Difficult Road Ahead for Macron
Strong economic challenges lie ahead for French President Emmanuel Macron as he celebrates 100 days in office with historically low approval ratings. Although the French economy has performed well recently, it still suffers from chronic weaknesses—a dysfunctional labor market and weak government finances—which the Macron administration must address through a series of reforms.
Since Macron’s election in June, his approval ratings have plummeted, reaching 36 percent at 100 days in August—an all-time low for any modern-era French president. Despite Macron’s low approval ratings, the French economy has performed relatively well, growing by 0.5 percent this quarter, according to recent data from Insee, France’s national statistics agency. This means that the French economy grew for four consecutive quarters, comprising the country’s strongest performance since 2011.
However, even with this performance, France’s economy lags behind those of its counterparts, most notably Germany. The two countries had roughly the same level of per capita income in 1997, but today, the average Frenchman is 8.3 percent poorer. Even worse, France’s youth unemployment rate of 21.9 percent is three times that of Germany. These measures easily place France among one of the worst-performing Western European economies.
In recognition of France’s poor economic performance, Macron promised a number of economic reforms and spending plans, including a plan to invest €50 billion on education, energy, the environment, and agriculture. Central to these promised reforms was a plan to overhaul the labor market and slash corporate tax rates, currently amongst the highest in Europe.
Yet, in light of Macron’s low approval ratings and pressure from the labor unions—including the hardline General Confederation of Labor (CGT)—the extent to which Macron will pursue these reforms is unclear. To accelerate long-term economic growth and to compete with its peers in the global economy, there are no alternatives to key reforms. At a minimum, such reforms should be ternary: relaxing labor market regulations, reducing government deficits, and making the business environment friendlier to foreign businesses and investors.
First, with one of out of every ten French citizens unemployed, France’s labor market is evidently dysfunctional. This poor labor market performance is largely the result of notorious labor regulations, which discourage companies from hiring workers on indefinite contracts. Such policies, combined with high taxes, leave French citizens—particularly the youth—vulnerable to unemployment. To this end, Macron’s recent labor reform bill—which would give companies greater flexibility regarding working conditions and hours—is a step in the right direction.
Second, as the government increased spending in order to stimulate the struggling French economy, the country’s debt rose sharply in recent years. In 2007, France’s debt accounted for 64.3 percent of its gross domestic product (GDP). Today, debt accounts for roughly 100 percent of GDP, about 30 percentage points higher than that of Germany. Consequently, France has more public debt than any other EU country, and violates the EU’s budget deficit target. The Macron administration has an objective of reducing the national debt by three percent of GDP by 2022. To achieve this target, France would need to institute a number of cuts and ensure that Macron’s €50 billion public investment project does not stray the administration from its deficit reduction target.
Third, in order to stimulate the economy, Macron must make it easier for foreign companies to invest and create jobs in France—which currently suffers from a negative image with foreign investors. Recently, France sued Google for supposed tax evasion in a $1.3 billion legal battle, which Google eventually won. A combination of cumbersome regulations and high taxes, along with Macron’s recent advocacy against cheap steel from India and China and complaints about Eastern European workers, has led to the investor perception that it is increasingly difficult to conduct business in France.
Impacting the ability to attract foreign investment, France performs poorly in measures of ease of doing business. While the United States and the United Kingdom rank 7th and 8th for ease of doing business, France shares company with Kazakhstan, coming in at 29th and 35th, respectively. the Macron administration must rebrand France as a business-friendly country through reforming the labor market, adopting pro-market policies, and lowering taxes.
Given the choice between Macron’s reformist and internationally oriented economy policies and Le Pen’s protectionist ones, the French were right to choose Macron. But the Macron administration must deliver a series of economic reforms that France desperately needs to get its economy back on the right track. Passing the labor reform bill and overhauling France’s dysfunctional labor market would be a good first step in that direction.