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Will Macron deliver? And what will French economic reforms mean for all of Europe?

By: EBR - Posted: Friday, September 01, 2017

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Some reasons for the early end of the honeymoon period are trivial such as the spats over the role of his wife and the expenses for his visagist (€26.000 within three months, albeit less than his predecessor Francois Hollande reportedly used to spend on it).
Some reasons for the early end of the honeymoon period are trivial such as the spats over the role of his wife and the expenses for his visagist (€26.000 within three months, albeit less than his predecessor Francois Hollande reportedly used to spend on it).

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by Holger Schmieding*

Although his popularity has nosedived over the holiday period, French president Emmanuel Macron still wants to deliver the cornerstone of his economic program, labor market reform, within less than four weeks.

He will likely succeed and lay the basis for a major French economic and political renaissance.

As a result, look for France to outclass a Germany that remains strong, but is becoming a little complacent as well as a UK that has shot itself in the foot through Brexit in coming years.

Back down to Earth

Macron’s job has become more difficult over the summer. Having hit a peak when he secured a parliamentary majority for his “La Republique en Marche” party on June 18, 2017, his once-stellar popularity has now fallen back down to earth.

According to fop opinion polls, his approval rating plummeted from 64% in June to 54% in July and just 40% in August.

That is the most pronounced fall in a newly elected president’s ratings since the days of Jacques Chirac in 1995.

Some reasons for the early end of the honeymoon period are trivial such as the spats over the role of his wife and the expenses for his visagist (€26.000 within three months, albeit less than his predecessor Francois Hollande reportedly used to spend on it).

Other reasons are more serious: Macron’s government announced some poorly-sold near-term austerity measures, totalling €4.5 billon for the remainder of 2017, including cutbacks in military expenditure and especially a politically sensitive €5 cut in monthly housing benefits – which did not go down well with many of Macron’s supporters.

In addition, a decision to postpone some of the tax cuts he had promised during his election campaign has raised suspicions that, like many of his predecessors, he may not have meant all he said during his campaign.

Reasons for optimism

Macron’s waning popularity may raise some concern whether he will be willing and able to implement his reform program. However, there are three reasons for optimism.

First, Macron seems determined to do what he had said, including to take the measures required to bring France’s fiscal deficit to no more than 3% of GDP this year already.

Second, Macron’s first set of actions suggest that he really wants to fix France. He knows that it is better to do the unpopular things first.

And by showing Germany and his other European partners that he is serious about reforming France, he is strengthening his hand for future negotiations about reforms in the EU27 and the Eurozone that will likely start in earnest after the German election of September 24, 2017.

Third, while those voters who flocked to him because they didn’t like the alternatives (ultra-right Marine Le Pen, ultra-left Jean-Luc Melenchon and the scandal-tainted center-right candidate Francois Fillon), Macron’s core supporters still seem to approve of his actions. His party will most likely endorse his agenda in parliament.

Reforms on track

So far, the crucial labor market reform seems to be on track. As the first step in a three-step process, the two houses of the French parliament adopted the law that authorises the French government to overhaul key aspects of the labor market through a series of decrees on August 1 and 2.

Having returned from the summer recess on Monday, the government will unveil these decrees this Thursday. After discussions with trade unions, parliament is scheduled to either confirm or reject these decrees wholesale without any line-item veto on September 21, just ahead of the German election on September 24.

France’s second-biggest trade union, the communist-leaning CGT, has called for a day of protests on September 12 and a small union may already stage some demonstrations on August 30.

The ultra-left Melenchon plans protests against what he calls Macron’s “social welfare coup d’etat” on September 23.

In France, such protests are par for the course. What matters is that France’s more moderate trade unions have so far preferred to discuss the changes with the government than to call for street protests against them.

Labor reform bill

The many facets of the labor reform bill include:

• a major decentralization of collective bargaining, giving companies significantly more freedom to negotiate pay and working conditions with their own workers instead of being bound by national agreements,

• a loosening of the rules governing dismissals, including dismissals at French subsidiaries of international companies,

• caps on severance pay by limiting the damages which courts can award in case of “unfair” dismissals,

• streamlining the representation of employees at the firm level by merging various workers’ councils.

Based on successful models

All in all, Macron’s package of economic reforms are based largely on Scandinavian “flexicurity” models and the German model of employer-employee co-operation.

These models work, although they do not fully confirm to libertarian textbooks. Injecting a major dose of flexibility into the French labor market by decentralizing collective bargaining and making it less difficult (and less costly) to dismiss employees can turn France into a better place to create jobs.

In that sense, it is just like Germany’s “Agenda 2010” reforms which were implemented after 2004. While it may take some years for the full effects to show up, France’s firming economic recovery, along with rising demand for labor, provides an ideal backdrop for such reforms.

In turn, a revitalized France at the heart of Europe will help to strengthen the cohesion of the Eurozone and the EU27. It also happens to make the EU more attractive for other countries to stay in.

Pro-growth structural reforms in France will also make it easier to agree on institutional reforms at the Eurozone and EU level over time.

France’s “Golden Decade”

For these reasons, there is a solid prospect that France is heading for a “Golden Decade” in the 2020s.

That would have a major impact on the future of Europe – not least because that would induce other countries, such as Germany, to shape up their act as well.

We may know within less than four weeks whether France and Europe are indeed on track for such progress.

*Holger Schmieding is chief economist at Berenberg Bank in London
**First published in www.theglobalist.com

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