The Economic Time Bombs Facing President Macron

(Bloomberg) -- Emmanuel Macron himself says the task is “immense.”

That’s what the newly elected French president said barely a week ago, in his victory speech from the courtyard of the Louvre. All during his campaign, Macron said the economy was in need of profound reform.  His program calls for lower business taxes, more flexibility in labor rules and a simpler pension system, among many other elements.

Part of the reason so much change is needed is that neither of his immediate predecessors, Francois Hollande and Nicolas Sarkozy, were able to get much done. In the past 10 years, sometimes called the Lost Decade, France’s economic ills just kept on mounting. These charts show the results — and what Macron faces if he can’t turn his country around. 

The national debt, for instance, has nearly doubled over the past decade, approaching the worrying threshold of 100 percent of gross domestic product. Last year, the public debt burden for France surpassed that of Germany, an economy over one-third larger.

A key driver of this is the country’s generous social spending, which is greater, as a share of GDP, than for any other large developed economy.

France’s fast-aging population poses a related challenge to the government’s cash flow, as fewer and fewer working-age people pay into the system for every older retiree they support. While this so-called old-age dependency ratio in France has outstripped the EU average in each of the past 10 years, the gap has been widening of late.

Turning to those people still in the workforce, the relatively high unit labor costs shouldered by French employers has long been seen as one of the country’s main competitive disadvantages. 

“Labor costs and regulations are probably the most urgent priority,” said Bruno Cavalier, chief economist at Oddo Securities in Paris. “Reforms in this field might create a shock of confidence,” even though the effect might take several years to be seen, he said.

The difficulty in hiring and firing workers, plus the various employee-related costs and taxes mandated by the government, help explain France’s persistently high unemployment rate, which has flirted with double-digit territory for  several years now.

Beyond their labor costs, French companies have another major complaint: their heavy tax burden. For instance, in the Paris region in 2015, the effective corporate rate averaged nearly 35 percent, compared to 21 percent in London and 27 percent in Brussels.

“Macron’s diagnosis is that there are too many brakes on hiring and private investments, it’s the first time in many years that a new president is embracing this economic message,” Cavalier said.

To contact the authors of this story: Andre Tartar in New York at atartar@bloomberg.net, Fabio Benedetti Valentini in Paris at fabiobv@bloomberg.net.

To contact the editor responsible for this story: Anne Swardson at aswardson@bloomberg.net.