Vive La Macronomics? Part I

Vive La Macronomics? Part I

Image Source: Flickr

Image Source: Flickr

President Emmanuel Macron achieved a decisive victory in the recent French Presidential elections in part due to his promise of ending the economic malaise that has gripped France. Mr. Macron ran on a platform of radical centrism and promised sweeping economic reform that aimed to end unemployment and speed-up growth of business. This three-part series shall discuss the viability of these ideas and assess whether they are prudent and potentially effective. However, before such an analysis is undertaken, a general understanding of France's economic status and the popularity of Mr. Macron's policies needs to be grasped. An analysis of Mr. Macron's policies would be poorly understood and their palpability would be ignored if we don't understand where they are going to be implemented and how likely they are to be implemented.

France’s economic state is not at its best. The Guardian reports that fifteen years ago, the eurozone’s two biggest countries, France and Germany, enjoyed comparable living standards. Today, Germany’s living standards are almost a fifth higher than those in France. Likewise, at the time when euro notes and coins were introduced in 2002, French and German unemployment rates were both around 8%. Today, Germany’s unemployment rate has dropped below 4% while French unemployment is close to 10%. What complicates France’s economic woes is that the previous President, Francois Hollande, did little to improve the French economy. Financial Times reports that the 1.1 per cent GDP growth last year, which was the fastest growth in Hollande’s tenure, was still fell well below the EU average of 1.8 per cent. In the first quarter of 2017, growth slowed to 0.3 per cent, compared with the previous quarter, missing analysts’ forecasts.” The graph below indicates the extent to which the French economy has underperformed under Hollande when compared with other countries.

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Furthermore, the OECD, in its 2015 report on the French economy, concluded: “The fiscal situation is weak, with a chronic deficit, considerable government spending, correspondingly high taxes and rising public debt.”

As far as Mr. Macron’s popularity is concerned, the situation is not very good. A poll published on Sunday (August 27, 2017), conducted by Ifop for newspaper Le Journal du Dimanche (JDD), showed the president’s “dissatisfaction rating” rising to 57%, up from 43% in July. This massive 15% rise in dissatisfaction comes at a time when Mr. Macron is pushing for labour reform and indicates that Mr. Macron faces an uphill climb with regard to the implementation of his plans.

This three part analysis will take a step by step approach. Instead of assessing Mr. Macron's plans as a whole this article series will provide an in-depth analysis of each and every proposal. It is only after this is completed that this series will seek to provide the bigger picture. This first part of the series will make a detailed and point-by-point analysis of a certain number of Mr. Macron’s proposed policies with the second  and third parts continuing the same. The third part will conclude by providing a verdict after this thorough examination is completed.

Labour Law Reform

Labour law reform has been a key promise of Mr. Macron. Mr. Maron has sought to end the stifling of economic growth caused by excessively restrictive labour law and the bottleneck to business caused by unions.  Mr. Macron has unveiled a piece of legislation on August 31 that comprises of 36 measures for labour reform. According to The Economist, under this labour reform, “[e]mployers will get more freedom to negotiate working time and salaries within their firm, rather than having to stick to branch-level agreements.” Also, there are considerable changes proposed to the law on workers’ unions. At present, there are various statutory works councils like the delégués du personnel, the comité d’entreprise and the comité d’hygiène, de sécurité et des conditions de travail. These councils complicate employment matters for businesses by acting in an unsynchronized manner causing much hardship to employers from different sides. This shall be done away with and all these work councils shall be subsumed under a single body, as reported by The Economist, thus simplifying and synchronising the work of these councils and making union discussions orderly.

Additionally, the proposed law changes redundancy plans. Under present law, “cases for unfair dismissal can be brought against a company for up to two years after an employee has left a firm, and the awards made by labour tribunals in such cases can vary immensely, making it difficult for small companies to plan their budgets.” Now, this is to be altered with cut-offs reduced to one year and awards capped to 20 months of salary for an employee with 30 years of service with the level of mandatory redundancy pay increased.

These changes are laudable as they greatly simplify labour law and ease compliance. However, what these changes do not do is scrap the 35 hour workweek rule. The 35 hour work week rule prevents businesses from expanding operations or chasing ambitious targets by practically disallowing them from making employees work more than 35 hours a week. Any work beyond 35 hours is counted as overtime. This has led to a weakened economy with stalling growth as businesses neither hire nor expand. Employees are very unproductive and the other mass of labour law prevents  more hiring necessary to work around this rule by making lay-offs difficult, resulting in France's near 10% unemployment figure. While lay-offs and negotiation of work time should become easier with the proposed changes, the fact that the 35 hour rule stands does materially impact the strength of Mr. Macron's reform agenda.

The biggest problem with Mr. Macron's proposed legislation is the opposition it faces. As pointed out above, Mr. Macron's popularity has taken a 15% hit due to this reform proposal. Furthermore, many unions have called for strikes. According to The Guardian,”[t]he new French president is facing the prospect of a September standoff in the streets over his controversial plans to revamp the labour laws.” This dents the strength of Mr. Macron's proposed policy greatly as it could lose much of its merit if it is watered down. The labour reforms are going to be tough to pass as France is a country where even the unemployed aren't afraid to strike.

Corporate Tax Reduction

Mr. Macron, as the Reuters reports, plans to reduce corporate tax from the current 33% to 25%. While this may seem radical, Mr. Macron intends to carry out this reduction in a phased manner.

This too is praiseworthy. A high corporate tax prevents companies from utilising high productivity (a strength of the French economy) via capital investment by taking away their profits. A high corporate tax also makes France uncompetitive in the international scenario. It prevents investment on setting-up operations on foreign companies due to the tax burden it poses.

However, a reduction in corporate tax hurts the exchequer and becomes impracticable due to public opposition to the move which is very likely to exist in a very left wing society like France. Mr Macron's gradual approach strikes a fine balance between public perception and prudence and is apt given the circumstances. But the response to the labour reforms indicates that even the gradual passage of radical reform will be a tough yet accomplishable task.

This brings us to the end of the first part of our analysis which appraised the more radical reforms that form part of Macron’s agenda. The parts that follow will continue this detailed analysis of different proposals and will seek to provide a decisive verdict.

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