Q You gave up a high-powered private-sector job in the US [as global head of law firm Baker & McKenzie] to come back to France to join the cabinet. How have you found the transition from working in the business world to working in government?

A It has been mind-boggling. A law firm is quite a funny beast: it is a partnership in which every partner thinks that they are at least as good as you are. It is a fairly political environment but everyone is driven by the same purpose, which is to serve clients and make money.

Advertisement

Often in politics, you wonder where the consensus is, because people tend to go off in different directions and criticise what is being done by the other side, even though it has worthwhile and good elements about it.

Q When president Nicolas Sarkozy asked you to become finance minister, what did you set out to achieve?

 

A I wanted to achieve what he wanted to achieve. I had no personal stake in the game. I come from another world and I will return to another world, but I wanted to achieve his plan of reforms and give enough confidence to my French mates – apologies for the Australian term – to drive growth and success and achieve their potential. That is the emotional dimension that I have; the rest is his plan of reforms to [achieve] better competitiveness and employability.

These are the two tracks that I have at my ministry: competitiveness, based on productivity, and employability. The two objectives that were set for me in my mission statement were to reduce unemployment to 5% by the end of this term and to improve growth significantly.

Q In terms of international competitiveness, France has lost much of its unit labour cost competitiveness.

A France started off having a serious competitive advantage against Germany. What I hear now, particularly from industry, is that France and Germany are on a par again. Germany has caught up by having a wage policy that is extremely restrictive and that keeps tight control of all the components of labour costs. Because of the steady, regular increase in the SMIC [Salaire minimum interprofessionel de croissance], we pushed the minimum salary increasingly higher, which has led to the collapse of the minimum salaries that are slightly above the SMIC and has increased labour costs significantly.

Q How, specifically, do you plan to raise growth to 3%? It seems like a tall order.

A We can do a few things. First, we can use tools that focus either on demand or on offer. In July, we used a set of tools that had more to do with demand than offer, which was intended to stimulate growth by adding purchasing power to the wallet of those who borrow to buy a house and of those who are prepared to work harder. That was the bottom line of that law. Half the funding will be dedicated to paying overtime gross and net of tax.

Many people can criticise that set of tools that we used, but we needed to send out two strong signals: first, that promises made by Candidate Sarkozy would be delivered by President Sarkozy. It was important to reconcile people with politics; there was a huge scepticism among the French about politics, and politicians were often regarded as those who made promises but never kept them.

The second signal is that he said repeatedly during the campaign: “Work harder and you will get more pay”. This is to instil and reiterate the fact that you need to create wealth to allocate it; you need to work if you want to be compensated for it; you need to make an effort if you want success.

A measure that becomes effective on October 1 [will mean] that each hour of overtime will be compensated at gross pay, net of tax – a real bonus for those working longer than 35 hours. Another measure that is quite effective is the one that gives a tax credit. It is a cheque in the mail for those who buy their residence and borrow to that effect. Those who do not pay tax get a cheque from the Treasury; those who do pay tax see a reduction in their tax bill. These two measures were produced predominantly to stimulate growth through an added piece of purchasing power.

On the other side, we need to focus on offer and this is going to be effective as of January 1, 2008. We are focusing particularly on R&D and innovation. We are boosting the tax credit available to companies that invest in R&D. We take the view that it is all very well reducing costs for companies [but] ultimately they will be competing strategically on those segments where R&D has been invested in, and which will turn into innovation and new products. We are therefore trying to incentivise companies to invest in R&D.

The tax credit that they will receive will correspond to 30% of any R&D-related expense, up to a limit of €100m a year. That is big. For anything over €100m a year, the level is 5%. That should significantly stimulate R&D – that is what companies are telling us.

Q Why not just cut corporate tax or income tax?

A Taxation is a tool to be used for specific purposes to induce people to do certain things that you believe are going to be good for the country overall. If you simply cut tax, you do not give an incentive to people to invest in R&D, which is where we all know we have to focus. I have just returned from China and the way that they learn from us and everyone else is an indication that if we want to stay a little ahead of the game, we need to get on with and continue to invest. That is my point: taxation is a tool to use to orientate behaviour.

Q You have said that one of your missions was to improve the image of France. How do you think you are doing on that score?

A The best person to answer that question would be Philippe Favre [head of Invest in France agency], because I have not stopped travelling. What Philippe is telling me – and I saw it in China, and in Germany and Portugal prior to that – is that people have a different impression. One of the benefits of the election of President Sarkozy is that it has turned people’s minds on about France, whereas it was very much off. I am talking here about the general perception.

I was amazed at the Ambrosetti seminar in Italy how much appetite there was for France. Germany is not on the same page at the moment but, generally, investors are pleased to see that we are trying to change the psyche, making overtime easier and cheaper for companies.

The two main complaints that [investors] had about France were about labour regulations and taxation. The labour market is too rigid. It is always difficult to hire, fire, manage, organise or change, depending on the constraints of the business. Investors see that we have begun to change. We have asked the unions and the employers’ associations to work on that. Our constitution and our laws require that any change in labour relationships has to be preceded by consultation with the unions and the manufacturers’ associations. So President Sarkozy asked all unions and employers’ associations to start negotiating from July, which they did.

The second [complaint] is tax, especially the complexity – there are a significant number of taxes. Corporate tax is relatively high compared with other European countries.

And employers and investors often resent what you would call red tape, administrative taxation. The French administration tends to be quite picky, detailed and demanding; although foreign direct investors acknowledge that public authorities are good at getting together and helping out when it comes to hosting FDI, they resent the fact that there is so much scrutiny, control and involvement of the French administration in their businesses. They regard it as equivalent to taxation, because it requires people to spend time and respond. However, we are improving on that front, too.

 

CURRICULUM VITAE: CHRISTINE LAGARDE

2007

French cabinet

Minister of finance (as of June)

Minister of agriculture (briefly)

2005

French cabinet

Minister of trade

1999

Baker & McKenzie

Chairman, Global Executive Committee

1987

Baker & McKenzie

Partner