France's Star Shines Bright on Bastille Day

 | Jul 14, 2017 | 9:00 AM EDT
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France has not had such a happy National Day in a while. General elections that brought a reformist and globalist president to the eurozone's second-largest economy have reversed, to a great extent, the confidence hit taken by the European Union following the U.K.'s vote in June last year to leave.

"You can only lead people by showing them a future: A leader is a dealer in hope," Napoleon Bonaparte once said. Emmanuel Macron won the presidency because he managed to inspire hope for the future in the French, in contrast with his main rival, extremist Marine Le Pen, whose main focus was on the fear of foreigners.

For now, Macron still is basking in the glory of his victory. He even managed to offer President Donald Trump an enjoyable time in Paris, something that, like most Americans who visit Europe, he seems to appreciate. Today they are watching the parade on Bastille Day, where U.S. soldiers march along French soldiers to honor the 100th anniversary of the U.S. entry into World War I.

However, once the parade is over and the bunting is stored for next year, Macron's efforts to start delivering on his promises will need to begin (OK, perhaps not right away; Europe usually is closed for holidays in August).

Action undoubtedly will be harder than words. The French, like everyone else in Europe, are tired of austerity, yet Macron's government must find another 4.5 billion euros ($5.1 billion) in spending cuts in order to bring the budget deficit to the EU-agreed level of 3% of GDP this year.

Despite this challenge, Prime Minister Edouard Philippe said in an interview with French newspaper Les Echos that taxes will be cut by around 11 billion euros next year as part of a total fiscal relaxation program totaling around 20 billion euros over five years.

"We want to give fiscal impetus to investment, employment and growth," Philippe said in the interview. "We want to give confidence to businesses by making visible, clear commitments."

These tax cuts would not derail the plan to bring the deficit below 3% of GDP, as they will be financed by reductions in the number of public workers (mostly by not replacing workers who retire, rather than layoffs), selling about 10 billion euros of state assets, and higher taxes on tobacco and pollution, Philippe said.

Importantly in the light of the Brexit vote that is forcing banks to look at EU cities besides London for some of their operations, Philippe also said France's notorious wealth tax will be modified next year so that it only applies to real estate fortunes.

In other words, bankers moving to Paris would not need to pay wealth tax on financial assets such as stock and bond holdings, nor on precious metals. Moreover, the tax on revenue from investments (such as dividends) will be cut to 30% from the current level of 50% or even 60% in some cases.

Corporation tax also will be cut gradually to 25% by 2022 from the current level of 33.3% -- a measure that analysts at Bank of America Merrill Lynch said by itself could lift GDP by 0.5%. In a July 5 report titled "France: 'sleeping beauty' awakening," they estimated that if all of Macron's key reforms are implemented, they could increase GDP by at least 2.5% within five to 10 years.

Of course, plenty of things could go wrong. Brexit is the biggest visible risk for now, as it is a big unknown not only for the U.K. but also for the EU. France could be hit by a higher contribution to the EU budget or a fall in trade with the U.K., not to mention gridlock on its roads if Britain crashes out of the Union without a deal on customs controls.

But assuming that the EU and Britain find a way to work together to make the separation as smooth as possible, over the long term France could gain from it. For now, media reports say that bankers shun Paris in favor of other EU financial centers such as Frankfurt, Luxembourg or Dublin.

But Paris is still the EU's second-largest financial center, so there is still time for banks to move part of their operations there if they find the reforms attractive. The same goes for investment in other areas such as in pharmaceuticals, which has gone into the U.K. but could be redirected to other countries so that the investing businesses can maintain unfettered access to the single market.

Investors looking for general exposure to France can look at the iShares MSCI France ETF (EWQ) , and for exposure to the eurozone there is the iShares MSCI Eurozone ETF (EZU) , which is a holding of the Action Alerts PLUS portfolio that Jim Cramer co-manages as a charitable trust. For specific stock suggestions off the beaten track, take a look at a story I wrote back when Macron was still just the rising star of the election.

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