France Update, July 23rd, 2012

by Véronique Queffélec on juillet 24, 2012


Key Summary

1/ France reforms update

On the 21st of July, the national assembly finally adopted the Amending Finance Law 2012. Unfortunately, it is mainly based on tax increase (€7.2 billion) rather than spending cuts (€1.5 billion), and is financed at 53% by households. The Senate still have to vote those amendments before the end of July.

Among the most important ones:

- Gas tariffs to be cost reflective.

- Livret A (tax-exempt saving account) rate unchanged at 2.25% in August.

- The tax exemption of overtime will stop applying on the 1st of August

- The social VAT is replaced by an increase of the CSG (General Social Contribution).

- The increase of the Social Wealth Contribution (ISF) should generate €2.3 billion for the State.

But also:

- The increase of the financial transaction tax rate from 0.1% to 0.2%;

- The introduction of a 3% tax on company dividends;

- Doubling the systemic risk levy on banks to 0.5%;

- Levy a one-off tax on the oil sector (4%);

- Deduction on inheritance tax will increase from €159,000 per child per parent to €100,000.

(See the previous note on the Amending Finance Law 2012 - 4th of July- for more details)

2 / France within the EU

French Parliament to discuss in late September or early October the ratification of the fiscal and growth compact (ESM has already been ratified).

Finance Minister Moscovici continues to favor euro-bonds/bills.

Key Analysis

1/ France reforms update

Gas tariffs

The French Constitutional Court ruled that the tariff freeze imposed by the previous Government was invalid as gas tariffs should be cost-reflective. The Court ordered the new government to allow tariffs to rise 10% in order to reflect the losses incurred in Q4 2011.

Banks – Livret A (tax-exempt saving account)

Michel Noyer, governor of Bank de France has announced that the Livret A rate will remain unchanged at 2.25% on 1st August. The Livret A rate is fixed by French authorities and can be changed twice a year in February and August.

An increase in the Livret A rate would have triggered some negative P&L impact for banks. A stable Livret A rate at 2.25% is therefore a positive news for French banks as a whole and for Credit Agricole in particular whose exposure to French retail banking is high. This comes as the second positive news around the Livret A after the Finance Minister has announced that the doubling of the ceiling of the Livret A rate will be implemented gradually.


The Government voted that the tax exemption of overtime, one of the major policies implemented by Sarkozy, will stop applying on the 1st of July (5 months earlier than predicted), as announced in Hollande’s programme for the presidential elections. From this point in time, employees will loose this advantage of exoneration on income tax, and companies will have to pay full taxes (except companies than employ less than 10 employees). This new decree will not be applied retroactively, as for all the coming reforms on fiscal issues, to account for individuals who would have probably not done overtime if they “knew it was not tax-free.”

Social VAT

The idea that makes a consensus between the PS and the UMP is that the financing of social protection must no longer weight on wages alone, but they have divergent points of view on the method. Nicolas Sarkozy had introduced in February 2012 the “social” VAT, also called “anti-offshoring”: a tax increase on the value-added amount of goods, in exchange for a reduction in social contributions paid by companies.

On Wednesday, the Government replaced this measure by an increase of the general social contribution (CSG). According to the PS, this tax has the same role but also the advantage of reaching all incomes, regardless of their source: work, pensions, unemployment benefits, income and capital gains. Moreover, the “social” VAT was criticized by the PS to be against the principle of European solidarity : “one of the goal of creating a single currency was to prevent countries from practicing competitive devaluation among European countries, and social VAT is nothing but competitive devaluation”.

Solidarity tax on wealth (ISF)

On Thursday, the Constitutional Court voted the increase of ISF that should provide the State with €2,3 billion this year. The average amount of this contribution has increased from €39,295 to €95,531. This contribution concerns a little more than 291,000 households with a net taxable wealth exceeding €1.3 million.

2/ France within the EU

Fiscal compact ratification

Prime Minister Ayrault said on Tuesday that the Parliament will discuss in late September or early October the measures being taken by European leaders to combat the EU debt crisis. His remarks refer to the fiscal and growth compact treaties, since the parliament already approved the ESM under the Sarkozy presidency. While we do not envisage any ratification problems, the possibility of a change in the constitution later in the process (depending on the ruling from the constitutional court) will require a two-thirds majority in both the lower and upper houses, leaving the government reliant on support from some of the opposition Members of Parliament and Senators.

The Government continues to favor Eurobonds / Eurobills.

On Tuesday, FM Moscovici ahead of meetings with IMF Managing Director Christine Lagarde, reiterated that France remains in favor of mutualized debt instruments, arguing that the idea of creating euro bonds and euro bills should not be ruled out forever, even if this proposal was not favored in the short-term by some European countries. He added that the ECB has a “major role to play” in fighting Europe’s debt crisis, and stressed that the institution had been instrumental in helping European policy makers make some “huge progress in the last months”. Mr Moscovici stressed that France’s 2013 growth forecast of 1.2% was “credible” and takes into account the fact that Europe “is returning to growth”, while the IMF last week published a more conservative estimate for France’s 2013 GDP growth of 0.8%.