France is sliding into a grave economic crisis and risks a full-blown “hurricane” as investors flee rocketing tax rates, the country’s business federation has warned.
By Ambrose Evans-Pritchard9:52PM BST 15 Oct 20122187
“The situation is very serious. Some business leaders are in a state of quasi-panic,” said Laurence Parisot, head of employers’ group MEDEF.
“The pace of bankruptcies has accelerated over the summer. We are seeing a general loss of confidence by investors. Large foreign investors are shunning France altogether. It’s becoming really dramatic.”
MEDEF, France’s equivalent of the CBI, said the threat has risen from “a storm warning to a hurricane warning”, adding that the Socialist government of François Hollande has yet to understand the “extreme gravity” of the crisis.
The immediate bone of contention is Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5pc to 62.2pc. This compares with 21pc in Spain, 26.4pc in Germany and 28pc in Britain.
“Let’s be clear, Article 6 is not acceptable, even if modified. We will not be complicit in a disastrous economic mistake,” Mrs Parisot told Le Figaro.
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An alliance of private organisations in France has issued a protest entitled “State of Emergency for Business”, warning that confiscatory tax rates threaten lasting damage to the French economy.
Mrs Parisot said the policies border on economic illiteracy: “The idea of aligning taxes on capital with those on wages is a profound economic error. It is scandalous that the French have been left in such economic ignorance for years.”
French business has called for “competiveness shock” of business tax cuts to claw back lost ground against Germany. Instead, it faces an extra €10bn (£8.1bn) of business costs from the budget unveiled in September.
Mr Hollande is tightening fiscal policy by 2pc of GDP next year to meet EU deficit targets, with two-thirds coming from higher taxes. The budget does little to shrink the French state. Spending has risen to 55pc of GDP, similar to Sweden but without Nordic labour flexibility.
French economic growth has been near zero for the past five quarters. It may have tipped into recession over the summer as the malaise spread from Italy and Spain, according to Banque de France.
New car registrations were down 7.7pc in the third quarter from a year earlier. Unemployment has been creeeping up, reaching a post-euro high of 10.6pc.
The fear is that a fiscal shock in 2013 will tip the economy into a sharp downward slide. “France needs more fiscal austerity right now like a hole in the head,” said sovereign debt strategist Nicholas Spiro.
“They don’t have any chance of meeting their growth target of 0.8pc next year, but that does not in itself put French debt at risk.
“The real danger is contagion if things turn ugly in Spain.”
Finance minister Pierre Moscovici has hinted at a shift in policy, saying there may have to be a “reorientation” of the eurozone’s fiscal strategy. “The people are not going to like Europe if it can’t offer growth,” he said.
Mr Hollande has promised reforms to the labour market next year but MEDEF remains sceptical.
Mrs Parisot said business feels deeply unloved and is “in revolt across the country”.