III. ECONOMIC TRENDS AND OUTLOOK A. Major Trends and Outlooks After a decline in GDP of almost one percent in 1993, modest growth of close to 2 percent is expected in 1994, led mainly by exports and residential real estate purchases. The economy should increasingly pick up steam in the course of 1994, and growth in 1995 is expected to be close to three percent. Inflation will remain modest at about 2 percent. Unemployment remains the biggest trouble spot in the French economy. The unemployment rate could peak at about 12.5 percent in 1994, abating only slightly in 1995. The automobile industry and agricultural sector were the hardest hit in 1993, with value-added in these sectors falling 15.0 and 7.1 percent after adjusting for inflation. Only the processed foods and energy sectors showed any real strength in 1993, with value-added in these sectors growing 4.5 and 2.1 percent, after adjusting for inflation. In 1993, household consumption grew only 0.7 percent, increasing by less than 2.0 percent for the third year in a row, a post-World War II low. Real disposable household income increased only slightly more than 2 percent in 1991 and 1992, and only 1.0 percent in 1993, after having grown by over 3.5 percent a year during 1988-90. Household income was held down primarily by high unemployment, which also kept wage increases modest. Nominal hourly wages increased only 2.5 percent in 1993, after increasing 4.1 percent in 1992. With unemployment likely to remain high, household income and consumption is likely to remain weak in 1994 and 1995. Facing weak demand, the lowest capacity utilization rates in almost 20 years, and high real interest rates, businesses cut back sharply on their investments in plant and equipment. After increasing over 7 percent a year between 1986-90, in real terms, corporate investment fell 3.4 and 8.5 percent in 1992 and 1993. Having reduced their indebtedness and maintained profits, by the beginning of 1994, businesses were in a good financial position to increase investment once they saw stronger demand. As a result, we expect business investment to rebound during the latter part of 1994 and 1995. Inflationary pressures remain well contained. The annual inflation rate for consumer prices has fallen from 3.6 percent in 1989 to 1.7 percent by May 1994, the lowest rate in France in 37 years, and considerably below both the OECD and EU averages. With an increase in excise taxes having added slightly less than one-half a percentage point to the annual inflation rate in late 1993 and 1994, underlying inflation has slowed even further. Continued wage restraint will keep inflation from increasing significantly. With wages, the price of oil, and interest rates all falling in 1993, businesses' unit costs increased only 0.5 percent in 1993. This increased the competitiveness of producers located in France, both in overseas and domestic markets. During 1993, French inflation remained about 1.2 percentage points below inflation in France's major trading partners. As a result, between December 1992 and December 1993, while the nominal trade-weighted value of the franc against the currencies of its major trading partners depreciated 1.1 percent, primarily due to the rise of the dollar and the yen, the real, or inflation-adjusted value, depreciated 1.8 percent. Due in part to this price advantage, France's 1993 merchandise trade surplus (fob/fob basis) of FF91 billion, and its current account surplus of FF59 billion, were its largest ever. However, much of the record surplus was also due to weak domestic demand, and in particular, declining corporate investment which has decreased imports of capital goods. Merchandise imports plunged over 10 percent during 1993, while merchandise exports declined only 5 percent as the drop in demand was less marked in France's overseas markets. France is likely to run another large merchandise trade surplus in 1994, having totaled over FF16 billion for the first three months of the year. B. Principal Growth Sectors Between 1989 and 1993 the fastest growing sectors, as measured by nominal value-added were Energy (29 percent increase), Food Processing (25 percent increase), Consumer Goods (22 percent increase), Miscellaneous Services -- excluding retail trade, transportation, telecommunications, and financial services (20 percent increase), Transportation and Telecommunications Services (16 percent increase). C. Government Role in the Economy France has a centuries-old tradition of highly centralized administrative and governmental control of its essentially market economy. In 1993, French general government total outlays were 54.3 percent of nominal GDP, compared to 34.5 percent in the United States and 44.9 percent in the United Kingdom. Over the last decade, the government, both Socialist and Center-Right, has accepted that reducing government involvement was the best way to spur economic growth and reduce the high unemployment rate. This process continues under the Center-Right coalition which came to power in March 1993 under Prime Minister Balladur, a former Economics Minister. His government has begun a program to privatize 21 state-owned enterprises, including some of France's largest, such as Rhone-Poulenc, Elf-Aquitaine and Banque Nationale de Paris. Four of the 21 scheduled privatizations have been completed, and the government plans to continue gradual privatization of the 17 remaining candidates. The French government has in the past subsidized, both directly and indirectly, state-owned firms in all sectors (Air France, Bull, Aerospatiale), particularly those with defense connections or considered "flagship" national enterprises. While France's adherence to multilateral trade agreements and European Union standards will preclude certain traditional subsidies, the French government continues to believe that direct subsidies, the French government continues to believe that direct subsidies are essential in the transportation sectors. This view has been a source of serious policy differences with the U.S. and with France's European Union partners. D. Balance of Payments Situation As noted above, in 1993, the merchandise trade surplus (customs basis, fob/fob) was a record FF91 billion. Trade in industrial goods, including military equipment, showed the largest change, registering a FF11 billion surplus compared to a FF53 billion deficit in 1991. For the first time since 1986, the manufacturing sector, excluding military equipment, ran a trade surplus. On a geographic basis (cif/fob), France posted a FF33 billion surplus with European Union (EU) countries, double its 1992 surplus. With non-EU OECD countries, France reduced its deficit from FF60 billion to FF31 billion, primarily due to a decrease in the trade deficit with the United States, which fell to FF16 billion from FF26 billion in 1992. Following a 1992 surplus of FF8 billion with non-OECD countries, France recorded a FF30 surplus in 1993. Due primarily to the merchandise trade surplus, France ran a current account surplus of FF59 billion in 1993. The surplus in non-factor services decreased slightly, primarily due to a slight decline in the net surplus of tourism revenues, as household income remained weak in many of France's trading partners, and as the franc appreciated against the lira and the peseta. The deficit on net investment income increased to FF45 billion in 1993 from FF41 billion in 1992, due to the continued inflow of foreign portfolio investment, and higher interest rates relative to rates in other industrialized countries. The current account surplus will continue to increase in 1994, largely due to an increase in the merchandise trade surplus. E. Trade Barriers U.S. companies sometimes complain of France's complex technical standards and of unduly long testing procedures. Testing requirements (which must usually be done in France) and standards sometimes appear to exceed reasonable requirement levels needed to assure proper performance and safety. Most of the complaints have involved electronics, telecommunications equipment, medical/veterinary equipment/products and agriculture phyto-sanitary standards. The 1989 EC Broadcast Directive requiring a "majority proportion" of programming to be of European origin was incorporated into French legislation on January 21, 1992. France, however, specifies a percentage of European programming (60 percent) and French programming (40 percent). These broadcast quotas were approved by the EC Commission and became effective on July 1, 1992. They are less stringent than France's previous quota provisions which required that 60 percent of all broadcasts be of EC origin and that 50 percent be originally produced in French. The new 60 percent European/40 percent French quotas are applicable throughout the day, as well as during prime time slots. The prime time rules go beyond the requirements of the EC Broadcast Directive and will limit the access of U.S. programs to the French market. Nevertheless, the market share of U.S. films and television shows remains high. The French government has recently revised its legal services system. Non-EU lawyers may no longer practice as legal consultants and are required to qualify as "avocats," on the basis of full-fledged membership in the French bar. Under the implementing legislation which went into effect on January 29, 1993, this means that non-EU lawyers will have to pass either a "short-form" exam or the full French bar exam. Non-EU lawyers will qualify for a "short-form" exam provided they are able to prove that the foreign state or territorial unit in which they practice allows French lawyers to practice law "under the same conditions." Failing that, they will have to take the full French bar exam. Due to EU regulations, France is required to recognize law degrees for EC nationals but not third country nationals. Nevertheless, non-French EU lawyers, who are also required to qualify as "avocats", may do so via exams less stringent than those for non-EU lawyers. Meaningful access will now hinge on how implementing regulations are administered, including the interpretation of what is meant by granting access on a "reciprocal basis" and the nature of the exam to be imposed on non-EU lawyers. F. Investment Barriers Screening See section VII, Investment Climate. Privatization The recently passed privatization law prevents the French government from selling more than 20 percent of a firm's capital to non-EU investors at the time the government sells its shares. Thereafter, however, the provision does not prohibit private EU-investors from selling their shares to non-EU investors. Shares already held by non-EU investors are not affected by the 20 percent limit. In addition, through "golden shares" in key companies, the government retains the right to block the sale of any assets "essential to the national interest," to prevent certain investors from purchasing additional shares in a company, and to exert significant control over company management, even after privatization is completed. Finally, any investor seeking to own more than five percent of outstanding shares of a privatized company in the health, security or defense sectors will first have to receive approval from the Economics Ministry. Sectoral Investment Restrictions Firms controlled by non-EU nationals may be denied national treatment in the following sectors: Agriculture, Financial Services, Accounting, Legal Services, Air Transport, Maritime Transport, Road Transport, Publishing, Telecommunications, and Tourism. G. Labor Force The French labor force is one of the country's strongest points in attracting foreign investment, combining high quality with competitive unit wage costs. In a recent survey of U.S. investors in France, management was unanimous in agreeing that the quality of local personnel was adequate and 90 percent found labor costs to be competitive. The Labor Code sets out minimum standards for working conditions including the work week, overtime, vacation and personal leave. Other labor standards are contained in collective agreements, which are usually negotiated on a national or regional basis by the various unions and employers' associations. The French minimum hourly wage is FF34.83 (approx. $6). The legal work week is 39 hours and average time worked hovers around this figure. When the work week exceeds 39 hours, non- executive employees are entitled to overtime payment and/or compensatory time off. Employees are entitled to 2.5 workdays of vacation per full month worked. The average private sector salary increased slightly less than three percent in 1993, a marginal increase after accounting for inflation. Including non-salary costs, French labor costs are below the average for Northern Europe. A 1993 U.S. Bureau of Labor Statistics study shows that, in the manufacturing sector, labor costs have been roughly the same in France and the U.S. between 1990 and 1993, with the difference depending on exchange rate changes. French absenteeism is relatively modest by European standards while the hours lost to strikes is at an all-time post World War II low. Despite highly visible nuisance strikes in the public sector and a high profile shutdown of Air France, relatively peaceful labor relations have been the order of the day, particularly in the private sector. H. Major and Third Country Competitors Being the world's sixth largest economy, centrally located within the European Union, there is strong competition for market share in all French industry sectors. Major French organizations, e.g. Aerospatiale, Alcatel, Michelin, and Thompson, have manufacturing and marketing expertise which matches major U.S. multinationals. The government of France has an industrial policy which considers the development of certain domestic industries as critical to national security. At the beginning of 1993, 70 state-owned enterprises accounted for approximately 30 percent of French GDP. This situation is gradually changing in light of the current government's efforts to privatize many of these state- owned industries; however, the fact remains that the French government plays a far more interventionist role in industrial affairs than many other industrialized nations. American exporters to France face more competition from European countries than Asian; however, the Japanese have been successful in developing a "foothold" in the French market, with substantial investments in the Alsace region. German manufacturers are the most serious competitors in Europe, relying on the many Franco-German joint ventures that have been established. Each industry has its own "principal competitors" and should be carefully analyzed before beginning an effort to capture a share of the French market. I. Infrastructure Situation The French transportation infrastructure is among the most sophisticated in the world, benefitting from technological advances such as the Train a Grand Vitesse (TGV) and from extraordinary investment by the government. The three main entry points for air freight are the Paris airports of Orly and Charles de Gaulle, and Lyon's Satolas airport. A major new freight hub, Europort, is being developed at Vatry, 100 miles east of Paris. France has 12 major maritime ports, many of which are equipped for container ships. The state-owned French rail system is one of the most comprehensive and technologically advanced in the world. The French highway system is excellent and has become an increasingly important part of Europe's overall transportation network. J. Major Infrastructure Projects Underway in France 1. Transportation Projects: a. Roissy/Charles de Gaulle Airport Expansion b. TGV Expansion Project c. Road Network Expansion Project 2. Defense Trade a. Nuclear Aircraft b. E2C Grumman Aircraft c. Horizon Frigate Propulsion System 3. Construction Projects a. "La Tour Sans Fin" - La Defense b. Bercy - International Food and Wine District c. Cite Internationale de Lyon d. Georges Pompidou European Hospital e. Eurodisney - Phase Two f. St. Denis Stadium g. Vatry Europort 4. Environmental and Urban Development Project a. Eco-Normandie Regional Technological Park 5. Mobile Communications a. License to be awarded to a third radio communication operator