Don't Expect a Big Macron Bounce in France
Markets bounced on Macron’s first-round victory and are likely to do so again on Monday if, as expected, he is declared the new French president. But investors should not expect a Macron presidency to pay off in terms of strong economic growth in France.
The first hurdle Macron will face is putting together a parliamentary majority. Under the Fifth Republic’s constitution, the president is popularly elected, and this legitimacy makes him a key political actor. But actual policy is carried out by the prime minister and the cabinet, which is accountable to the National Assembly, the lower house of Parliament, which is due to be elected in a June vote. Without a majority in the National Assembly, the president, while not quite a figurehead, finds his powers in domestic policy seriously curtailed.
There is reason to believe Macron will not have this majority. His young party, En Marche!, might be an adequate vehicle to winning a media-driven national election, but parliamentary elections are also local affairs. En Marche! hasn’t even selected candidates for most constituencies, whereas candidates from rival parties have been campaigning at the local level for months, and in each constituency they have offices, staff, volunteers and party elected officials who carry weight at the local level.
Macron will almost certainly try to work out a deal with one or another of the main parties, either the center-left Socialist Party or the center-right Republican Party, but this will limit his options in terms of policy-making. Or the National Assembly may end up being hung, in which case Macron would have to appoint a cabinet that could be subject to a vote of no-confidence at any time, and would have to cobble together ad hoc majorities, a daunting prospect for any bill that is controversial, as Macron’s promised structural reforms would be.
Even if Macron finds a way to have a majority that gives him the most sweeping version of the powers the French constitution invests in the office of the presidency, that is no reason to believe he will implement reforms to deliver economic growth. France’s sluggish economic growth is due to both demand-side and supply-side constraints. On the demand side, Macron has said he would abide by European deficit and debt targets, winning plaudits and endorsements in Berlin, but making it difficult that any sort of meaningful stimulus package can be adopted.
On the supply side, while Macron talks a good game about the need for reform, his proposed reforms deviate little from the status quo. He proposes to shave 60 billion euros ($65 billion) off government spending over the life of the next parliament, including 15 billion from health care reimbursements, which is sure to be controversial. He proposes modest cuts to payroll taxes, financed by a raise in the social security tax on income known as CSG. The most ambitious plank is bringing the corporate tax rate to 25 percent from 33 percent. In fact, according to a recent government report, while large businesses pay an effective corporate tax rate of 22 percent, small and medium-size businesses pay closer to 30 percent. A broad-based corporate income tax cut should therefore help medium-size businesses, which provide most of the job growth and fuel a lot of innovation.
His agenda has scant words to say about the main supply-side hurdles in France, which are barriers to entry to protected professions and sectors, such as retail, pharmaceuticals and other health-care professions, as well as legal professions, and environmental red tape. In terms of research and development, a key supply-side driver of growth, his main proposal is to merge universities and institutes so they can reach world-class "critical mass," a policy that has already been in effect for 15 years and has shown no appreciable gain in research quality or impact.
Macron seems to aspire to modest tweaks, cuts and giveaways that keep business happy while funding a technocratic welfare state. In that sense, he is emulating Britain’s Tony Blair. But while Blair had a good economic record, for there to be a Blair, there had to be a Margaret Thatcher to sweep away cartels holding back the British economy, and France has not had its Thatcher. Macron is the darling of the markets for now, but he could disappoint them later.
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