The presidential election ended without surprise, with the tiresome remake of Marine Le Pen losing in the final to Emmanuel Macron, the announced candidate of progress, elected for a new mandate. The beauty contest, designed to entice Jean-Luc Mélenchon’s voters, turned into a race for the most absurd promises to secure purchasing power. Although they both discussed different social issues, economic reforms were largely absent from the debate, with the exception of pension reforms.
Since it is the candidate presented as “liberal” who won, it would be coherent in this light to evaluate the reforms of the first five-year term. In reality, there was no major reform, but rather a large number of minor reforms. The status of the SNCF has been reformed, in accordance with the requirements of the European Union (EU), but preserving all employee guarantees. There was no French-style CDI reform, just a marginal reduction in the legal protections afforded. There has been no reform of collective bargaining standards, the 35-hour working week, or of the single minimum wage that cannot be adjusted according to age or occupational sector. On the other hand, there is a welcome reform of the calculation of unemployment benefits and an improvement in apprenticeships and vocational training. It is too early to say whether the reform of secondary education will lead to a better match between the training offered and the needs of business and society. Fortunately, Emmanuel Macron has committed to returning to removing mathematics from the common core, even though the country generally lacks engineers and more particularly girls in scientific fields.
The economic containment of the health crisis, culminating in the shutdown of the economy in the spring of 2020, has been wide open to criticism. From this point of view, the government has done well not to repeat and not close schools during the third wave of the pandemic. Emmanuel Macron boasted that he had nationalized wages to the tune of €27 billion in 2020. In reality, he plunged the country into this absurd situation where production collapsed by 8% in 2020 while household incomes rose slightly.
Unsurprisingly, French public debt has fallen from 97.6% of GDP in 2019 to 113% in 2021. For debt enthusiasts, as long as private investors accept this debt, there is no problem. The claim is true, but in this case, that’s not what happened. Most of the new debt was absorbed by the ECB through its 1,850 billion asset purchases between March 2020 and March 2022. In addition to this explosion in these securities purchases, the ECB also cut in the long term, fueling the excesses of “professional ” borrowers with large amounts of 4-year negative interest loans.
After the reforms are not implemented, our inventory goes through the untreated and thus unresolved weaknesses of the French economy. The first in terms of severity seems to us to be the country’s chronic trade deficit, which has worsened over the five-year period. Our exports have long suffered from a competitive handicap, caused by hidden costs in labor market regulations, as François Hollande rightly pointed out at the time, and caused by a tax wedge between the EU’s highest countries, the OECD.
The second weakness of the French economy is deindustrialisation. Admittedly, all OECD countries have experienced a strong deindustrialization movement, but in France this movement is strongest. In 2020, French industry will contribute only 9.4% of value added, compared to 18% in Germany and 14.9% in Italy (World Bank† Deindustrialization results from the general difficulty of French companies to hire staff, fund themselves and more generally navigate the maze of national regulations. Nuclear generated electricity is certainly an asset for our industry. The government did well to take advantage of the post-Covid-19 fiscal stimulus to quietly sneak in excessive territorial corporate tax cuts. It has yet to intervene in administrative simplification and in reducing and making consistent the myriad of standards, rules and regulations in all areas.
With the return of inflation in the eurozone, Emmanuel Macron took advantage of the centralized energy price system to block the gas price for households and curb the rise in the electricity price. This electoral measure, of course, limited price rises and thus inflation, but in the short term and deceptively. The State had to directly or indirectly subsidize the losses or guarantee any operating losses incurred by EDF and GDF. There too, after the elections, we will have to pay this slate and return to measures aimed at saving energy.
Make the labor market more flexible?
Emmanuel Macron has promised a return to full employment before the end of his second term, but without specifying the terms of action. However, he will not be able to follow the example of US President Joe Biden, who quickly reduced unemployment with immeasurable and reckless expenditure, resulting in historically high inflation. France is not America. We understand that he plans, without being able to say it yet, to make the labor market more flexible. This is the only possible way for us and we wish this company every success.
The bill for the Covid-19 overrun, the shutdown of the economy in 2020 and the few reforms of the quinquennium will first appear in the form of the double rise in interest rates and inflation. The war in Ukraine has only exacerbated the rise in inflation, without this being the primary cause.
We do not doubt the direction in which Emmanuel Macron’s many small measures are going and perhaps his strategy of “little red tape” is the most pragmatic method of reforming our country. The war in Ukraine will slow the economy, but must not plunge it into recession. Emmanuel Macron therefore has a chance to reinvigorate the reform machine, especially since the rise in interest rates will rob him of the temptation of budgetary generosity. The time of fiscal discipline is coming. We wish the future government every success in its commitment to reform.