Daniel Lacalle

France post-elections. Careful with optimism

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The French presidential elections have shown several evidences .

The second round will again put a moderate candidate, Macron , against a far-right one, LePen. This happened years ago between Chirac and LePen’s father … The big difference is that, then, the combination of extreme-left and the far-right did not add more than 40% of votes.

The euphoria of analysts ahead of a second round that concentrates the moderate vote in Macron cannot make us forget that the French society has reacted to the fierce and interventionist statism of Hollande increasing the support to more ultra-interventionist radicalism.

The disaster of the socialist party – pledging unicorns, making stimulus plan after stimulus plan and raising taxes over and over- has been spectacular. Not only has ultra-left-wing and ultra-right-wing populism not stopped, but Socialists have legitimized and fed it by repeating to citizens that the magic solutions of eternal expenditure and constant imbalances were viable. Between the diluted populism of Hamon and that of the totalitarians Melenchon or LePen, many prefered the original.

The decline of the center-right comes after many years of renouncing to its principles of free market and low taxes, surrendering to copy the Socialist party. This has made Fillon, besides the scandals, appear as not credible in its proposals of reform, among other things because he has been in high positions of responsibility and those same reforms were delayed to perpetuate the interventionism that he now criticizes.

Both Hamon and Fillon have requested their voters support for Macron  in the second round, which leads to a high probability of a moderate victory.

What about Melenchon? The far-left candidate lost, but has refused to request the vote for Macron, proving that the extreme left candidate’s calls to defend France from the National Front were just political tactics. Melenchon’s economic policies are very similar to LePen’s.

The inability of traditional parties to respond to the real concerns of the people, including the terrorist threat and immigration, and their historic failure to implement reforms, has taken its toll .

When you make a race to see who is more socialist, it ends up backfiring and benefiting the one that promises unicorns.

The Macron challenge… if he wins

Now the problem of France is to recover the dynamism lost in an economy that Macron himself described as “sclerotic” . There are many doubts about his true reformist agenda, evidenced by his actions when he has been minister. But we have to give him the benefit of the doubt. He faces a radicalized parliament, with traditional parties in disarray.

Reducing corporate tax, cutting labor costs, carrying out a labor reform similar to the Spanish one, and immigrant integration policies are part of Macron’s proposals, but we must wait to see if he wins the second round and if he has the support to implement them.

The challenge is enormous.

Just fifteen years ago, Germany and France had similar deficits and debts. Germany took the road of reforms and France the “ostrich policy”, ignoring its imbalances, attacking its own waterline with confiscatory tax and spending policies to sustain a hypertrophied public sector.

The last time France had a balanced budget was in 1980, and since 1974 it has never generated a surplus, public debt reached 96% of GDP, the economy has been stagnating for two decades, unemployment stands at 10% (with 23.6% youth unemployment ) and in 2017 it still has a current account deficit of 6.5 billion euros while the Eurozone has a surplus. Germany, on the other side, has a budget surplus, growth, much less unemployment (3.9%) and lower debt (71%). The French candidates have blamed the country’s problems on external enemies, from ‘globalization’ to ‘the euro’, however, comparisons with Germany destroy those arguments. It is hilarious to listen to LePen or Melenchon, the Ying and Yang of extremism, blaming France’s problems on “budget cuts” or “austerity .

In a country where public spending exceeds 57% of GDP, where public administration spending has grown by more than 13% since 2008 and 22% of the active population works for the State, local governments and public entities, talking of austerity is a bad joke. In addition, France has spent tens of billions on ‘stimulus plans’ since 2009 . Specifically, 47 billion euro in 2009, 1.24 billion to the automotive industry and two ‘growth plans’ under the Hollande mandate: 37.6 billion euro (‘investments’) and 16.5 billion (‘technology’).

Blaming the French stagnation on “neoliberalism”, “austerity” or “the euro” is like an obese person blaming his overweight on lack of more donuts.

The problem is economic “dirigisme” -interventionism-, which stifles the potential of a rich nation that should not be satisfied with having better economic data than the periphery of Europe. France should be compared to the world’s leading economies. The problem that the next president of France faces is that, repeating the mistakes of the past, the country will not regain the dynamism of a nation that should not be content with secular stagnation and perpetuating imbalances.

Unfortunately, the results of these elections have shown us that a large part of the electorate thinks that “dirigiste” socialism has not worked because the country needs a lot more of it. A large part of the electorate prefers to believe that two plus two add up to twenty-two and that they will be richer if they take more money from those who produce to give it to those who do not.

Last night the European project may have won, and many will be relieved, but this cannot make us forget the most important thing: Legitimising the populist message is not the way to combat radicalism. It fuels populism.

Daniel Lacalle is a PhD in Economics, fund manager and author of Escape from the Central Bank Trap (BEP), Life In The Financial Markets, and The Energy World Is Flat (Wiley).

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