France’s (Non)Investment Philosophy

Is French President FranÇois Hollande pondering the long-term impacts of the new rule changes? Source: Getty Images News.

As France has worked for some time to boost the economy since its recession, we’re rather perplexed by its most recent proposed policy change. This week, France’s National Assembly closed in on rules dictating how firms offload unprofitable business units. The aim is benign enough—it’s all about preserving jobs—until you consider how the unintended consequences, like the potential to disincentivize investment, could actually threaten long-term job growth. If these rules are adopted, they could have a negative impact on France’s prospects of long-term economic growth—not a near-term headwind for French stocks or the eurozone, perhaps, but something investors should keep in mind.

The saga seemingly started last year, when a foreign steelmaker tried to shut down a French furnace. Instead of allowing the business to do as it saw fit to maintain efficiency, Hollande worked to keep the facility in production so the 600+ workers could keep their jobs—and vowed new laws to keep it from happening again. And here we are. The proposed rules would dictate how companies shed unproductive operations. Instead of just closing factories, they would have to make a strong effort to sell them. But not just any sale will do! Employees get a say, and accountants will have to conduct a full cost-benefit analysis—all within a three month timeframe.

In principle, encouraging firms to sell, rather than close, unprofitable operations seems logical. Problem is, the rules create additional risks for businesses looking to set up shop in France. This disincentivizes investment—particularly foreign investment, an important economic input. As companies grow and expand, they’ll often open offices, factories, etc., in other countries, providing these countries with new capital, more jobs and even additional tax revenue. But businesses don’t just expand anywhere—they weigh the costs and risks against the benefits, and a big risk to consider is, “What happens if this doesn’t work?” If there are too many administrative hassles to deal with in the event of failure, firms could very well decide it’s not worth it to enter France in the first place.

Put yourself in their shoes for a moment. Your coffee mug business is really taking off, and you want to go global—and to keep shipping costs low for your Transatlantic customers, you decide to open a factory in Europe. It’s a risk! And you want to limit that risk—your potential costs—as much as possible. Would you be comfortable opening that factory in a country where you’ll have to jump through myriad hoops and endure substantial costs in the event your venture doesn’t work? Or would you follow the path of least resistance? To firms considering entering France, the thought of a complicated, costly endgame if things don’t work may be enough to deter them from moving forward and say “forget it.”

For now, whether or not the proposed rules take effect remains to be seen. But they are another instance of how Hollande’s attempts to boost his historically low approval rating (largely a result of his approach to mishandling the country’s slow-moving recovery) could create unintended economic consequences downstream. Not a near-term risk for French or eurozone stocks, but something investors might keep an eye on over time.