Civil war
Olivier de Berranger, CEO, La Financière de l’Échiquier (LFDE) | February 2025
In response to the Thirty Years’ War, Richelieu and then Mazarin were obliged to continue with a tough policy of increases in taxes and duties. Having doubled between the time of the Battle of Marignano and the end of the sixteenth century, the expenditure of the realm quintupled between 1600 and 1650. In addition, to entrench royal power, a series of reforms and new regulations stoked competition among the nobility and other functionaries, provoking incomprehension and status downgrades.
Whilst history never repeats itself, recent statements from French industry bosses regarding fiscal instability in France and European regulatory zeal are unprecedented. Guillaume Faury, CEO of Airbus and president of GIFAS[1], recently stated of the aerospace sector, that it was important not to “put spokes in its wheels, tax it and prevent it from operating[2]”, with the press release of the industry association calling for a “loosening of the regulatory vice”.
The Draghi report on European competitiveness warned of Europe’s worrying decline over the last 15 years and the urgent measures required to improve competitiveness. The hearing of Florent Menegaux, CEO of Michelin, before the French Senate was in this respect a master class and a litany of the distortions of competition.
France represents 9% of the turnover of Michelin but 16% of its workforce and tax levies worldwide. As an example, Michelin is forbidden from exporting agricultural tyres to India, in contravention of WTO rules, whereas Indian producers have taken 10% market share in France, since neither France nor the European Union prohibit the import of these tyres from India. Michelin is present in all European countries. A European directive adapted for each country means 27 adaptations of the same regulation for national specifics. Menegaux added, “and with the local one-upmanship that ensues, this is an administrative nightmare”.
Then there’s the costs of production. In 2019, Michelin could manufacture in Asia at a cost base of 100; five years later these costs – that include raw materials, energy and salaries – are more or less stable thanks to productivity gains. In Europe, the cost base was 134 in 2019 – higher but manageable – and has since risen to 191. This is more or less double the figure for Asia, due in particular to the explosion in energy costs following the war in Ukraine and the price fixing process in Europe.
Michelin, like all European companies, enjoys competition and rubbing up against the global elite. But for competition to be fair, when you play football with a team of 11 players, the other team shouldn’t be able to count on “22 players and pick the ball up with their hands as well”.
At a time when Germany could chalk up a third consecutive year of recession, for Peter Leibinger, head of the BDI (Federation of German Industries), the outlook is both gloomy and extremely uncertain given the change in the US administration.
Markets have already adjusted for this overlay of European regulation which restricts corporate profitability. Any relief would be extremely beneficial for European equities, which in dollar terms have risen by over 90% since 1 January 2008, versus an increase of 477% for US markets[3]… Any help in lightening the regulatory burden and a real shock treatment to simplify things would create a rosier picture.
As we wait for this much-desired shock, since Sunday 2 February, the first rules of the EU AI Act have come into force, adding to the requirements of DORA[4], applicable since 17 January 2025 and more specifically targeting financial services, and the future of the CS3D[5] and CSRD[6] is being determined as we speak.
The opinions expressed reflect the views of the author. LFDE shall not be held liable for these opinions. Securities and sectors are provided as examples. Their inclusion in the portfolio is not guaranteed.
[1] Groupement des Industries Françaises Aéronautiques et Spatiales – association representing the French aerospace sector.
[2] https://www.youtube.com/watch?v=mWclEvmePog
[3] Stoxx Europe 600 in USD / S&P 500
[4] Digital Operational Resilience Act
[5] Corporate Sustainability Due Diligence Directive, 2024
[6] Corporate Sustainability Reporting Directive