In the run-up to last spring’s French elections, the normally cautious Economist magazine famously described the rather studious-looking François Hollande as dangerous, warning that he “talks a lot about social justice, but barely at all about the need to create wealth.” “Investors beware,” the editors wrote. Since the polls, the Élysée Palace has made strenuous efforts to overturn that view by portraying France’s first Socialist president in nearly two decades as a moderate. Hollande has created a ministry for industrial recovery and talked about restoring French competitiveness. He’s dismayed left-wing supporters by raising the minimum wage far less than they’d hoped. The message has been that business has nothing to fear from him. But entrepreneurs and the wealthy aren’t reassured. They think the man who once announced on television his dislike of les riches remains a menace, and they’re threatening un grand départ to escape the French taxman.
Already some big names have announced escape plans. PPR, the luxury-goods group and owner of iconic brands Gucci and Yves Saint Laurent, reportedly has contingency plans to relocate highly paid executives to London, as have some foreign banks with offices in Paris. In the world of finance, private equity executive Bertrand Meunier and Christophe Florin, former chief operating officer of Paris-based Axa Private Equity, have left for jobs in Switzerland and Abu Dhabi respectively. Entrepreneur Pierre Chappaz, founder of websites Kelkoo and Wikio Ebuzzing, has moved to Switzerland. And Marc Simoncini, one of France’s most famous dot-com investors, is threatening to move to Belgium.
In his first 100 days in office, Hollande has in some regard shown less revolutionary zeal than critics feared. But on campaign promises that lie at the heart of the misgivings of the French business class, he hasn’t flinched. He’s cutting the retirement age for some workers to 60 (thus adding to government spending) and making it harder for employers to fire workers. He’s hiking taxes for the rich—the top marginal rate for those earning more than $1.2 million will be 75 per cent; for those earning over $186,000 it will be 45 per cent—and raising punitive taxes on wealth, assets, inheritance and dividends. He’s doubled a tax on financial transactions that was created by his predecessor, Nicolas Sarkozy.
The government hopes the tax measures will generate an extra $8.9 billion to meet 2012 deficit targets. But Hollande’s opponents charge that it will do little to help reduce France’s public debt, which is almost 90 per cent of GDP, because it will deter entrepreneurs, cripple French industry and reduce over time the revenues the state could take in with lower taxes. And what does Hollande get out of it? The revenues will make up about 20 per cent of the $40.9 billion the government either has to raise or cut for next year’s budget.
One entrepreneur making those arguments is 47-year-old Laurent Bervas, who left France once before to set up business in nearby Morocco. “The government there was doing a lot to attract investors,” he says. Back in Paris now, Bervas is set to move again with his IT recruitment business—either to Belgium or Germany. “I can’t see good times for entrepreneurs here,” he says. He believes Hollande’s government is “positively anti-business.” “I am shocked by what the government isn’t doing, by what is not happening to encourage business and spur French competitiveness,” he says.
Even left-wing sympathizers have warned of the risks of the hit-the-rich strategy. “If we put up barriers saying, ‘If you stay, you will pay more than anywhere in the world,’ the equation becomes impossible,” says Jean-Emile Rosenblum, founder of the shopping site Pixmania.
For their part, other European countries are primed to benefit from France’s entrepreneurial brain drain. Headhunters, tax consultants and real estate agents report a dramatic uptick in queries from French businesses and entrepreneurs. And, to the irritation of French Socialists, U.K. Prime Minister David Cameron cheekily (and tactlessly) announced at the G20 summit in Mexico that Britain stood ready to “roll out the red carpet” for the French rich. (Of course, that won’t help the more than 200,000 well-heeled Britons who own second homes in France. Tax on rental income from foreign-owned French homes is set to rise from 20 per cent to 35.5 per cent, and capital gains tax on property sales from 19 per cent to 34.5 per cent.)
The French government’s line on the threatened exodus is that there were similar dire warnings of business and capital flight during François Mitterand’s Socialist government in 1981—an administration the young Hollande served in. A mass flight didn’t take place then and won’t now. Bernard Cazeneuve, Hollande’s European affairs minister, says French business leaders are patriots, and will remain and pay extra tax to get the country back on its feet.
But the 1980s are an era away when it comes to the globalized ease with which the wealthy and entrepreneurial can now relocate, shifting assets and businesses. And given an EU free market for goods, capital and most services, many businesses don’t need to be located near their customers. An employee who costs $157,000 in the U.K., say, will cost $267,000 in France. So why not nip over to the U.K. or Switzerland and not only escape higher income and corporate taxes but save money on labour costs too?
Hollande promised to revitalize French industry and balance the books while saving the social welfare model—not an easy task. So far he’s dithered about what state programs he’s prepared to cut to balance the books. He’s a hero now for many on the left with his squeezing of the rich, but when the cuts inevitably come, his supporters are likely to be as angry as les riches.