Speech by Mme Christine Lagarde at the Executives’ Club of Chicago

PNGMs President, (Kaarina Koskenalusta)
Mr Mayor, (Richard Daley)
Mr Ambassador,
Dear friends,

"Change" is a politically very heavy word. I make a point not ot use it too often, but to practice it as much as I can.

There are important changes everywhere in the world. France is on the move. UK is nationalizing banks. There are international calls for more financial regulation. Who would have thought this a few years ago ?

But the most striking change is certainly that now foie gras is back in town.

I’d like to say that I feel at home in Chicago. I had the chance to live and work here for many years. And Chicago is certainly the “Frenchiest” city in the U.S. After all, its founder was a French Haitian named Jean-Baptiste Pointe du Sable. He settled on the shores of the Chicago River in the 1770s and became so popular that the Americans living around Lake Michigan wrote a petition to have him appointed administrator of the region. Imagine nowadays an American city begging for a French mayor... Personally, I could petition for an American mayor - à la Daley.

The biggest lesson Chicago could give us is how to reform successfully. In less than twenty years, Richard Daley transformed the city of the rust belt into the city of the future.

Just a few months ago, whenever I told foreign audiences that “France is on the move,” I didn’t have much to back up my assertion. Today, I have on my side the IMF “Article IV” Review and the 2008 World Competitiveness Yearbook published by the Institute for Management Development in Lausanne, which make both the same assertion, word for word. But above all, numbers are on my side. Unemployment has been trending down to its 1983 level (7.5 percent), 2007 saw a record number of business starts (+ 320,000), and growth has been encouraging. It has lived up to our forecast for last year—2.2 percent—and overshot our forecast for the first quarter of 2008—0.6 percent. We have four years left to meet our target of adding another percentage point to growth and achieving full employment. We are already on the right track.

I’d like to ( I ) start with a broad overview of what our reforms are all about : France is on the move. Then ( II ) I’ll go on to describe their specific features that should make France more attractive to those of you who intend to live, work or invest in our country : France is opened for business.

( I ) France is on the move

Don’t worry—I won’t go through each of our fifty-five reforms, contained in thirty-seven laws passed by Parliament in the last year. Together, they represent a kind of “shock therapy,” if I may borrow an expression from one of the most famous Chicagoans, Milton Friedman.

There are (1) reforms that we as a Government are implementing, (2) economic reforms that I am conducting more personally as Minister for Economy, Employment and Industry, and (3) international regulation reforms that your country can help us realize.

(1) Reforms that the French Government is implementing

The shock therapy will make all the clichés about our country belong to history.

The country of the laziness ? France is not anymore the country where everyone works 35 hours a week. We have made overtime work tax-free, which means less costly for businesses and much rewarding for employees. The result is that over half of all French companies (59 % in March) currently take advantage of this opportunity.

The country that subsidizes leisure ? We are creating a “Solidarity Income” which is very similar to your Earned Income Tax Credit. I know that Mayor Daley is very committed to the implementation of the EITC, as he made clear in his May 1st Annual Address, and I have no doubt that he would support this “Solidarity Income” mechanism designed to put people back to work.

The country of civil servants ? The aim of our Comprehensive Public Policy Review is to reduce headcount in the civil service while making it work more efficiently, based on Jean Chrétien’s approach in Canada. We have already decided that one out of every two civil servants going into retirement will not be replaced.

The country plagued with strikes ? We have passed several minimum service laws that will allow in the future to keep school premises open to large numbers of children whose teachers are on strike.

The permissive country ? We have introduced stricter rules for dealing with repeat offenders, and we have stepped up our efforts at tackling illegal immigration. In 2007, the total number of illegal aliens decreased for the first time in 30 years.

The country with jam-packed lecture halls ? We have established the principle of university autonomy and set aside a budget of 5 billion euros to finance ten major university campus development programs. We also plan to create American-style endowment funds.

The isolated country ? By advocating and then ratifying the Lisbon Treaty, President Sarkozy initiated a proactive policy that has gotten the European process back into gear. By the way, I have a favor to ask to those you who are irish, who know someone Irish, or who know someone who knows someone Irish : could you please use any means, cellphone, e-mail, text messages, to make Ireland vote for the Lisbon Treaty in the coming referendum ? Ireland is a great nation that deserves a great Europe. Vive l’Irlande !

(2) I will now talk about the economic reforms that I am responsible for.

They are based on a few basic principles : we need more work, more competition, more innovation.

More work : as I already mentioned, companies managers as well as workers can circumvent the 35-hour week thanks to facilitated overtime hours. Labor time in France today is now organized on a flexible basis, reflecting what businesses need and what employees want.

We have also established arrangements for renegotiating employment contracts, including the possibility of terminating them by “mutual agreement,” and reformed our Public Employment Service. I also intend to get people on the dole to accept any "reasonable offer", otherwise their benefits will be cut. So France is clearly headed in the direction of flexicurity. I have also merged the organization responsible for paying the unemployment benefits and the one responsible for helping people who need job to find them. Our system will become more simple and more practical.

More competition : One of the goals of the Economic Modernization Bill I will present next week in Parliament is to develop a freer market by encouraging entrepreneurship and stimulating competition. We intend to do away with administrative red tape and cushy niches, especially in the retail business.

Our bill will create an individual entrepreneur status so that anyone who wants to work on a self-employed basis can do it. Whether that involves selling souvenirs, designing websites, crafting costume jewelry or giving voice lessons, the only formality will be to fill out an online registration form. In addition, individual entrepreneurs will be allowed to pay their income taxes and social security contributions in one go : a total of 13 percent for retailers and 23 percent for service providers, as long as annual revenue doesn’t exceed a given ceiling. In a word : this is France’s version of a flat tax.

As regards competition, we’re going to loosen restrictions on price negotiations between suppliers and distributors, which aren’t what you’d call free today. We’re also going to increase the number of competitors in the marketplace by making it easier to open large retail stores, up to 1,000 square meters. Having more supermarkets, with greater freedom to determine how much they charge, is the fairest, most effective way of keeping prices down and inflation low in a free market economy.

More innovation : I have tripled the research tax credit in the 2008 Budget Bill - but I will get into more details later. And I also develop a strong cluster program to help create competitive R&D spots in France.

(3) There are also reforms that France cannot implement on its own, since they imply international cooperation.

France will be holding the presidency of the European Union for half a year. Regarding the economy and finances topics, this will be an ideal opportunity to take the initiative in at least four major directions : enhancing financial stability, completing the E.U. internal market, strengthening Europe’s competitive position, and ensuring that the Economic and Monetary Union operates smoothly. That is the least to do for the 10th anniversary of this Union - almost as much time since Chicago and Paris became twin cities.

The French have an historical habit : whenever we undertake national reforms, we put them in universal terms. That goes for the 1789 Declaration of the Rights of Man and of the Citizen, and we might try again for banking regulation today.

Nicolas Sarkozy was the first world leader to call for greater regulation, and subsequent developments in the financial crisises (I think there are more than one) have unfortunately proved him right. I remember that the President called me on my cellphone during my very short holidays in August to tell me : "something serious is happening, you should come back to Paris".

At the G7 meeting of finance ministers last October, we initiated discussions on what changes needed to be made. At the following G7 meetings in Tokyo and then in Washington again on April 11th, we went into action, setting a detailed timeline for implementing those changes. The aim is to promote more responsible future behavior among finance professionals—to prevent the kind of negligence that did so much damage. One such crisis is more than enough.

Relating to this, I’d like to tell you a fable of our well-known 17th-century author, Jean de La Fontaine, called “Conseil tenu par les rats”, Rats’ counsel. A cat named Rodilardus was slaughtering rats in so huge proportions that it was nicknamed “the devil”. One day that he was away flirting with some female, the rats held a meeting and concluded that the only way to fix the problem was to tie a bell around Rodilardus’neck. But the first rat said : “well I won’t do it myself, I’m not a fool” – and the second : “I don’t know how to do it” – and finally nobody dared to implement the decision. Coming back, Rodilardus was free to eat as many rats as usual…

Unlike the rats of the story, each of us in the G7 meetings is now ready for action. That is why we have given the various market players a hundred days to act on our most urgent recommendations—and since today is May 23rd, their time is almost half up. The G7 has pressed the banks to be fully transparent about their losses and risk exposure, based on the Financial Stability Forum report, which contains a detailed list of points requiring disclosure. You might call it a patient health questionnaire that the G7 is asking banks around the world to fill out. With respect to accounting practices, the relevant supervisory authorities will be providing guidance to help banks and auditors apply consistent methods that are suited to valuing financial assets in a period of market disruption. And the Basel Committee, which brings together the various bank supervisory authorities, is scheduled to issue stricter standards for controlling liquidity risk by the end of July.

Further measures will be gradually introduced before the year is over, particularly to address capital adequacy requirements for banks and the role of credit rating agencies.

We politicians try naturally to keep a cool head and not to behave like these “barbarians at the vault” bashing the banking industry that The Economist mocked in its last issue. We don’t forget the strength of modern finance and the way it contributes to the general wealth. I do believe that there isn’t a true opposition between what we use to call the "financial world" and the "real economy" : there are both parts of the same system.

Bankers are driven by a mix of greed and guilt. They need greed : profit-making is at the heart of the financial industry. But they also need guilt : excessive risks have to be sanctioned. The purpose of a good regulation is to deal with these two aspects.

( II ) France is open for business

France is already the world’s second biggest recipient of Foreign Direct Investment, since we outdistanced the U.K. last year, with total FDI in excess of 100 billion euros, versus 63 billion euros in 2006. France is number one for the FDI to the US ; and the US is symetrically number one for the FDI to France. Germany may be number one in exports, but France holds the FDI title in Europe, which is a very good news, as any of the 600,000 French workers employed in France by US companies could attest.

Despite these figures, France usually gets an average ranking in attractiveness and competitiveness surveys. We are ranked 31st by the World Bank’s Doing Business report, 18th by the World Economic Forum’s Global Competitiveness Index, or, very recently, 25th by the IMD World Competitiveness Yearbook. Therefore we have stepped up our efforts to make our country a more attractive place to work and invest in. I’d like to take a few examples.

Individual taxpayers : The Act of August 21, 2007 sets a 50 percent tax shield to ensure that taxes never exceed half of total income.

Wage and salary earners : The Economic Modernization Bill aims to relax restrictions on impatriates by making the impatriation bonus tax-free – which is a kind of “remittance basis”. In addition, high-level executives from other countries will have less trouble getting residence permits. Just when the United Kingdom is moving away from the tax breaks for the “non-doms”, France is doing the opposite.

Businesses : As I already said, one of my top priorities is to foster innovation. Thanks to our new research tax credit, a company that spends up to 100 million euros on R&D will get 30 percent of that expenditure back from the Government (and 5 percent on spending above 100 million euros). The first year, the rate will even be 50 percent, then 40 percent the second year. France is now the most competitive country in the OCDE countries in terms of R&D taxation, and a lot of multinationals are starting to take advantage of this new opportunity. So if you want to save money while developing research labs, France is the place to be !

Financial service providers : This is a project I am personally very committed to. One of the first steps I took when I came to office was to set up a "Haut Comité de Place" with representatives of the financial sector to find the best way to improve our competitiveness in this field. Last December, we abolished the stamp duty on financial transactions on the Paris stock exchange. We have assisted NYSE-Euronext in creating a new “light-touch regulation” compartment on the Paris market. On this compartment dedicated to professional investors, information and language requirements are streamlined to keep the costs for issuers and investors down to a minimum. And what we have achieved on this new NYSE-Euronext compartment will soon be extended to all markets, thanks to a financial markets reform that will come with the Economic Modernization Bill.

In the same way, France has finally signed the London Agreement in order to reduce by 20-40 % the cost of establishing patent rights for inventions, and to make possible the use of the English language.


So as you can see, France is well on the road to reform. Like Spain in the eighties, like the United States in the nineties, like Germany in the early 2000s, we are experiencing what psychoanalysts refer to as a “Renaissance”. All of a sudden, the words just seem to be flooding out and taboos are falling. Open any French newspaper and you’ll find pages and pages about President Sarkozy and our reforms. It’s gotten to the point where the political opposition is suggesting that formal limitations be placed on the President’s “media exposure.” In any event, my bet is that the current “shock therapy” will produce results. As William Faulkner wrote, "The end of wisdom is to dream high enough to lose the dream in the seeking of it."

A new France will emerge, stronger though leaner, more confident but not pompous, modern but still loyal to its culture.

Thank you very much./.

May 23, 2008

Dernière modification : 01/07/2011

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