Emmanuel Macron wants to limit risks on growth

The French President announced several measures during his press conference last Thursday.
There are structural measures such as reducing the number of pupils per primary class to 24. It is an important choice to stop the deterioration observed, for France, in every international rankings on school. This is a first step, a necessary condition for reducing inequalities and improving equality of opportunity.
The other structural measure relates to public service houses. A house should be set up in each administrative district (Post Office, Social Security, Unemployment administration, ..)
The state must re-acquire the territories to make life easier for everyone. It is also a measure of reducing inequalities and it was an initial demand of November’s protesters (yellow vests).
Comments on decentralization have not been sufficiently specified to be a structural measure. .
The objective is to allow a better equilibrium of the French society and the capacity to face a world which changes thanks to the formation, which starts with new measures at the primary level (24 pupils).

There was also a battery of short-term measures on the reduction of the income tax (5 billion as of January 2020 for 15 million French), the renewal of the non-taxed bonus, the re-indexation of small pensions (less than 2000 € ) in 2020 and for every pension in 2021.
These amounts are significant and will take effect from January 2020 as stated by Gerald Darmanin (finance minister) on the reduction of taxes.

We can make three remarks
1 – The government is paving the way for moderate but stable growth for 2019 and 2020. The measures announced last December (mainly higher income for people at the bottom of the income scale) will be a support for growth in 2019. The measures announced last Thursday will take over in 2020.
2 – The government wants to immunize the French economy from external shocks by supporting the internal demand and especially household consumption. The downturn in world trade and uncertainties are all sources of slowdown in activity. By supporting domestic demand, the government allows for a more flexible way to cushion these shocks, thus reducing the volatility of French growth.
The new measures for 2020 are smaller than those announced for 2019 suggesting that the government does not expect a extended crisis. This hypothesis is important for the business investment momentum. A higher expected demand will reflect in higher corporate investment.
What is unfortunate is that this economic response is only carried by France in Europe while the shock is perceived by all (see here)
3 – The question of financing all these measures remains fuzzy. Macron spoke about lower expenditures, elimination of corporate tax loopholes and the necessity to work longer. These three means must finance all the measures but there are absolutely no details on how it will work. It could also be through an larger public deficit but this was not discussed by the president.
It is unfortunate that the “grand débat” has not allowed a deep discussion on public expenditures . The initial stance of the November protesters was that taxes were too high. The reduction of taxes necessarily requires a reduction in spending. The choices to be made are complex, but we could have expected the “grand débat” to make collective choices on this point. This has not been the case and it is a shame because it will have to be done.

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

Political watershed at the heart of Eurozone growth

The euro area is looking like a haven of stability these days. The election of Emmanuel Macron and his strong relationship with Angela Merkel have driven expectations that the economy will get back to more robust growth and that the political arena will take the steps required to embark on reforms that will maintain stability in the long term.

This watershed is remarkable as barely six months ago, the euro area looked like it was on its last legs. The expected surge in populism during the various different elections was set to hamper European integration and set off a downward spiral of lessening cooperative and greater antagonism.

Yet as July gets off to a start, we can observe that this is far from the reality and that European electors did not follow the path chosen by the US and the UK. Continue reading

France: General elections – Second round – Employment and Europe in line of sight

The President-elect has won an overall majority after the general elections. His party will have 306 seats and 348 when the Modem, a close political party, is included (on 577 seats). Nevertheless, the new majority will not depend on ally (Modem).
It’s far from the tsunami that was expected after the first round. The new President majority will represent 60% of the seats (versus almost 80% expected after the first round) it is close to the average seen since 1981.
France-legislatives2emeround-2017-en
Continue reading

France: General elections – First round

The French general elections will give an overall majority to Emmanuel Macron the President-elect. After the first round, yesterday, La Republique En Marche (LREM) his political party can expect between 400 and 455 seats on a total of 577.

Different remarks
1 – French people are legitimist; they have given a large majority to the new President enabling him to pass the reforms he announced during his campaign. This mustn’t be a surprise. The new President has always had a majority notably since 2002 as general elections follow the presidential election by a month. Nevertheless the LREM victory is large but not the largest as it can be seen on the graph below. Continue reading

The French Labor Market Reform

The French government has made its first proposals to reform the labor market. Its main idea is that competitive conditions have dramatically changed and it’s impossible to have a law that can solve all the issues.
For the government a “one size fits all” law cannot exist anymore on the labor market. The main reason is that companies face now very different environments that lead to a very specific framework for each of them. Therefore it can be efficient to commit to rules at companies’ level. These specificities are globalization which can be a very different constraint from one sector to another one, technological shocks with very different speed of adjustment depending on the type of activity, regulation can be very different between firms and sectors,  companies’ size from the very large company to a very small one is also an issue and specificities associated with different sectors can have an impact on companies’ behavior.

In other words, competition is not a uniform framework Continue reading