Zooming In On French Industrial Policy

France’s "production pact" has resulted in a new industrial policy dynamic targeting more sectorial support for industrial innovation, digital technology and the energy transition of industry. Although France's competitiveness has improved, both in terms of costs and the quality of its products and services, several areas still need to be developed, including support for strategic sectors, industrial development of the country, and strengthening the scientific and technical skills of the national population. Aloïs Kirchner, Senior Fellow at the Institut Montaigne, looks back at the industrial policy conducted since 2017. 

With under 2 months to go until the French elections, this article is part of a series that looks into the achievements and drawbacks of Emmanuel Macron’s presidential term. The extended analysis in French can be found here. 

Key Notions: 

• France Relance - The French Covid-19 recovery plan was launched in July 2020 comprises €100 billion, with the aim of accelerating the country’s ecological, industrial and social transformations, by proposing concrete measures for individuals, companies and associations, communities and administrations. This plan is financially supported by approximately 40 billion euros from the European Union. 
   
• In 2021, Emmanuel Macron outlined his ambitions for a post-Covid "Marshall Plan" for African countries. This plan involves promoting African development, notably youth employment, and healthcare systems, with the short-term goal of improving vaccination access and long-term goal of reducing migration to Europe. 
   
• The production pact - In 2019, President Macron announced le pacte productif, which sought to lay out a roadmap towards full employment and increased industrial competitiveness. It is made up of five components regrouping the different measures: energy transition, digital, industry, agriculture and innovation.
   
• The France 2030 investment plan was launched in October 2021, focusing on promoting France’s industrial sectors by the year 2030. The plan, drawn up with Europe, aims to support the sustainable transition of the French economy in the automotive, aerospace, digital, green industry, biotechnology, culture and healthcare. It will be worth €30 billion over five years, of which €3-4 billion will be spent as soon as 2022.

Key figures:

• Despite recurrent policies or industrial strategies aimed at promoting "national champions", France has seen strong deindustrialization during the last decades, in comparison to its competitors. The industry only represents 10.3% of total employment in 2020.
   
• Since 1980, France’s industrial sector has lost nearly half of its workforce, i.e. 2.2 million jobs. At the same time, the share of industry in GDP fell by 10 points to 13.4% in 2018, compared to 25.5% in Germany, 19.7% in Italy, or 16, 1% in Spain.
   
• French industrial policy comprises a diverse range of sectors and targets. In 2019, 12% of financial interventions in favor of companies benefit industry, i.e. a share lower than its weight in the private sector. In total, out of 100 euros of aid to companies in the industrial sector, 40 euros is targeted at employment and training, 25 euros is targeted to R&D and Innovation, 10 euros are reductions or exemptions from the TICPE (domestic tax on consumption of energy products), and 6 euros is given to subsidized loans.
   
• The government’s aid to industry is horizontal in approach. Direct aid explicitly targeted at industry represents only 30% of total economic interventions by the government. 

Evaluating French industrial policy: 

• The first half of Emmanuel Macron's five-year term was defined by the implementation of cross-divisional projects benefiting the entire economy (with particular emphasis on taxation, labor law, and vocational training). In addition to the cost-competitive measures undertaken by the previous government, this has initiated notable progress among industry, resulting in a significant increase in job creation between the second quarter of 2017 and the end of 2019. This period also gave rise to the implementation of effective policy measures, in order to develop innovation and protect strategic sectors at the French and European levels. 
   
• At the end of the Great Debate (Le Grand Débat National), on April 25, 2019, the President set a "new production pact" objective, resulting in a new industrial policy model that targets more sectoral support for industrial innovation, the digital sector, and industrial energy transition. Delayed by Covid-19, this package materialized in the framework of the France Relance recovery plan during the summer of 2020. The package consists of fiscal measures targeting industry (€10 billion/year reduction in production taxes) as well as tools to invest in future strategic industries, and their location in France (fourth investment plan for the future, with €20 billion).
   
• The results of Emmanuel Macron's industrial policy have generally been positive, helping France to improve its competitiveness - both in terms of costs and the quality of products and services. Nevertheless, there are six key areas which deserve to be developed in the future:

1. France's cost competitiveness remains insufficient: while it is now close to Germany’s (in 2019, the hourly cost of labor in industry - excluding construction - was €39.1 in France, compared to €41.4 in Germany, €28.8 in Italy, €27.5 in the United Kingdom, and €23.9 in Spain), it remains significantly lower than the majority of its European neighbors.
    
2. The government’s support for strategic sectors, despite several significant initiatives (battery plan, hydrogen, AI, quantum...), has not resulted in an overall systematized policy, making decision-making challenging, and giving rise to concern that decisions will be made according to the latest trends, rather than long-term strategic goals. The announcement of the France 2030 investment plans represents an interesting shift towards a more strategic vision of this support, but this remains to be confirmed in practice.
    
3. As industrial companies undergo digital and ecological transitions - amplified by initiatives such as France Relance - the government’s support must be provided sustainably and systematically, with an outlook beyond the projects initiated by 2022. 
    
4. In order to protect Europe's industrial fabric from aggressive or less sustainable industrial policies in other world regions, ambitious policies must be implemented at the EU level (such as carbon adjustment mechanisms at borders, EU screening tools for foreign direct investment, and reforms of competition policy).
    
5. Despite ambitious campaign declarations, such as the "Marshall Plan" for reindustrializing economically under-developed territories, the State remains relatively powerless in terms of industrial development in territories. Deindustrialisation remains one of the main causes of abandoning certain territories. 
    
6. French scientific and technical skills are declining, of which the negative effects will undoubtedly be felt in the medium and long term.