Can Macron turn around the French economy?

May 08, 2017


By Andrew Sentance, Senior Economic Adviser, PwC

Now that Emmanuel Macron has been elected as the next President of France, attention will turn to the policies which he will seek to implement over his five year term of office. His biggest challenge will be to turn around the performance of the French economy.

France’s unemployment rate remains stuck above 10 percent, compared with less than 5 percent here in the UK and below 4 percent in Germany. Economic growth has also been sluggish. The French economy has grown at just over 1 percent a year since the financial crisis – just half the growth rate of Germany and the UK.

France is the third largest economy in Europe, and its disappointing performance has exerted a drag on growth and jobs in the European economy as a whole. Taken together, France, Spain and Italy account for around two-thirds of total unemployment in the Eurozone.

So what is Macron’s plan to turn round the French economy? Unlike his opponent Marine Le Pen, he does not want to pull France out of the euro. Instead, he would aim to make France’s economy more flexible and competitive by reducing the burden of regulation and reforming the tax system.

His economic programme – unveiled about two months ago - plans reductions in taxes on employment and a cut in the rate of profits tax to 25 percent. He aims to ease petty regulations which hold back growing businesses and discourage the creation of new jobs. France’s complex structure of pension schemes will be streamlined.

Will this programme work? Macron’s reforms would certainly take France in the right direction. They follow the pattern of similar measures in other European countries to reduce business regulation, reform taxes and make labour markets more flexible.

The UK led the way in the 1980s and 1990s, and that has helped bring our unemployment rate down from around 12 percent in the mid-1980s to below 5 percent now. Economic reforms – including privatisation – also helped to boost UK economic growth in the 1990s and 2000s before the shock of the financial crisis.

Germany embarked on a programme of economic reform in the early 2000s, under Chancellor Gerhard Schroder. This included relaxing business regulation, changing unemployment benefits and introducing other measures to make employment more flexible. At the time these reforms were introduced, German unemployment was over 10 percent of the labour force. It has since fallen to below 4 percent – the lowest jobless rate of any major European economy.

Spain has been the latest country to see the benefits of a package of economic reforms. Under the government of President Rajoy, employment laws have been made more flexible and the rate of corporate tax brought down to 25 percent – just as Emmanuel Macron plans. The Spanish government has also supported the restructuring of the country’s banking system.

In 2015 and 2016, Spain was the fastest growing of the large economies in Europe – with GDP rising by over 3% in each year. This year, economic growth in Spain is likely to be around 2.5%, again ahead of other large European economies. Unemployment is still high in Spain – at over 18 percent of the labour force – but the jobless rate has come down from over 26 percent a few years ago.

Macron’s reforms are therefore along the right lines, and they are backed up by the experience of other major European economies. But they will not transform the performance of the French economy overnight. There may be opposition in the French Parliament to the economic programme the new President is planning, and attempts to water down some of his proposals. It also takes time for the kind of “supply-side” economic reforms on Macron’s agenda to be implemented and to have an impact on jobs and growth.

However, a successful programme of economic reform in France should provide a welcome boost for European economic growth as we move into the 2020s. The French economy is the third largest in Europe and the sixth largest in the world. France is also the third biggest national market for UK exports – behind the US and Germany.

The need for economic reform has been on the agenda in France since the 1980s and 1990s. However, successive governments have struggled to embrace the challenge of making the necessary changes. The consequence has been high unemployment and sluggish economic growth.

The election of Emmanuel Macron this weekend offers the best hope for a long time that the French government will start to make the reforms necessary to make its economy more flexible and business-friendly. That should be beneficial not just for France, but also other countries in Europe – including the UK.

This is an edited version of an article which was first published in the Daily Telegraph on Saturday 6 May 2017

Andrew Sentance:
Read profile | Contact by email | Tel: 020 7213 2068