein directive on services, which included
provisions to liberalize professional services, was partly
responsible for France's rejection of the European Constitution in
2005. In October 2006, the EU Commission sent opinions to France,
among other EU member states, requiring it to scrap nationality and
ownership requirements that restrict access to a number of
professions. Sarkozy's proposals are an important break from past
French practice, and a move towards bringing France in line with
Commission efforts to enforce the free movement of services and
freedom of establishment. Sarkozy has also signaled that France
will fully implement EU directives governing recognition of diplomas
and professional mobility.

Comment
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9. (SBU) President Sarkozy's plans to reform France's goods and
services markets are similar to proposals he put forward in 2004 as
Minister of Economy and Finance. The Attali Commission provides
additional political and intellectual cover to move forward. The
constituencies most affected by change (pharmacists, notaries, taxi
drivers, etc) will appeal to French lifestyle arguments to water
down the proposed reforms. Outcomes will depend on whether Sarkozy
maintains his political momentum in the months to come and
conversely on whether opponents succeed in uniting interests most
impacted by reforms.

Stapleton

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