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Can the French Afford to Say Au Revoir to Mittal?

Wednesday, 28 Nov 2012 | 10:08 AM ET

The row between Indian steel tycoon Lakshmi Mittal and the French government remains unresolved, at a difficult time for France.

Socialist President Francois Hollande is trying to push through reforms to help reinvigorate growth and stimulate the labor market. So far, he has proved to be rather less socialist than many in the market feared, and there has been cautious welcome for a high-profile competitiveness report and better-than-expected economic growth.

"It is in Hollande's political interest to implement the unpopular reforms at the beginning of his mandate," Gilles Moec, economist at Deutsche Bank, pointed out. "Hollande still has more than 4 full years for the positive impact of the reforms to materialize."

Hollande is taking "steps in the right direction" according to Moec. However, the fallout from Mittal's conglomerate ArcelorMittal's decision to close blast furnaces in the country is proving hard to contain. Mittal famously threw one of the world's most expensive weddings for his daughter in locations in France including the Palace of Versailles. But he may not be cracking open the champagne after meeting Hollande in Paris on Tuesday.

Arnaud Montebourg, Hollande's industry minister, earlier in the week told the company – which employs 20,000 workers in France - to leave, despite an unemployment rate of over 10 percent that might lead a government to court businesses.

The planned hike in higher-rate tax to 75 percent has also been seen as an attack on wealth, and has already sent some of France's best-known wealthy, including actor Gerard Depardieu, across the border to Belgium. France's richest man, Bernard Arnault, the scion of the LVMH empire, has applied for Belgian citizenship.

Mayor of London Boris Johnson could barely contain his glee at Montebourg's actions.

"The sans-culottes appear to have captured the government in Paris," Johnson said as part of a meeting in India to encourage Indian investment in the UK. "I have no hesitation in saying here, 'Venez à Londres, mes amis!' (Come to London, my friends!)"

This comes after the government effectively bailed out Peugeot-Citroen, one of France's best-known companies, which is part-owned by General Motors, after it threatened to close factories and sack 8,000 people earlier in the year. There is already a state-backed investment body in France, as in most of the G8 countries, which helps incentivize investment from global and French countries.

Still, French labor laws are notoriously rigid, with strong protection of employment going hand-in-hand with generous unemployment benefits, and one of the highest holiday counts in Europe.

"There's a general consensus (in the U.K. and Europe) that we need to create more jobs," Chuka Umunna, the UK's shadow business secretary, told CNBC. "If you're serious about resolving that, you can't keep beating up people who bring those jobs, and that means you have to have fairness in your labor market. We have flexibility in the U.K."

"You've got to be careful when you adapt an active government approach because it's about knowing when not to intervene as well as when to intervene," he added.

Moec warned that "more will be needed" to give France's economy the positive shock it needs than the reforms pledged by Hollande – and predicted that, while the reforms will eventually deliver, the results will be "patchy" and "stop and go."

By CNBC's Catherine Boyle. Follow her on Twitter: @cboylecnbc