Investors Are Becoming More Interested in France as Concerns About Germany Continue to Increase

For 65 years, Hager, a German manufacturer of electrical components, has maintained operations on both sides of the Rhine. However, in recent times, the family-owned company has chosen to focus its expansion efforts on the French side.

According to group chairman Daniel Hager, France has become an attractive option due to various factors. These include reductions in business tax rates, the willingness of local officials to assist in finding suitable locations for business expansion, and even some flexibility in the typically inflexible labor regulations. This combination of factors is making France a compelling choice for businesses.

Over the past seven years, President Emmanuel Macron has implemented a series of pro-business reforms that have successfully recalibrated the economic dynamics between the euro zone’s two largest economies.

Long gone are the times when international investors would hesitate due to France’s elevated taxes and shorter work week, in contrast to Germany’s more extended hours. France is now experiencing unprecedented levels of foreign direct investment.

“Ever since President Macron assumed office, the business environment has noticeably improved, becoming more favorable and receptive towards companies,” Hager remarked.

Continuing its investments in Germany, the group—a prime illustration of the minor to midsize “Mittelstand” of frequently family-owned companies that make up 55% of German employment—is dedicating 120 million euros ($130 million) to the border region of Alsace in France.

Macron will fly to Berlin on Sunday, the first state visit by a French president since 2000. With growing misgivings about Germany’s growth economic method, he may be more assured than his predecessors about France’s position.

Foreign investors needed to see a better reception to France’s new 35-hour work week. But, beginning in 2006, Germany’s labor market changes were a significant factor in the country’s ten years of solid export development.

In recent times, Germany’s growth has experienced setbacks due to the nation’s heavy reliance on exports to China and, in the past, on inexpensive Russian gas. Additionally, the country has been burdened by aging infrastructure, elevated power prices, and strict fiscal policies.

In contrast, France’s unwavering dedication to nuclear energy—with strategies in motion to allocate a minimum of 52 billion euros towards the construction of six additional reactors—is becoming increasingly appealing to international technology investors such as Microsoft (NASDAQ:MSFT), which intends to establish energy-intensive data centers in the country.

Formula for Achievement

Since 2019, France has emerged as the leading choice for foreign direct investment in Europe, surpassing Germany and Britain. A recent survey conducted by consultants EY highlighted France’s ability to attract significant investment despite the challenges faced by its neighboring countries.

This year, it has already secured an unprecedented 15 billion euros in investment commitments at an annual event called “Choose France,” which is hosted by Macron at the prestigious Versailles Palace and attended by CEOs from around the world.

Macron has significantly decreased companies’ yearly tax expenses by 25 billion euros. This was achieved by lowering the corporate income tax rate to 25% and eliminating or reducing other taxes that businesses have to pay. Hager believes that Berlin could learn from this approach.

Germany Trade & Invest reports that the average corporate tax rate in Germany is slightly below 30%.

Macron has additionally limited employer reimbursements in labor tribunals, allocated funds towards apprenticeships, and granted businesses greater flexibility to deviate from the standard 35-hour work week.

According to Laurent Degre, France’s head of U.S. communications technology group Cisco (NASDAQ:CSCO), favorable aspects such as a proficient workforce and excellent infrastructure, along with the reduced tax burden, have been attracting foreign investors in the tech sector.

“When compared to other competitive countries such as Germany or Britain, France may not be the top choice in every aspect, but it offers a diverse range of opportunities that are crucial for investors,” he stated.

Foreign investors also value Macron’s administration’s resisting pressure to reduce a substantial tax credit for research and development, which has always been a significant attraction for multinational companies.

“It is crucial to establish consistent policies and avoid any uncertainty regarding policy changes every six months,” expressed Romain Dumas, the France leader of Mars, a U.S. company specializing in food and pet-care products.

Not All of Macron’s Reforms Are Supported by Voters

The pro-business agenda has yielded positive economic results, as French economic growth has surpassed that of Germany since Macron’s election in 2017, according to Reuters calculations. Additionally, employment in France has reached unprecedented levels.

According to the EY survey, the employment opportunities generated by overseas investments increased by 4% in the previous year, even though the number of projects decreased.

“He (Macron) doesn’t receive recognition for that; French politics are challenging,” EY’s EMEIA area managing partner Julie Linn Teigland expressed to Reuters.

Despite being favored by international investors, Macron’s reforms have frequently clashed with the preferences of voters, resulting in consistently low approval ratings. Recent polls suggest that his party is poised to suffer a significant defeat at the hands of the far right in the upcoming EU parliament elections in June.

The economy still encounters various obstacles, ranging from declining productivity to a significant budget deficit. The IMF cautioned on Thursday that the government’s targets for the deficit would not be met.

Meanwhile, international investors argue that Macron should take further action, particularly in reducing bureaucratic obstacles for businesses, an issue that a new proposal by his Finance Minister Bruno Le Maire seeks to tackle.

Numerous administrative forms will be gradually eliminated, while a diverse range of official websites for tasks such as taxes and payroll charges will be consolidated into a single unified site.

Hager mentioned that while foreign investment is making a solid comeback in France, its industrial sector still has a significant distance to cover in order to match Germany’s level.

“There is no economic justification for excessive celebration,” he remarked.