Merkel rejects Macron’s proposals on Europe

Angela Merkel’s interview last week-end, in the Frankfurter Allgemeine Zeitung, doesn’t not really change the usual German answer on the renewal of European institutions. Her responses remain at odds to Macron’s proposals.

The main difference between France and Germany on the European question is that France thinks that there is an advantage in explicitly coordinating economic policies. A budget can and must do that. This implies a significant intervention capacity which can
be measured by several points of GDP as it has been stressed by Macron and Sarkozy before him.
On the German side, co-ordination is implicit if one respects the defined rules, in particular those which could be taken in the case of a help from the EMF (European Monetary Fund which would take over the European Stability Mechanism. It would be different from the IMF which has a too friendly approach to the Greek debt restructuring). In other words, the adjustment mechanism requires respect for the “right rules” (budgetary austerity) and therefore deeply reducing the need for state intervention.
The coordination advocated by France is the vision of risk sharing within a political entity (the Euro Area) while the German option is that of not sharing the risk because if everyone behaves “in the right way” no country has a risk to share. Continue reading

Emmanuel Macron’s first anniversary as President – part 2 Europe

After just one year it is still too soon to make a full assessment of the Macron presidency, so the question we must answer is whether the measures taken by his government over this first year are the rights one to tackle the changes we have witnessed worldwide.

In part 1 of this series, I outlined the need to make growth more self-sustaining, even in a context of ongoing globalization. I described the need to raise the innovation aspect in our investment, and the necessity of making the labor market more adaptable to better address change. Recent research by Gilbert Cette et al uses a broad international comparison to suggest that high employment protection legislation in France leads to capital-to-labor substitution. This would explain high investment levels in France. However, the authors note that the innovation component of this investment is inadequate and does not sufficiently bolster productivity. Another conclusion of the report is that a more flexible labor market means higher quality capital.
And this equation lies at the very core of the supply question in France: capital needs to be more efficient, while the labor market needs to be more flexible in its ability to adapt. I noted in part 1 that steps taken to support public investment along with government labor market decrees help ease these restrictions and promote an adjustment in supply.

But we have seen two other watersheds in the world economy that the French economy must now address if it is to further integrate i.e. the location of production and the location of innovation.

The second shift is the geographical location of production. Continue reading

Emmanuel Macron’s first anniversary as President (part 1)

This month marks Emmanuel Macron’s first anniversary as President. It is too soon to make a full assessment of his presidency, as he has already said himself that he wants to be judged on the full five-year term, but it is also too early to make that call because the very positive economic outlook overall could skew our analysis somewhat. Business indicators in France followed trends in the euro area, displaying a robust performance followed by a downturn.

The latest example of this is this year’s first quarter growth figure, which slowed to 0.3% in France and 0.4% in the euro area, after the country posted showings in line with its European neighbors in 4Q 2017 at 0.7%. Business leader surveys also reveal similar findings.

Economic policy still to show its mettle
It is still too early to sift out the effects of the government’s economic policy from the impact of the overall economic context, and in this respect, 2018 budget performances will provide a useful benchmark. The budget deficit came out at 2.6% in 2017, falling below the infamous 3% mark for the first time since 2007, primarily as a result of growth picking up from 1.1% to 2% between 2016 and 2017. Growth is expected to come out at 2% in 2018, flat vs. 2017, so it is government policy that will shape public finances this year and the public deficit will act as a good gauge of policymakers’ achievements.

However, there is one thing that has most definitely changed over the past year – the way the international community talks about France and its President, both investors and others. International spectators are more interested in the country, reflecting on the one hand the arrival of this newcomer bursting onto the world political stage, and on the other his active international involvement, particularly in promoting Europe.  Continue reading

French GDP – First elements

French growth slows in Q1 2018 with + 0.3% (non annualized) vs. 0.7% in Q4 2017. Carryover growth for 2018 is 1.2%.

Explanation : a more limited dynamics of business investment and a marginal contraction of exports. This is consistent with the inflection seen recently in the surveys.

My expectations for 2018 is 0.4% on average per quarter. The first quarter is consistent with this. The main point to look at will be surveys during this spring. But April was not a good start. See here

Budget balance in France and the ‘funding pot’

Robust economic growth in France in 2017, coming in at 2%, helps ease the restrictions on public finances. The public deficit is finally set to fall below the 3% mark (2.7%), helping France shake off its image as the worst culprit in the euro area. This is the result of the French economy’s ability to benefit and take advantage of world growth.

The economic improvement drives revenues and means that countries no longer need to spend so much to shore up demand, automatically improving public finances. However, that’s not the whole story, as the French President made a campaign trail pledge to rebalance public finances during his term.

The 2018-2022  Public Finance Planning Act (link in French only) published in January does not confirm this scenario. The bill indicates that the budget balance should remain negative at -0.3% of GDP in 2022, and more worrying still, the structural balance (i.e. adjusted for cyclical components) is still poised to be negative, at -0.8% at the end of the President’s 5-year term. In other words, long-term efforts to adjust the path for public finances are poised to be inadequate over the President’s full term. Measures adopted out to 2022 will not be enough to balance public finances alone, setting aside cyclical components. Continue reading

France – GDP growth at 1.9% in 2017

The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.

The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.

A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.

The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.
FR-2017-Q4-GDPTrend.png

The Economic Cycle in France and French Economic Policy

Growth in France is set to come to 1.8% in 2017 and 1.7% in 2018. From today’s standpoint, these figures look high as trend growth for the French economy came to slightly more than 1.1% on a yearly basis between 2013 and the third quarter of 2017, making 2017 and 2018 look like good vintages. However, a comparison with the pre-crisis period is harsh. Trend growth for the French economy stood at 1.8% over the period between 2000 and 2008 and could go well beyond this figure, which equates to the cycle peak in today’s economy.
The extent of the economic cycle provided leeway for all concerned as growth could go well beyond this trend, e.g. coming out at 4% in 2000. French economic policy at the time did not generally view this cycle peak as an opportunity to adopt a more restrictive strategy, and France as a whole was unable to reduce imbalances when growth was strong, particularly from a budgetary standpoint. The French budget “funding pot” concept, invented during periods of vigorous growth, was used to justify all sorts of spending on the back of higher budget revenues. Continue reading