French candidates’ economic visions
by Jean-Jacques Barbéris
One thing that stands out in the French presidential campaign is how little attention is being paid to the candidates’ economic policies. This is a first in modern times.
In 2012, François Hollande’s call for a 75% tax rate got everyone talking. Five years earlier Nicolas Sarkozy won with his slogan ‘work harder to earn more’. In 2002, the electorate witnessed the great battle of the assessment of the 35-hour working week. In 1995, Jacques Chirac won the election on the promise of healing France’s ‘social fracture’. In 1988, the ‘No-No’ of François Mitterrand (no nationalisations and no privatisations) was the omnipresent slogan.
In 2017 there has been virtually no comment or headlines on the economic programmes of the candidates. The lone point that has caught the attention of investors has been the risk of leaving the euro area, as proposed by Marine Le Pen, leader of the right-wing National Front. No one seems interested in what the other candidates are offering, even though they have a greater chance of being elected and being able to implement their policies.
Yet, according to a poll by the French Institute of Public Opinion, economic challenges are among the top issues for French voters (54%). On top of this, it is mainly the economic reforms that France does or doesn’t bring to the table that will determine whether the European Union and the euro area are able to revisit the idea of deeper EU unification.
Economic growth in line with potential
The pace of economic growth over the past two years (1.1% and 1.2%) may appear disappointing, but is in line with the French economy’s potential.
In terms of competitiveness, the French economy has improved, as evidenced by improved performance of French corporates, but not enough. Foreign trade figures for 2016 show that increased household purchasing power and consumption resulted primarily in increased imports. The main driver of French growth remains domestic consumption.
The rate of growth remains too low to have a lasting effect on unemployment, notably due to France’s strong demographics.
Notwithstanding this mixed performance, the level of inequality in France is a lot lower than in other western democracies that have been affected by populist politics. Tax breaks and social transfers associated with public spending account for more than 56% of GDP and thus act as a de facto buffer. Over the past decade, all Italian households and 70% of Dutch households have seen their income, after tax breaks and benefits, stagnate or decrease. This compares with only 10% in France, illustrating how the French model has remained extremely income-protective.
Growth close to its potential, improving competition, still high unemployment, and unceasing inequality: this is the economic landscape with which the presidential candidates must contend.
Candidates’ economic solutions
Against this backdrop, the candidates that have the best chances of success – centre-right François Fillon, social-liberal Emmanuel Macron and left-wing Benoît Hamon, although the latter is least probable – offer three solutions.
Hamon has a programme that falls within the ‘economy of sharing’. He believes that growth will remain low, in particular because of heightened environmental constraints, and that technology will gradually replace labour as a factor of production for some processes. He proposes introducing a universal income and a new allocation of working time.
At the European level, this programme would be extended by a new budgetary treaty that readdresses the rules of the 1992 Maastricht treaty, instituting a euro area parliament with budgetary power, and establishing debt solidarity. Hamon is planning to create a minimum European salary and introduce a €1tn investment plan. Overall, his programme is characterised by the will to share value added on a national level and to implement a European-level Keynesian stimulus programme.
Fillon’s programme is, as he says, one of ‘liberal rupture’. He believes that France needs a dramatic reduction in public spending and a boost in competitiveness. His drastic economic measures include: cutting 500,000 civil service jobs; reducing social contributions and taxes on production by €25bn; increasing the retirement age to 65; raising value added tax by 2%; and abolishing the wealth tax and the 35-hour working week. These measures should enable France to meet the European challenges within the context of a new relationship with Germany; using intergovernmental methods, meaning relying on heads of state rather than EU institutions, and major projects, such as the convergence of corporate taxation, to strengthen the euro area.
Macron has a programme that follows the Nordic model of social democracy. He proposes a €60bn savings plan and a €50bn investment plan over the five-year presidential term, accompanied by a 6% decrease in social contributions.
The wealth tax would be limited to tax on real estate while the council tax would be discarded. In the social sphere, Macron is proposing to nationalise the unemployment benefits system, introduce a points based retirement system based on the Scandinavian model, and make statutory working time more flexible. On Europe, he is for immediate compliance with the Maastricht treaty and supports the strengthening of the euro area, specifically through the creation of a euro area budget overseen by a minister of finance. Minimum social rights would be implemented on an EU-wide basis.
Clear choices for voters
These three programmes present clear choices for French voters.
Hamon has opted to divorce from France’s past economic policy and is proposing to break with European policies introduced over the past 10 years.
Fillon wants to see an intergovernmental relaunch of the EU with negotiations to include structural reforms (like those recommended by Germany and the European Commission).
Macron is proposing a European revival by continuing to leverage European institutions coupled with the introduction of a reform programme inspired by social democracy.
One of these three, probably Fillon or Macron, is likely to defeat Le Pen and win the May election. So scrutiny of their economic policies is crucial – for the sake of the French electorate and, indeed, of the rest of Europe.
Jean-Jacques Barbéris is Global Head of Central Banks and Sovereign Wealth Funds at Amundi Asset Management and a Member of the firm’s Executive Board. Back