Daniel Lacalle

Video: France. Reforms Could Disappoint

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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 the past 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.

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).

Video and Images courtesy CNBC

 

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