New hope for France

I recently returned from a 10-day holiday in France. The focus of the trip was visiting some of the country’s great wine regions, highlighted by a private luncheon at the fabled Chateau Mouton Rothschild near Bordeaux, arranged by tour organizer and well-known wine writer Tony Aspler. But, financial junkie that I am, I also took advantage of every opportunity to learn more about the state of the European economy and, in particular, about the future prospects for France as a result of the election of Nicolas Sarkozy as the new president.

The strength of European stock markets in recent years has been nothing less than astounding, particularly in light of the many problems that members of the European Union have had to contend with. Efforts to create a new constitution were stymied last year when voters in France and the Netherlands during down the plan in referendums. That stopped forward momentum in its tracks and Sarkozy has made it one of his first priorities to end the logjam and push forward with a new constitution, albeit somewhat watered down from the original version.

Meantime, the euro has been rising in value at a rapid rate against the US dollar, thereby increasing the cost of European goods in the American market. At the start of 2006, it took US$1.1841 to buy one euro. On Friday, the rate was up to US$1.3445, which translates into an appreciation in the value of the euro of 13.6 per cent. (By comparison, the Canadian dollar has lost 6.2 per cent of its value against the euro over that period.) As we have seen in our own situation vis-à-vis the US, a rising currency puts pressure on manufacturers and squeezes profit margins.

Another major impediment to European prosperity is an antiquated system of subsidies and entitlements which, along with lagging productivity, have held back GDP growth in the two continental giants, Germany and France. This is where Sarkozy (known in France, both affectionately and unaffectionately, as “Sarko”) plans to direct his attention, implementing major reforms in such areas as labour mobility, cutting France’s bloated civil service, and providing productivity incentives by making overtime pay tax-free (the French have been notoriously reluctant to work more than 35 hours a week and enjoy many more national holidays than North Americans, including such obscure observance as Ascension Day, which shut down the country while we were there.) He also hopes to reduce the power of France’s unions to paralyze the country with massive strikes in key sectors such as transportation and public services, to reduce tax rates, and to reform the country’s unemployment benefits system. “The French people have chosen change and it is change that I will implement,” he said in his victory speech.

Some observers have compared Sarkozy’s win to the coming to power of Margaret Thatcher in Britain but that’s a misleading analogy. “If he tried to do what Thatcher did, France would explode,” one prominent Bordeaux businessman told me. But he is hopeful that the new president has the negotiating skills to propel France into the 21st century and end the country’s economic stagnation. “He has the opportunity to be the greatest president since de Gaulle,” he said. “If he doesn’t do what he promised, then I shall lose all faith in the political system.”

That wasn’t an isolated comment. Without exception, every business person I spoke to during the trip supports Sarkozy, with another one calling him “France’s only hope for the future.” The new president will have more than his share of opposition from trade unions, student movements, and militant immigration lobby groups (one of his policies is an immigration crackdown) but from everything I could determine the business community is 100 per cent behind him.

That’s reflected in the initial reaction of the Paris Bourse, where the CAC 40 Index moved up nicely in anticipation of Sarkozy’s election on May 6. The French market has lagged behind some of the other major European countries recently, gaining 9 per cent in the first five months of this year compared to 15 per cent for the German Dow. If the new president can actually implement his program (and much will depend on whether his supporters can secure a majority in next month’s legislative elections), then France may finally be ready to break out of its long economic slumber.

The implications of this for investors would be significant. As readers know, I have been encouraging more global diversification for some time and we have been actively searching for more European stocks for our Internet Wealth Builder (IWB) newsletter. Although the US remains the biggest and most highly diversified market in the world, Europe has become an attractive alternative and will be even more so if the EU is able to ratify a new constitution and France is again able to pull its economic weight.

Currently, we have two French stocks on our IWB Recommended List, both of which trade as ADRs in New York. One is Suez (NYSE: SZE), which was originally recommended by contributing editor Glenn Rogers on April 2 at US$52.88 and which closed on Friday at US$57.02. The other is Veolia Environnement (NYSE: VE), also a Rogers selection at US$74.32. It is now trading at US$83.05. We continue to look for more opportunities in France and elsewhere in Europe.

It looks like France is in for some exciting times ahead. Expect some volatility along the way – in that country, change never comes easily. But if Sarkozy can pull it off, there are going to be a lot of new investment opportunities for us to consider.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go to