It is an old Rothschild adage that to get rich, you must buy “on the sound of cannons”. Earlier this month there were water cannons in the streets of Paris to clear members of the “black bloc,” masked anarchists who hijacked May Day demonstrations against President Emmanuel Macron’s reforms.
This flare-up may have been viewed by international investors as a symptom of ills that have afflicted France for decades. But nothing could be further from the truth. I can’t recall a better time to invest in France.
The French government is determined to reinvigorate the country’s sclerotic business environment. France is witnessing reform at a rate never before seen in the Fifth Republic. With Mr Macron’s La République en Marche party enjoying a large parliamentary majority, there is no reason to think that the pace of change will slacken.
The president’s reforms fall into five broad categories. First, labour market reform. The labour law passed in September 2017 allows companies to reach deals with their own workers rather than being forced to comply with industry-wide agreements on working hours, pay and overtime. It also caps the damages courts can award for unfair dismissals and makes the closing of lossmaking plants in France by profitable multinationals permissible.
Then there are individual tax cuts. The typical French payslip reads like a giant laundry list of various taxes and social charges. The employee contribution for health and retirement has been abolished, and employers must now prepare simplified payslips.
It is for asset owners, high earners and the wealthy that tax cuts will have the most impact. The contentious wealth tax was abolished last year for all assets other than real estate equity.
Meanwhile, corporate tax rates are set to decline — from 33.3 per cent today to 25 per cent by 2022. This may not be on par with Ireland or the UK, but it certainly makes France competitive with Germany and countries in southern Europe.
Historically, it has been costly for the French to invest in equities, with tax rates north of 50 per cent for some. No longer. In its first budget, the government introduced a “flat tax” of 30 per cent on all investment income. This makes it worthwhile for people to consider investing in the stock market, venture deals and private equity.
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The final category of reform involves cutting red tape for entrepreneurs. For example, forthcoming small business legislation will allow people to start a company with a single registration form, rather than seven as previously.
If all this is good for French businesses and workers, what does it mean for foreign investors?
On the private equity side, the most interesting investment opportunity may lie in small and medium-sized companies that were previously handcuffed by the requirement that business owners own a minimum of 25 per cent of their equity in order to circumvent the punitive wealth tax. This created a disincentive to use equity to grow via mergers and acquisitions, to sell a stake to a financial buyer or to raise equity capital to expand. New incentives to finance growth with equity should be attractive to investors.
The government is also planning to make equities investing more attractive. France’s personal savings rate is 14 per cent, but this is mostly invested in low-yielding savings accounts and life insurance. A small shift in asset allocation has the potential to create a demand for equities on the part of long-term savers.
Will Mr Macron’s plan work? That depends on whether tax cuts and deregulation are accompanied by a serious attempt to cut the size of government. He has done a lot in his first year in office to turn France into a country where working and investing pay off. There is no sign that he is about to stop.