Emmanuel Macron’s victory over Marine le Pen in Sunday’s French presidential election is a cause for celebration in both France and the rest of Europe. It offers the prospect for much needed economic reform in France, and it holds out hope for deeper economic integration in the eurozone.
Before allowing oneself to get carried away by the election result, however, one needs to recognize how formidable are Macron’s economic challenges and how tenuous is the political support for his reform agenda. One also needs to recognize how resistant Germany is likely to be toward the very idea of a more-integrated Eurozone.
{mosads}There can be little doubt that the French economy needs major economic reform if it is ever to rival the German economy. Unlike Germany, France is yet to undertake meaningful labor-market reform. This has left France with a rigid labor market, as exemplified by the country still being stuck with a 35-hour work week and by the many impediments to firing an employee.
At the same time, the state of France’s public finances are immeasurably weaker than those of Germany and remain a major obstacle to the country getting itself onto a faster economic growth path. Public spending in France now amounts to a staggering 56 percent of GDP, while the country’s public debt exceeds the level of its annual output.
As is the case with the eurozone’s southern European countries, the French economy too could benefit from a more integrated Europe. In particular, it would help France if there were to be an early move toward a European banking union, if the eurozone were to have a minister of finance and if Germany would entertain the idea of a joint European bond issue.
It would also help if France were granted more flexibility in the timetable for meeting its budget deficit target and if Germany would use the fiscal room that it presently enjoys in order to boost overall demand in the eurozone. One of the benefits of such a shift in relative budget policy positions would be that it would help facilitate the much-needed reduction in Germany’s outsized external current account surplus, which presently amounts to around 8.5 percent of GDP.
France is fortunate to have elected a centrist and market-oriented president who will both push for economic reforms at home and a more-integrated Europe abroad. However, it remains an open question as to whether Macron will enjoy political support at home to implement his agenda. It is also far from clear that Germany will go along with his plans for more Europe.
In gauging Macron’s prospects for achieving real reform, it is important to recall how narrow his political support appears to be. True, he did win 65 percent of the vote in the second round of the presidential election. However, this is to be seen less as a mandate for his policy agenda than as a repudiation of all that Marine Le Pen stood for.
In the first round of the presidential election, almost half of the French electorate voted for left-wing and right-wing extremist candidates who were opposed to Macron’s economic reforms and who questioned the benefits of France’s continued EU membership. In addition, judging by the experience of past efforts to reform France’s archaic labor laws, he must expect strong opposition on the streets led by the French trade union movement.
The relatively tepid reception that Macron’s electoral victory received from the German political establishment does not bode well for his efforts to get real reform to the European project. In congratulating Macron, German politicians from both sides of the political spectrum seemed to go out of their way to indicate that they saw little reason to agree to the issue of joint European bonds or to modify the eurozone’s fiscal rules as they apply to France.
One has to hope that, in the period ahead, political support for Macron’s French and European reform agenda builds. Since, should he fail to implement his agenda, we should brace ourselves for the return of Le Pen and all that for which she stands in France’s next presidential election.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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