Successfully investing in France

PrintMailRate-it

last updated on 13 September 2022 | reading time approx. 35 minutes

 

 

 

How do you assess the current economic situation in France?

Corona, Russia's war against Ukraine, high energy prices and the associated inflation weighed and continue to weigh on the French economy. Admittedly, the Corona effects eased noticeably from the beginning of 2022 on­wards, as supply chain problems, for example, diminished noticeably.

 

Rather, the French economy, like all of Europe, is feeling the consequences of the war against Ukraine. It is true that before the war, trade with Russia and Ukraine each accounted for just under 2 percent of France's imports and exports. Nevertheless, some large French companies such as Renault, TotalEnergies or the Bank Sociètè Générale had and still have strong links with the Russian economy, which lead to considerable burdens.

 

In addition, energy prices are rising in France. For consumers, electricity and gas prices are capped until January. However, not for industry and businesses. There is also a kind of "fuel rebate" that reduces the price per litre of fuel by 18 cents. As a result, despite the French government's efforts to reduce energy costs, there are considerable risks for the French economy, which are also explained in more detail in this article.

 

Complicating matters is rising inflation in the Eurozone and also in France, which is further fuelled by the continuation of the Russian attack on Ukraine, the related reciprocal sanctions and the European Central Bank's cautious interest rate policy.

 

Despite these challenges, the unemployment rate was reduced by 0.5 percent year to 7.4 percent by the end of the second quarter of 2022 when compared with the previous year, but increased by 0.1 percent compared to the previous quarter. However, a negative trend is not (yet) discernible in this.

 

The French economy is also expected to grow positively in 2022. However, the forecast was lowered from over 4percent to 3.4 percent to 2.8 percent as a result of the war in Ukraine. In addition, the forecast for growth in the following years was also revised downwards by the central bank.

  

How would you describe the investment climate in France? Which sectors offer the largest potential?

Germany remains the main foreign investor in France with a capital stock of 86 billion euros. In principle, France has seen a 32 percent increase in foreign investment projects in France.
 
This can be attributed to a series of reforms in French labour and tax law. The corporate tax rate has been lowered from 33.33 percent to 25 percent and thus now corresponds to the tax rates in Canada, Spain or Austria, for example. However, it is still 10 percent higher than the German corporate tax rate of 15 percent. In addition, France is also very attractive as an investment and development location for research and deve­lop­ment companies because of its advantageous taxation.
 
The labour law reforms envisaged by President Macron in the current legislative period and the expected reduc­tion in labour costs will also make France a much more attractive location for foreign investors. 
 
France's attractiveness as a business location is also based on other strengths. The infrastructure is still of good quality and will be further expanded. The workforce is well educated. Especially since France is investing heavily in the training of workers as part of the labour law reforms. The excellence of French engineers also explains why France attracts more research and development centres than its neighbours. 
 
However, electricity and energy prices have risen a lot in the last year (as in the rest of Europe).
 
Furthermore, the country not only has proven top industries, such as the luxury goods industry and the food [and energy] sector, but is also characterised by factors such as innovation, creativity and problemsolving skills. According to the French government's plans, an important field will also be in the area of renewable energies and decarbonisation. In addition to nuclear power, photovoltaics and offshore wind power will be the main energy sources, and industry and infrastructure will gradually be decarbonised.
 
German companies from all sectors of the economy are located in France. In addition to the traditionally large share of German investors from industry, the importance of the service sector continues to grow. Most German companies come from the transport and construction sectors. Other important sectors are:
  • Machinery and mechanical equipment,
  • electronic, IT and medical equipment,
  • commercial, financial and other services,
  • the chemical and plastics industry and
  • the automotive industry.

  

What challenges do German companies face during their business ventures into France?

Challenges exist for foreign companies in the legal situation in France, which in some cases differs greatly from Germany and changes frequently, especially in the areas of tax, labour and company law. 
 
Additionally, in France, the legislation is a very employee-friendly one, which also has to do with a critical basic attitude of the French population towards entrepreneurship.
 
In 2019, a new amendment to the French Monetary and Financial Code has expanded the scope of foreign investment subject to approval to include research and development in cybersecurity, artificial intelligence, robotics, additive manufacturing, nanotechnology and space activities, as well as digital data acquisition and storage.
 
Foreign trade control by the French Ministry of Economy applies to the acquisition of the majority shares or all or part of the business of a company whose registered office is in France. For foreign investors from outside the EU, the authorisation requirement already applies to the acquisition of a capital holding or voting rights of 33.33 percent.
 
Foreign investments requiring approval are subject to a specific approval procedure, the procedural steps of which must be observed in detail.

  

How does France's energy supply influence economic development?

Europe, but also France, are facing difficult times. As a result of the Russian war of aggression against Ukraine, Russia has gradually reduced its energy supply to Europe to almost zero. Admittedly, France is not as depen­dent on Russian gas as Germany, for example, since it is mainly heated with electricity here and gas-fired power plants only cover around 7 percent of the electricity demand. 
 
However, there are domestic problems in the French energy supply. Over the summer, many nuclear power plants, which bear the main load (around 70 percent normally) in the French energy supply, were shut down. As a result, France imported a lot of electricity from other EU countries, such as Germany or Spain. The shutdown of the reactors is based on various reasons. More than half of the power plants were or have been inoperable as a result of regular maintenance, but also water shortages, staff absences and erosion in reactors. The resulting increase in energy prices in response to the supply shortage will have a noticeable impact and is already doing so. The expected inflation for 2022 is estimated at 6.5 percent and has already determined the French President as well as Parliament's 2022 election campaign.
 
In addition, more than half of the French use electricity for heating. Although prices for consumers are capped until the end of 2022, this can lead to a considerable burden on the French electricity market if the price effect and the associated incentive to save do not have an effect on the citizens.
 
The now nationalised energy provider EDF announced that all nuclear power plants would be back in operation over the winter. However, in a "worst case" scenario, the French energy ministry warns of occasional power cuts of up to two hours. Especially as some experts consider EDF's announcements too optimistic and expect a slower return of the nuclear power plants.
 
In order to prevent blackouts, the French government is implementing an electricity quota trading system that will be activated should it not be possible to supply sufficient energy to all businesses. This would allow com­pa­nies to buy and sell electricity quotas in order to make the best possible use of the limited power supply in their operations. 
 
As a last resort, temporary disconnections of customers are also being prepared on the instructions of the energy ministry. A website of the French electricity grid operator shows French citizens how high the grid utilisation is and whether disconnections are potentially imminent.
 
It is obvious that this can lead to considerable losses, especially in industry. To prevent this, the government is encouraging companies to draw up energy saving plans.
 
In addition, the French state will help the affected companies, but exactly how this aid will be structured had not yet been decided by the time this article went to editorial deadline. The state is also trying to help with the repair of the nuclear power plants.
 
It can only be hoped that the nuclear power plants in France will come back online as announced and that the winter of 2022/2023 will be a mild one, so that the electricity supply for the companies and thus their eco­no­mic existence can be secured.
 

In your opinion, how will France develop?

The good economic developments of recent years are at risk as a result of the war against Ukraine and its repercussions. Much will depend on how France and Europe get through the winter of 2022/2023. If prices continue to rise or the supply of energy is not continuous, the French economy is expected to shrink, especially in energy-intensive sectors.
 
Nevertheless, France is structurally well on the way to initiating necessary reforms in order to develop economically. The path to decarbonisation of the French economy is also playing an increasingly important role.
 
However, due to the current political situation – the loss of the absolute majority in the French parliament for President Macron – it is questionable to what extent his plans can be implemented one-to-one. Nevertheless, in the end it can be assumed that France's attractiveness for foreign investors will continue to increase. Even if President Macron has to make compromises, his reform ideas will be implemented at least in part.

Contact

Contact Person Picture

Nicola Lohrey

Managing Partner

+33 1 5692 3125
+33 1 5692 3129

Send inquiry

 How we can help

Deutschland Weltweit Search Menu