For Macron and France, It’s the Economy, Stupide
(Bloomberg Businessweek) -- For five years, Emmanuel Macron has been fending off challenges from the fringes of mainstream French politics. It began in the 2017 election runoff against far-right nationalist Marine Le Pen, continued through a showdown with the yellow vests protest movement, and is culminating in a culture-war clash with ultra-right-wing polemicist Éric Zemmour, who entered the race for the presidency in November.
But as he seeks reelection in April, the president who was nurtured in the top echelons of the French technocracy has a potential knockout punch to throw: the robust economy.
With polls showing that the French are veering right, Macron regularly gives nods to that part of the electorate. He has praised former President Nicolas Sarkozy for inciting a debate on “national identity,” hired a hard-line interior minister, and gave an interview to a far-right publication in which he spoke about immigration and Islam. In turn, his star has faded among left-wing voters.
But rather than becoming ensnared in confrontations about identity and immigration, Macron’s most senior supporters are urging him to lean on his economic record.
“At a time when crowing about France’s decline seems to be in fashion, we have among the best economic growth figures in the euro zone and we got back to pre-crisis levels of activity three months sooner than expected,” Finance Minister Bruno Le Maire told Parliament at the start of December, adding: “Let’s be proud of our economic policy, the jobs we have created, investment that is recovering, the attractiveness of France.”
After a precipitous crash early in the Covid-19 pandemic, France has recorded a standout rebound, with output reaching pre-crisis levels in the fall—ahead of peers and far sooner than even Macron’s team expected. Vast spending to support households and firms during lockdowns preserved the country’s economic foundations, and Macron has built on them with the high-speed deployment of a €100 billion ($113 billion) recovery plan.
Le Maire and others point to an employment market and corporate investment trends which suggest Macron’s earlier bet on labor and tax reforms may finally be delivering results. If they are right, that would mark a major shift in the course of European economic history. For years, France has been labeled as one of the bloc’s problem economies, unable to adapt to globalization and grow and create jobs like its bigger neighbor, Germany.
Holger Schmieding, the chief economist of Berenberg, in 2017 posited a “golden decade” ahead for France and says his thesis still holds. Even if Macron should stumble in the polls, whoever wins could potentially inherit an economic base some have compared to the legacy left to Angela Merkel by reformist German Chancellor Gerhard Schröder.
“The rebound of France is one of the most interesting longer-term stories, and it is a key factor in stabilizing the core of Europe for good,” Schmieding says. “The return to a balance between Germany and France has huge political ramifications beyond the numbers.”
Walk through the streets of Paris, and most buildings you see have been unaltered for more than a century. Similarly, the French themselves often remark on how resistant to change they are, even as they’ll be quick to bemoan the state’s regulatory overreach into the economy.
Seven years ago, Macron was the economy minister and political neophyte tasked by President François Hollande to address just that inertia with so-called “structural reforms” that economists and international institutions had long implored France to undertake. He swept across the portfolios of his fellow ministers, loosening everything from the labor code to transportation regulations, and further opened the door to state asset sales.
The controversial pro-business tilt of the law afforded Macron the necessary notoriety to quit Hollande’s Socialist government and craft his own election-winning political brand, sometimes dubbed “Macronomics” by the French media.
Quickly after taking office in 2017, Macron used contentious decree-like tools to push further changes to labor laws through Parliament. And in his first budget, the then 39-year-old president picked apart France’s heavy taxes on wealth and capital.
Such changes take time to bear fruit, and there is debate over Macron’s record and whether it’s a clear election asset for him. A recent report by the Institut des Politiques Publiques found that while his policies as president, including during Covid, have boosted disposable incomes overall—particularly for working French people—they didn’t for the poorest segment of the population. Another, from the government think tank Conseil d’Analyse Economique, found no link between the changes to taxation and improvements in wages and investment. And some of his planned overhauls remain on the to-do list, including the pension reform he paused during the pandemic.
Yet even if it is tricky to confirm cause and effect, many indicators have improved in the last five years, giving Macron plenty of numbers to bolster his credibility. The tax cuts have helped raise company profit margins back to levels not seen since before the global financial crisis. That’s no vote-winner in a country where corporate profits are at best viewed with suspicion, but he can point to a corresponding increase in investment rates, which have reached their highest level since the 1970s. The pandemic did little in France to disrupt the trend of firms putting more money back into the economy—in fact, investment levels are higher now than before the crisis, while Europe as a whole still hasn’t recovered.
Entrepreneurial spirits are running high with the monthly count of new companies continuing on a sharp upward curve that began in 2017; a trend only briefly interrupted by the pandemic. And foreign investors are piling into France, pushing the country above the U.K. and Germany in consulting firm EY’s ranking for attracting projects that create new facilities and jobs—even though the number of investment projects dropped last year.
The labor market is strong despite the upheaval of lockdowns. Unemployment has dropped to levels seen just prior to the first wave of Covid, and the employment rate hit 67.5%, its highest level since records began nearly a half-century ago. (This may be partly attributable to more women joining the workforce and French workers retiring later, rather than any of Macron’s policies.) The French leader can also boast some success in raising the ratio of new hires on coveted open-ended contracts—a crucial ticket in France to access housing and loans.
And despite media portrayals of a nation of discontents, one long-running national survey indicates the French actually consider their living standards higher with Macron in the Élysée Palace than under either of his two most recent predecessors.
There are holes in the economic record—most notably a still-gaping trade deficit that shows years of French industrial decline, as well as the debt mountain left behind by the pandemic. But come the election, the stars may align for the incumbent president if he can show that “Macronomics” is intact, with economic activity continuing to rebound from pandemic lows and consumers having billions of extra euros thanks to Covid relief plans.
The timing could be decisive, because the recent surge of the omicron variant has driven French Covid cases to record numbers, put pressure on hospitals, and embroiled Macron in a controversy over his use of vulgar slang directed at the unvaccinated. He’ll also be counting on the longer-term economic argument to offset more recent concerns about surging inflation, as well as doubts about whether he’s delivered on his pledges to improve social mobility and unite a country polarized by right-left divisions on issues ranging from religion to security.
If Macron prevails, he would be the first incumbent to win reelection in France since Jacques Chirac 20 years ago. With Olaf Scholz now chancellor in Germany and Mario Draghi leading Italy, that raises the prospect of Europe’s three largest economies being run by closely aligned champions of closer EU integration who are eager to project the bloc’s economic heft.
Should he be defeated by Le Pen, the political landscape in France and Europe would look significantly different. While she has dropped her opposition to the euro, her National Rally party remains staunchly opposed to Macron’s agenda and wants to put the brakes on free circulation and trade within the bloc. Valérie Pécresse, a center-right candidate, would provide more continuity on the economic front.
Macron has already dangled the prospect of many more years of his economic approach. The furlough scheme created in crisis has been transformed into a long-term program that provides a financial backstop for firms and their employees to have more flexible working hours. Looking further ahead still, he has presented a “France 2030” plan to pour public money into high-risk industrial investments. And pro-business fiscal policies are back on the agenda, alongside a pledge to revive the pension reform.
“Our responsibility is to continue to offer you an economic, tax, and financial environment that is as favorable to you as possible,” Le Maire told business leaders at a gathering in Paris on Jan. 5. “Believe me, there’s a lot of work to do, and thank goodness—otherwise we’d get bored in the coming years.” —With Alan Katz and Zoe Schneeweiss
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