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Op-Ed: French elections are an economic non-event

  • Monetary policy is in the hands of the ECB
  • Fiscal policy is supervised and sanctioned by the EU Commission
  • Weak economy precludes meaningful structural reforms
  • The brewing crisis with EU and Germany is bound to erupt

Emmanuel Macron — an all but certain winner of the French presidential election — is a straight-line continuation of a massively rejected Socialist government, where he served as the economics minister. He has now been re-positioned as a "centrist" to block the political forces attracting, at this writing, nearly half of the French voters intending to cast their ballot on Sunday, May 7.

The new 2017 official presidential election posters of the remaining two candidates, Emmanuel Macron and Marine Le Pen, who will compete for the second round.
John van Hasselt | Corbis | Getty Images
The new 2017 official presidential election posters of the remaining two candidates, Emmanuel Macron and Marine Le Pen, who will compete for the second round.

Macron's economic "program" is not credible. His hands are completely tied. There is nothing he can do, but the French media and the elite that support him are sweeping all that under the rug.

Things are very clear, though. France's credit costs and terms of trade are set by the European Central Bank. Tax and public spending decisions are framed in a tight corset imposed by budget deficit limits of the monetary union. And the fiscal policy is jointly supervised and sanctioned by the EU Commission and the Eurogroup — a forum of the euro area finance ministers under Germany's thumb.

France has been overshooting its deficit limits since 2008. But it now seems impolitic in the extreme to even mention that France has to deliver a socially and politically flammable fiscal austerity in a stagnant economy with a jobless rate of 10 percent.

The latest numbers on economic activity released last week show a slowdown to a quarterly growth rate of 0.3 percent in the first three months of this year (from 0.5 percent in the fourth quarter of last year) as a result of flat consumer spending and a deteriorating trade balance. That slowdown implies an implausible assumption of steadily accelerating aggregate demand for the rest of the year to hit the official growth target of 1.3 percent in 2017 (compared with 1.1 percent in 2016).

Malaise is a very French word

Predictably, the weak economy is taking a toll on labor markets. Over the last five years of the Socialist government, the number of people out of work has soared 26 percent to a devastating total of 9 million. And that is despite some 40 billion euros the Socialists spent on various job creating programs, which came because President François Hollande was staking his reelection bid on declining unemployment. He failed, and he is the only president of the Fifth Republic whose attempt to run for the second term was rejected by the French people.

The French social malaise runs deep. There were 24.7 percent of young people (15 to 24 years of age) unable to find work in 2015 and 2016. During the same two years, the number of long-term unemployed (i.e., people virtually unemployable) was stuck at 45.6 percent. Employment problems have raised the poverty rate to 14.3 percent, and the income inequality (measured by the Gini coefficient) in the country of liberté, égalité, fraternité has also been rising.

A German right wing daily summed this all up last week in a headline "A depressed neighbor," while reporting the results of a socioeconomic study focusing on France.

Still, France is Germany's second-largest customer (after the U.S.). Last year, Germany's 35.7 billion euro trade surplus with France accounted for 43 percent of Berlin's total trade surplus with the monetary union.

In spite of that, Macron thought he needed to reassure Germany about his attachment to the crisis-ridden "French-German couple." He extolled the virtue of the two countries' work for a united Europe at Berlin's Humboldt University last January. Two months later, he was again in Berlin to get a nod from the German chancellor whom he assured that, if elected, he would implement "reforms to reinforce the French economy."

Macron's "austerity growth model?"

What reforms? Any attempt to trim the bloated public sector by cutting the government spending — about 1.5 percent of GDP in 2016, compared with 3.8 percent of GDP in Germany — would destabilize an already moribund economy and cause riots in the streets. The same would happen in case of radical labor market reforms — essentially a free-hand at hiring and firing — which, according to some analysts, have gone much further than those in Germany.

The rest of reform chatter is cosmetics.

But this is not cosmetics: What, if anything, did Macron tell the Germans about the huge problem of French public finances? Sure, he would rather not talk about that, but that's all the Germans want to discuss — in excruciating detail.

After a conditional pass Germany gave France last year on yet another failure to meet its budget deficit target, Berlin and its EU Commission enforcers are expecting that France will honor its commitment to cut this year's deficit to 2.7 percent of GDP from 3.4 percent in 2016. They also want France to stop and reverse the alarming growth of public debt. Over the last five years that Macron's Socialist friends have been in office, public debt with respect to GDP has increased 11 percent, and is on course to hit 124 percent by the end of this year — more than double the 60 percent public debt-to-GDP ratio set as the upper limit by the monetary union rules.

How can France deliver on these commitments with virtually no economic growth, and one of the worst labor markets in the euro area? Will the French discuss that in the week remaining to May 7 elections? And would that matter to the election outcome?

Oh, well, never mind … Macron is unstoppable. The French elite and the mainstream media keep chanting that his opponent, the Front National's leader Marine Le Pen, cannot be allowed to win.

Recalling the recent elections in the U.S., the American reader can recognize these incantations and the familiar mud-slinging hurled at Le Pen: "populist," "fascist," "racist," "xenophobe," "homophobe."

Quelle horreur (!), but Le Pen would change things for the better. She knows that she does not have the votes to leave the EU and the euro area. But she could easily extract concessions from the EU Commission and its German enablers to relieve the policy constraints and claw back sovereignty transfers that have frozen fiscal policies and made impossible meaningful structural changes in a stagnating French economy. She could even nudge the EU toward bolder and more comprehensive economic and social policies to reconnect with alienated Europeans.

Investment strategy

The most influential right-of-center French daily was resigned last week that "Macron, l'enfant gâté d'une France malade" ("Macron, a spoiled child of a sick France") — will be its next president. Opinion polls are narrowing his lead, but his election victory does not seem in doubt.

It is much less clear what he can do with his presidency. The ECB's monetary policy will remain helpful, but that has not been enough to rev up the French economy and stop a dramatic deterioration of its labor market conditions. The fiscal policy can't help either as a result of budget strictures and the soaring public debt. Germany is also unwilling to accelerate its economic growth to help the recovery in the monetary union.

And there are broader problems the next government will face. Elections have shown radical political changes in France. The left-right certainties have given way to an amorphous and fluid body politic torn apart by massive immigration, borderless Europe and France's epochal identity crisis — a grave danger in a country where rising unemployment and poverty continue to feed social unrest.

The question of EU membership, and of Germany's dominant role in European politics, is also posed. It is now clear that France can only be an increasingly junior partner, and that Germanophobia is no longer the best kept secret of French political leaders.

Three major parties — Front National, France Insoumise (France Unbowed) and Debout la France (Stand up, France), polling at 45.6 percent (16.5 million votes) in the first round of elections on April 23 — are virulently opposed to taking orders from a German-run EU. Marie-France Garaud, an influential advisor to former Presidents Georges Pompidou and Jacques Chirac, and one of the most prominent Gaullist true believers, said last week that "France has nothing to tell Germany," and that France is "facing the possibility of the (German) Fourth Reich."

Doesn't sound good, does it? Big EU changes are afoot. The British view that Europe can only be a free-trading area of sovereign nation states may have a bright future.

Meanwhile, the French elections have no particular meaning for financial markets.

The ECB is setting an upbeat tone to the euro area economy and asset prices. And that is good enough — for now.

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