France has a new president in town and there is general agreement that his “task is immense”, as Emmanuel Macron himself declared several times from his pedestal in front of the pyramide du Louvre. While Macron won a clear majority, the significant share of votes that went to Marine Le Pen on the right and Mélénchon on the left (during the first round of the election) demonstrate the degree to which many French voters are dissatisfied with the country’s current economic order.
On 2 May, Econ+ held a roundtable conversation with French economist Xavier Ragot to look at Hollande’s economic legacy, the future of Europe and Macron’s opportunity in a (sometimes surprisingly) open and frank discussion.
Xavier Ragot is the president of the Observatoire français des conjonctures économiques (OFCE), a research body of Sciences Po, Paris, a university, where he also teaches economics. He is also a research director for the CNRS, one of France’s most prestigious academic institutes, and is member of the National Economics Commission (Commission économique de la Nation). He holds a PhD in economics from the École des hautes études en sciences sociales and did his post-doctorate at MIT.
Here are the main takeaways from the roundtable:
Hollande’s failure is more than a communication problem
If Hollande is judged harshly by history, in line with current opinion polls, it is because he failed to fulfil promises made during his campaign and ended up taking a different line of action, Ragot said. Part of this should be observed in the context of the extremely difficult economic situation that faced Europe as he took office.
In May 2012, the situation was catastrophic, according to Ragot. Both Greece and Italy were facing dire economic crises that necessitated urgent action, while Portugal and Spain were not faring all that much better. The very real economic danger that faced Europe at this time was not sufficiently dramatised by Hollande, which meant that the public did not understand the gravity of the situation.
France, meanwhile, was faced with three “French problems” that have consistently dogged the country’s economy: (1) high public debt; (2) a high current account deficit, especially compared to Germany; and (3) a high unemployment rate. Hollande’s enduring miscalculation was to publicly declare his desire to be judged on (3)—promising that he would reverse the unemployment curve that was spiking upwards—while undertaking policies that affected (1) and (2).
His policies were supply-driven—the Responsibility and Solidarity Pact, the tax credit for competitiveness and employment (CICE) and the controversial “loi El Khomri” that reformed the labour code. What Hollande failed to do, however, was compensate his restrictive fiscal policies with any demand-raising programmes. An ambitious Bercy wanted to bring France’s deficit down to 3% immediately, neglecting that alleviating unemployment was essential for the government both economically and politically.
Labour market divergence is the root of Europe’s economic problems
Regardless of Hollande’s missteps, many of the underlying economic problems that Europe—and specifically the eurozone—faces have predated him. At the root of many of these problems, according to Ragot, is the divergence in labour costs among eurozone countries. The euro is likely about 30% weaker than what Germany’s currency should be, allowing the EU’s biggest country to become an export powerhouse at the expense of southern European countries. The fact that Germany sits on its surpluses, further dampening demand, only aggravates the problem.
Ragot’s proposed solution for this fundamental problem involves naming a joint finance minister for the Eurozone, something that candidate Macron placed in his programme along with the desire to develop a common fiscal policy, a eurozone debt instrument and completion of the banking union.
Europe has already changed
While the French politicians who joined in the recent presidential election race universally said that the EU had to profoundly change—even the optimistic Macron promised to “refound” the EU—Ragot pointed out that we tend to miss the extent to which Brussels has already dramatically changed its economic philosophy.
Once a bastion of economic liberalism, the European Commission now openly promotes a ‘social Europe’, with President Jean-Claude Juncker stating that each EU member state should have a minimum wage, for example. It is all too easy to understate how much of a shift this is from traditional Brussels policymaking.
Macron’s opportunity
For Ragot, Hollande’s economic policies were clearly electoral suicide but may be good for France in the longer term, and Macron could reap the benefits of Hollande’s fiscal discipline. France is now on a clear path to bringing its deficit down to 3%—which Macron promised to do—at the same time that Brussels seems to be taking a less stringent line on how countries respect their macroeconomic pledges. In other words, Macron could benefit from the flexibility that Hollande’s policies afford him.
Moreover, what some may see as Hollande’s cautionary tale—that the outgoing president went too far too fast in administering austerity—could also accentuate the unfortunate pressure on politicians to act for short-term benefits rather than long-term gains. A wider discussion—perhaps one for a future Econ+ roundtable—would be how to encourage our elected leaders and policymakers to think about the long term, and how to communicate such policies to the general public.
ECON+ 