France's new president plans ambitious structural reforms. But can he overcome vested interests ranging from hostile trade unions to civil servants? Simon Wilson reports.
Is France a basket case?
Au contraire. It remains the third-largest economy in Europe and the sixth largest in the world a wealthy country with decent infrastructure and mainly high-quality public services. And over the long-run it has performed pretty well, with significantly higher productivity than, say, the chronically under-productive UK; France's output per hour worked is 28% higher.
Moreover, according to data comparing France and Germany compiled by the economist Thomas Piketty, in both countries GDP per hour worked was just under €20 in 1970 and €55 in 2015. The European Commission's latest forecasts for economic growth for France are 1.4% this year and 1.7% next. In Germany the figures are 1.6% and 1.8%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
So what's the problem?
There's an awful lot of bad news to go with the good. Since the global financial crisis of 2008, French GDP has grown at an average of just 1% (about half the rate in Britain and Germany). Real GDP per head was more or less the same in 2016 as in 2007 (for context, the UK's is 2% higher, Germany's 7% higher, but Italy's 11% lower). And France has a big problem with joblessness.
The unemployment rate remains stuck above 10%, compared with 4.5% in the UK and slightly below 4% in Germany. In particular, youth unemployment is shockingly high. Unemployment among young people rocketed across the EU in the years after 2008, to an average of around 24%. But while it has fallen back sharply elsewhere, in France it has remained stubbornly high at 25%.
How are France's public finances?
Extremely stretched. On IMF figures, public spending was 56% of GDP in 2016 easily the highest ratio in the G7 big economies (Germany's was 44% and Britain's 39%). Net public debt was 88% of GDP last year much higher than Germany (45%), though not shockingly higher than the US or UK (both 81%). Still, "sustaining the taxes needed to finance such spending is a huge challenge", reckons Martin Wolf in the FT.
France is not in a perilous situation yet. And there are tentative grounds for optimism. Some of the unemployment may be cyclical; inflation is under control at well below 2%; there's every reason to expect the continuation of a highly supportive monetary policy; and growth is already picking up a bit. Nevertheless, the scale of the economic challenge faced by France under its new president is considerable. Macron's first priority, suggests Wolf, is "to pray for a strong recovery" and then quickly push through his planned labour-market and public-spending reforms.
What has he got planned?
A fairly orthodox programme of liberal reforms. Macron wants to cut corporate tax over five years from 33.5% to 25%, and bring down public spending to 52% of GDP (notwithstanding a five-year €50bn stimulus plan). He wants to unify France's 35 public pension schemes and cut 120,000 civil service jobs.
These, and other modest reforms, are likely to prove controversial but manageable (assuming Macron can either win a majority in parliamentary elections next month or build a workable coalition as looks increasingly likely). However, his flagship legislation, to loosen France's notoriously rigid labour market, could well prove "explosive", reckons The Economist.
What are Macron's jobs proposals?
He wants to cut taxes on employment, make it easier for firms to take on workers or downsize where necessary, and radically simplify the Labour Code, a 3,600-page doorstop of a book that regulates every aspect of employment relations.
He intends to give firms far greater powers over organising working time and pay, and put a cap on redundancy payments awarded in labour tribunals. And he wants the government to take control of the unemployment benefit system and €30bn training budget, which are both currently run jointly by unions and employers. The idea here would be to tighten benefit rules and to refocus training spending on the unemployed rather than people who already have jobs.
Will all this work?
As we pointed out last month, Macron is one of the very few people in France who has managed to push through structural reforms before two years ago under President Francois Hollande. Liberal reforms of France's labour market should make it much more dynamic over the longer term, paving the way for higher growth. But they are unlikely to do much to boost employment in the near-term, unless there is also a significant boost to aggregate demand. And for that, the critical factor will be a wider recovery in the fortunes of the eurozone.
Macron's ultimate goal, says Harvard professor Dani Rodrik, is a eurozone fiscal union, with a common treasury and a single finance minister. Such a regime would "make it possible for countries like France to increase infrastructure spending and boost job creation without busting [Brussels-imposed] fiscal ceilings" but would require big policy shifts in Germany. It's quite possible, reckons the FT's Wolfgang Mnchau, that Macron "finds it relatively easy to reform the French economy, but gets stuck in his negotiations with Berlin".
The devil's in the detail
Macron's core aim must be to make it far easier to hireand fire permanent employees, says Martin Sandbu in theFT. Despite reforms in recent years, not least by Macronhimself under Hollande, it remains the case that liberalising"on the margin" introducing flexibility into new jobcontracts, but leaving existing employment rigidities intact means that well-meaning reforms have the perverseeffect of merely entrenching a "dual labour market". What Macron has to do is provide "better real protection by lightening the rules that appear to protect". And he must first "convince his fellow citizens of the paradox that makes many of them defend that which holds them back". Thatwon't be easy. Bon courage!
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
Trust in US TIPS to beat inflation
In an inflationary market TIPS, the US Treasury Inflation-Protected Securities are most compelling says Cris Sholto Heaton.
By Cris Sholto Heaton Published
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
By Simon Wilson Published