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Macron’s Reform Gamble

eye on the news

Macron’s Reform Gamble

The French president wants to revive the nation’s economy and preserve the EU as a union of equals—and not just an appendage of Germany. May 17, 2018
Politics and law

The jury is still out on French president Emmanuel Macron’s efforts to reform the nation’s struggling economy, but so far he has gotten further than his predecessors. Macron wants fiscal integration with the European Union (EU), including a union-wide finance ministry, and he knows that German support depends on a revitalized French economy. More fundamentally still, Britain’s exit from the EU makes French economic health essential to prevent the union from devolving into an appendage of the German economy.

France’s economy certainly needs a boost. In the five years leading up to Macron’s election, its gross domestic product (GDP) never grew more than 1.5 percent annually in real terms. Job growth stalled to less than half a percent a year, on average. Unemployment in France still verges on 10 percent of the workforce, while youth unemployment approaches 25 percent. More than half the workforce, especially the young, lacks what could be described as full-time employment, laboring instead on limited-time contracts subject to renewal or termination by employers.

Apologists have tried to explain France’s plight in terms of broader European problems, but Germany and Britain have grown impressively. The French tax structure has discouraged work, stifled investment, and generally impeded expansion. Corporate tax rates range as high as 33 percent; passive income, the reason that most people invest, faces a sliding tax scale that runs as high as 45 percent. France also levies a highly complex wealth tax that can levy up to 1.5 percent of the value of a person’s total assets, regardless of whether those assets generate income.

France’s labor rules are impediments to prosperity. Its 3,200-page Code du Travail has needlessly raised costs, depressed productivity, limited business flexibility, and stifled growth. Until the recent round of reforms, still not finalized, the code mandated a 35-hour workweek, even for senior executives, and retirement at 62. It demanded that firms with 50 or more employees offer a minimum of five weeks’ paid vacation a year and 156 weeks’ parental leave. Companies with 1,000 or more employees had to place laid-off workers in new positions and retrain them at company expense. Employees fired for cause had five years to challenge the action, with severe fines for any firm that lost in arbitration. Foreign firms operating in France could not lay off workers if any of their subsidiaries could claim financial viability. To hamstring business flexibility further, the code insisted on national salary and work rules, set largely by major unions.

It’s easy to see, then, why the French economy lacks dynamism. French productivity has grown during the last five years at just 0.8 percent annually. French industry might have invested in equipment as a way to minimize the code’s implicit insistence on expensive and inflexible labor, but an anti-capital tax regime militated against it. French business and industry have had little choice but to assume a defensive posture. Capital investment in France languished, growing during the five years prior to Macron’s election at only 1.2 percent a year in nominal terms, and even less in real terms.

Macron’s economic reforms look to undo this dysfunctional structure. He will keep the 35-hour workweek for now, as well as the requirement that workers retire at 62, but he will replace the complex tax structure on investment income with a flat 30 percent rate and abolish the special tax on non-real-estate wealth. He will begin a gradual reduction in the corporate tax rate, from over 33 percent to 25 percent, and ease restrictions on laying off workers and firing for cause. He will ease the unions’ grip on setting work rules and work schedules, which have denied French businesses the flexibility to complete globally. Medium and small businesses could negotiate directly with their own employees. Larger employers would still have to negotiate with unions at the national level but can consolidate workers’ councils so that they cease working against one another, a major impediment to efficient firm-wide decision-making.

The French president wants to reduce the differences that presently exist between public and private pensions. To limit the budget impact of the tax cuts, he plans to shrink the number of civil servants, which he claims will reduce public spending from 55 percent of GDP to 52 percent—a huge step for France. He has also committed to bringing the French government’s budget deficit into line with the EU-mandated 3 percent of GDP. Macron plans to revamp the way Paris and local governments fund their programs by imposing a previously ignored condition: cost effectiveness. He wants to streamline health, pension, and family subsidy programs, and take the management of job training as well as unemployment insurance away from the unions, which have long controlled both.

Interest groups—especially the unions, university students, and those in established and protected positions—have taken to the streets to protest the changes, and they may yet prevail. Protests have forced retreats from reform in the past, but the changes already announced seem largely a done deal. France has given its president the power to reform by decree, which will stand until the assembly ratifies it. Since Macron has a comfortable majority in the assembly, approval seems likely.

Macron believes that the EU’s recurring financial crises stem from a lack of fiscal discipline on the part of Greece, Italy, and other so-called peripheral members. He has pressed for a union-wide finance minister and union-wide fiscal policies to prevent such laxity, but Germany is wary, fearful that a union-wide approach will leave Berlin on the hook for all the bills. Macron also wants Berlin to help the rest of Europe recapture growth momentum by inflating the German economy. German chancellor Angela Merkel has made it clear that her support for Macron’s plans depends on a French economic revival and a clear indication that Paris will put its fiscal house in order.

Macron understands how much Germany dominates the EU. It has dictated terms for loans to peripheral members in various stages of their financial troubles, most prominently Greece. With Britain’s vote to exit the union, France stands as the only national economy capable of counterbalancing German economic power, thereby preserving the EU as a union of equals, instead of a dependency of the German economy. Though it is bad form for European politicians to speak explicitly of such imperatives, they cannot be ignored, and they surely have motivated Macron in his reform gamble.

Photo by Lukas Schulze/Getty Images

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