The biggest |
During the first 18 months of his presidential term of office, Emmanuel Macron has put through a highly ambitious set of reforms inspired by supply-side economics and Nordic flexicurity, while facing little opposition.
# Tax reform, with some of the burden shifted away from companies and employees and towards wealthy retirees, tobacco and fuel; # Reforms of the job market, apprenticeships and professional training to introduce more flexibility and, in some cases, to reduce trade-unions’ role in professional negotiations and the financial administration of social welfare systems; # A reform of French railways (SNCF) including the end of a special professional status for future railway workers; # Measures in favour of education, particularly in underprivileged neighbourhoods; # An increase in certain minimum entitlements (for the handicapped and elderly); # Various measures to ease regulatory constraints holding back supply on the markets for products and services (including the very large real-estate and medical services markets); # The launch of a five-year €57bn (about 2.5% of GDP) investment plan. |
France’s measures |
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The outbreak of the yellow-jacket crisis ultimately forced the government into significant |
But, in retrospect, that was the easy part. In November 2018 the sudden outbreak of the yellow-jacket crisis ultimately forced the government into significant concessions, including more demand-side policies and less aggressive fiscal consolidation. # In all, more than €15bn (or 0.7% of GDP) in fiscal measures were announced between December 2018 and April 2019, including the cancellation of planned petrol tax hikes, tax cuts or the cancellation of tax hikes for medium income households, cost-of-living adjustments to some pensions, tax exemptions for overtime work and some bonuses, and an increase in tax credits for low-income workers. One impact of these decisions will be to raise the French public deficit temporarily above 3% of GDP in 2019 (keeping in mind that a temporary hike in the deficit to 2.9% in 2019 was already planned prior to the yellowjacket crisis, due to the one-time overlap this year of a corporate tax credit and cuts in payroll tax that will replace it from here on out). These measures will be partly funded by postponement of planned corporate tax cuts and caps on some tax shelters. # The government also attempted to reassure rural areas and give its policies a less elitist image through other targeted promises, including a pledge not to close any schools or hospitals during the rest of the presidential term of office and the closing of the Ecole Nationale d’Administration, which is often regarded as a symbol of the training of senior civil servants who are cut off from the daily lives of ordinary people. # These concessions raised fears that reform momentum would come to a halt. Likewise, with its spectacular and heavy foreign media coverage, the yellow-jacket crisis dented the international credibility of the French president, who had championed the strengthening of European institutions. On the European front, Macron’s results were, in any case, only mixed. True, France was able to achieve significant headway in establishing a budget for the eurozone (albeit one that was restricted to investment missions and support for convergence, and not economic stabilisation). However, northern Europeans continued to look askance at Macron’s initiatives, wary that they could go too far in terms of risk-sharing. This was especially the case of Angela Merkel’s successor as head of the CDU, Annagret Kramp-Karrenbauer. At the same time, Italian leaders, whose “anti-system” government is in many ways the polar opposite of Macron’s, tried to exploit the French government’s domestic issues for political gain.
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The government is determined to continue its |
# The yellow-jackets crisis faded during spring 2019, and Macron’s popularity rose back (to 30% in June 2019, i.e., what it had been prior to the yellow-jacket crisis, during which it had fallen as low as 18%). And while his party garnered only 22.4% of the votes in the May 2019 European elections– the first major electoral test since 2017 – i.e., a little less than the first round of the presidential election and less than the Rassemblement National party – the outcome was nonetheless greeted with relief, given the scores that had been feared a few months before. Despite a political and social environment that is now clearly less favourable than early in Macron’s presidential term, with the current lull not dispelling the risk of a resurgence in social unrest, the government is determined to continue its supply-side reforms.
# A new stage in the reform of unemployment benefits, the principles of which were announced in mid-June. It aims in particular to reduce the practice of switching back and forth between short-term contracts and payment of unemployment benefits. This is a costly practice and often considered an important cause of the high level of structural unemployment in France. A reduction in benefits paid to high wageearners, which are among the world’s most generous, is also planned. # Most important, a very ambitious pension reform, the probable principles of which have been announced in July, is scheduled for Parliamentary approval in H1 2020. It aims to merge the 40-odd existing systems into a single set-up in 2025, and to use a pointsbased system to match contributions to benefits. This reform, which was initially presented as a structural transformation that would be fiscally neutral in the short term, will nonetheless be accompanied by incentives to extend the effective age of retirement.
# New supply-side sector-based measures on the markets for goods and services (with increased competition and support for innovation via the ongoing roll-out of the investment plan). # Additional headway on flexicurity through the merger of several welfare entitlements into a single universal scheme. # Greater fiscal consolidation via savings in public spending. The structural deficit is expected to decline in limited fashion in 2019 and 2020 (from 2.3% to 2.2% of GDP in two years, due to the yellow-jacket concessions), but a new drive to lower it to 1.5% in 2022 is announced thereafter.
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Pension reform early next year will be the main test on whether reforms will remain on track. |
The most likely outcome is that at least some of these plans will become reality and that there is therefore still some momentum for reform in France, despite the risks involved and overly ambitious fiscal projections.
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In the short term, the main |
______________ * The average interest rate on French public debt has fallen from 4.4% in 2008 to 1.9% at the end of 2018, which has enabled the government to make very significant savings over the past ten years. With the average interest rate on debt falling below the level of nominal GDP growth, it is easier to stabilise public debt, even in the presence of a primary deficit. Despite all the foot-dragging and dangers, we believe that momentum in favour of structural reforms in France, which has thus far been strong, is not yet exhausted. The results of these reforms, in terms of potential growth and a declining structural jobless rate, should show up within a few years (some of the effects of reforms carried out in the second half of François Hollande’s term are already visible today). In fact, the final outcome could be even better than the aforementioned OECD estimates, which do not reflect all the reforms. From this point of view, France stands out against its large neighbours, where the political environment are not currently conducive to supply-side reforms. We therefore expect, at least, an improvement in France’s economic performances relative to the rest of the euro zone during the coming years. However, it would be jumping the gun to say that a mere macroeconomic improvement, if it indeed happens and even if it is significant in scope, will be enough to soothe once and for all the discontent that recently broke out in spectacular fashion in France, that is to be found in various forms in many developed economies, and that is generally put down to structural shifts in the job market and social disruption from globalisation and technological trends. Indeed, a few more percentage points of growth or a few less percentage points of unemployment brought about by the current reforms, which are straight from the “toolbox” of organisations like the OECD or the European Commission, may utterly fail to calm the hostility of a portion of the population to the ruling institutions. Keep in mind that while no one possesses a cure-all for social unrest, the yellow-jacket crisis showed in France that population discontent had a strong territorial dimension (large cities’ capturing of most of the positive impacts of globalisation, to the detriment of the rest of France). Healing these divides will probably require, at the very least, proactive supply shocks in housing, infrastructure, and land-use planning that are more ambitious than those currently planned. |