France: significant promises kept, but the most crucial reforms will take time

Such flexi-security had, to date, barely figured in the programmes of parties bidding to govern France, even if once in power they had often pursued policies very different to their electoral platform (as was the case with François Hollande’s spell in charge). The left had traditionally opposed flexible labour markets. The right had little interest in the issue, preferring to call for lower taxes and public spending and generally did not make competition in markets for goods and services a major theme (as it could upset right-leaning professional lobbies).

A year on from his election, Emmanuel Macron has already ticked two important boxes in his economic programme:

• The first is labour market reform. He has brought in measures that make it slightly easier to dismiss workers either individually or collectively and devolve part of the labour negotiation process to workplace or company level. Already in place at end-2017, this reform is now being followed by a new drive on professional training (long denounced as ineffective by international organisations), apprenticeships and unemployment insurance. This last measure is designed, among other goals, to better support risk-taking and career switchers.
• The second achievement is a package of pro-business and labour tax changes: transferring employees’ sickness and unemployment contributions into an income tax with a broader base, converting a tax credit offsetting some employers’ social contributions into a permanent cut in the latter, introducing a flat tax on household’s investment income, eliminating wealth tax on financial assets and gradually reducing corporate profit tax. Highly visible and well sold to the markets by the government (sometimes oversold in fact, the labour market reforms are actually a continuation of sizeable efforts made under Hollande), these changes have been welcomed by the international financial observers. Even more so as France has stood out as a trail-blazer in a year when Germany, Italy, Spain and the UK have all been mired in internal political uncertainties.

In addition, the government has also been active on numerous other fronts, perhaps less obvious to international investors but, to judge by the literature coming out of international bodies, just as important (if not more so) for long-term growth:

• Reforms to education, including measures to favour underprivileged areas and a first step toward allowing student selection in universities.
• A reform - this one not announced in the official election manifesto and only briefly alluded to in the campaign - of the state railway company SNCF, widely perceived as a bastion of traditional unions and social benefits specific to a certain sector.
• A Housing Law (see box below).
• Changes to healthcare provision, particularly dental and eye care, focused on better reimbursement, which also imply downward pressure on prices.
• A rise in social benefits directed towards individuals (the poor elderly and the disabled).
• A number of cuts in red tape for corporations.
• Also, though not directly pitched as a reform to the market for goods and services, the slated elimination of housing tax (a local tax calculated using a particularly antiquated system) is also an opening sally toward reform of local authority finance. Local authorities are big providers of local services and their many overlaps and inefficiencies feature regularly in reports by international organisations. 

In contrast, the reduction of the budget deficit to 2.6% of GDP in 2017 (from 3.4% in 2016), while highly visible to investors and much feted in the positive news flow on France, owes far more to the economic environment than the actions of the new president. Ironically, it is precisely on the budget front that he is proving slow to live up to his promises: public spending was virtually unchanged on 2016 at 56.5% of GDP, while the plan is to cut it to 52% by the end of his term of office in 2022. Most importantly, proposals on how to save on public spending remain short on detail at this stage.

The government’s flexi-security and supply-side policies will probably play positively on potential growth and structural unemployment.

Judging by the analyses of international organisations, by the relatively positive economic and social outcomes achieved in the Nordic countries who have applied them long term and by their generally encouraging results in countries that have recently increased at least labour market flexibility (notably Germany and, more
recently, Spain), measures that combine supply side policies with flexi-security should very probably, if pursued over several years, yield positive macroeconomic
results.

Therefore, it does not seem overoptimistic to expect the policies of Emmanuel Macron (and the deferred effect of those of his predecessor) to at least slightly raise potential growth and reduce the structural unemployment rate after a few years.

Some of the factors that have caused France to underperform Germany and some other euro zone countries may, therefore, be gradually eliminated. However, it is hard to quantify this improvement. Not only are the structural rigidities of the French economy many and complex, but also the impact of similar measures has varied from country to country.

Moreover, some aspects of flexi-security are being deployed by the French government in a way that differs substantially from that followed by other countries (more specifically, the government constantly gives the impression that it tends to curtail the role of unions, seen as overly corporatist, rather than bring them into decision-making as they do in Northern countries).

Yet these improvements may not be enough to fend off the rise of anti-establishment political forces, a challenge that probably requires deeper changes notably on the products and services markets.

We note, however, that while a rise in growth and fall in unemployment are probably necessary conditions to head off the rise in anti-system political forces - the main political challenge facing France and many other developed countries - they may not on their own be sufficient. While the French have long been told that unemployment is the source of all evils, Brexit and the victory of Donald Trump in 2016 gave a glaring illustration in two big developed countries that even a rock-bottom unemployment rate is no absolute protection from a simmering pool of dissatisfaction with the existing political establishment. Voting patterns in the US and UK have thrown up other kinds of social divide than that between the employed and the workless. Some of these fault lines, particularly between metropolises embedded in globalisation and neglected other territories, map easily onto the French electoral landscape.

Fixing these territorial fault lines is a very complex endeavour with no certain comprehensive solutions (and certainly not even a consensus regarding what the goals should be). Yet it seems likely that policies that aim at improving the supply of product and services (notably of those with large territorial implications) could
be at least as important as the quantitative drop in unemployment being promised (probably with good reason) by the flexible labour market so beloved of international organisations. Policies regarding urban planning, housing, transportations or those aiming at a rise in quality or an improvement of the access to some key services in underpriviledged areas (health and education, among other) are probably essential in this respect. While the program of E. Macron (who is sometimes perceived, or described by his opponents, as the “President of rich cities”) includes efforts in these directions (see box below), it is still too soon to assess their real extent, their ability to overcome many unavoidable resistances, and their capacity to produce visible effects a few years from now.