Plot Twist While French Businesses Are Dying

France, tangled up in a presidential election with major implications for the Eurozone, has gotten used to watching President Nicholas Sarkozy getting clobbered in a historic fashion by socialist François Hollande. But on Tuesday, the country woke up to the news—quelle horreur—that their presumed and possibly written-off loser was suddenly ahead in the polls, or in one poll, to be precise. And the main media outlets, which had been so ready for a change at the Elysée, fell all over each other to doubt the results.

During the first round, when a whole slew of candidates go at each other with knife and fork for the top two spots, Sarkozy would obtain 28.5% of the vote, and Hollande 27%, both well ahead of the pack. Forty days till the election, and there’s finally a poll that shows Sarkozy in first place.

“That’s just froth,” deadpanned Sarkozy.

Perhaps it has something to do with Hollande’s ambitious tax-raising program—ambitious even for the French who tax everything out the wazoo. Key element: a 75% income tax bracket aimed in his populist manner at the chieftains of the largest companies and banks. Instantly, a hullabaloo broke out, not among his targets, but in the world of soccer, the people’s sport.

In the second round, Sarkozy would still get clobbered with only 45.5% of the vote, against Hollande’s 54.4%. Nevertheless, the first-round numbers were a glimmer of hope for Sarkozy. In his desperation, he’d made Germany the economic model for France, which didn’t sit well with French workers when they noticed what it would mean for them, and he’d even made a pact with German Chancellor Angela Merkel, who is trying to protect her own oeuvre, a Europe of balanced budgets tied together by a new fiscal-union treaty—which Hollande had vowed to eviscerate. But now, Merkel raised the stakes by roping in three powerful allies and lining them up against Hollande—to keep Sarkozy in power.

Amidst this plot-twist chaos, two fundamental cross currents with harsh impact on the future of the French economy went practically unnoticed, though they should have caused an outburst of national soul searching during the campaign: record high bankruptcies so far in 2012 and a plunge in venture capital investment.

The first two months were brutal: 10,900 companies filed for bankruptcy, a trajectory that might establish another sad record, beating the prior record of 2009 at the height of the financial crisis, when 61,595 companies went bust. And where is the new blood in the French economy supposed to come from? Not from startups and venture capital, it turns out.

Last year, venture capital firms invested only €822 million ($1 billion) in startups, down 21% from 2010, and down 10% from 2009 when France was in a recession. And only 604 startups were funded—during a period when over 58,000 companies went bankrupt. It’s hard to imagine how France can regenerate itself. The decline accelerated in the second half of the year with VC funding dropping a breathtaking 24% from the same period a year earlier—after having fallen 19% in the first half.

And the future of startup funding doesn’t look bright: intentions by banks and insurance companies to allocate capital to venture investing collapsed by 69%. This is perhaps why there is such a vibrant community of French entrepreneurs and software engineers in Silicon Valley. They’re going where they can thrive.

Bright spot: internet and ecommerce attracted over a quarter of VC funding in the second half. It now is the preferred sector, replacing biotech and medical devices. Some internet startups in France have proven that they can produce profitable exits for their investors—who, like their brethren in the US, are all looking for the next Facebook or Google.

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