Sexy Cecilia of France Is Shown Up by Christine

Oct. 25 (Bloomberg) — News that Cecilia Sarkozy is divorcing her husband, President Nicolas Sarkozy, is all over the U.S. press. We know now that the breakup was civilized, that Cecilia once modeled for French fashion house Schiaparelli, that the 49-year-old likes the idea of relocating to New York so she can jog in Central Park.

But there is another woman in the Sarkozy constellation who matters more than Cecilia. She is Christine Lagarde, the 51-year-old finance minister.

Lagarde, a lawyer who was the first woman to lead the big U.S. law firm Baker & McKenzie, spoke this week at the Council on Foreign Relations, where I work.

Her host, buyout firm magnate Henry Kravis, spent much of the hour leaning forward in his seat, and so did the other guests, male and female. For all the finance ministers of France who have sashayed up and down the East Side over the decades, Lagarde is the one most likely to seduce investors away from the U.S. and to France.

The finance minister's power doesn't derive from her fashionable haircut or her generally pro-business slant, which has earned her the nickname "the American." General Motors Corp. is also American, and no longer has much in the way of allure. And, of course, Cabinet members of preceding French governments also declared themselves pro-business. Jacques Chirac himself rattled on about building "national champions" of French industry that might confront what he called American hegemony.

Lagarde's Way

Lagarde's charm is that she focuses on the smaller challenges, the micro issues of enterprise. She addresses those specific aspects of nations' relative competitiveness that executives themselves talk about in the first-class lounge — at least when they aren't checking for updates on Cecilia.

Consider the relatively technical subject to which Lagarde devoted a good share of her remarks, specifically the marginal tax rate on labor. In the U.S., several presidential candidates are signaling that they may lift or end the cap on Social Security taxation. That would mean that every last dollar of worker pay, and not merely the first $100,000 or so, would be subject to payroll taxes.

The assumption is that a rich country such as the U.S., which wants to help the poor, can afford such an increase.

That's not the case. Lifting the cap means an increase in the effective top tax rate of more than 10 percent, a shift that undoes all the value in the income-tax rate cuts of President George W. Bush. If those Bush rates are also allowed to expire, an idea almost every Democrat supports, the tax increase will become more dramatic. Daunted investors will lift their eyes and look abroad.

Opposite Directions

And they will see France, where Lagarde is focusing like a laser on marginal tax rates. Years ago, there were French politicians as confident of eternal prosperity for their country as John Edwards and Hillary Clinton are today. They decreed that France could afford a 35-hour work week. They levied an effective surtax on employers, by forcing them to pay extra social security taxes even on costly overtime. The punishing burdens on employers contributed to the horrifying youth unemployment that sent Muslim teens rampaging in the streets.

Lagarde is cutting marginal taxes even as the U.S. seems intent on raising them. By proposing a ban on payroll taxes on overtime, Lagarde is ensuring that the more a worker works, the more he gains, just as Sarkozy promised in his campaign. Lagarde reckons that this step alone will add 0.3 percent to France's annual growth.

Almost as competitive is the plan Lagarde offers to lower the tax rate on investors by boosting research tax credits. France is removing an overly complex research tax and replacing it with a simple tax credit that will be equal to 30 percent of the first 100 million euros ($143 million) spent on research and development.

Getting in Line

Finally, the Sarkozy administration is lowering the share of citizens' total income that can go to income taxes to 50 percent or less, from 60 percent. This puts France more in line with Germany. And it is another example of the French moving in the opposite direction of the Americans.

Lagarde is also demanding that English be used more as the language of business. After Sarkozy's ascent, France finally ratified the dreaded London Protocol, which ends a requirement that all patents be translated into French. She utters the syllables "Wal-Mart" without grimace, a sight that is as tantalizing to an investment banker as Britney at work is to a 14-year-old.

Statist Predecessors

The rap on Lagarde and Sarkozy both is that they talk better than they can deliver. At the Council discussion, the finance minister didn't spend time on the worst French levy, a tax on households worth 760,000 euros or more. This tax, the "Impot de Solidarite Sur La Fortune," has weighed upon residential real estate in Paris for years and driven any number of French into duplexes on New York's East Side and or flats in London. The Sarkozy team also has instituted a new charity tax and allowed a value-added tax increase.

These are significant. But at least Lagarde is thinking about the smaller business issues, unlike her statist predecessors.

Her relatively pro-entrepreneurial stance means she will be able to take advantage of pent-up demand to do business in France. After all, many companies have regretfully stayed away as long as a quarter of a century, ever since Francois Mitterrand laid out his crazy first agenda, nationalizing financial institutions and pushing through higher wages. All France need do is show it is serious to bring them back. And the person who understands that isn't Cecilia, but Christine.

(Amity Shlaes, a senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2007 Bloomberg

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