What does Macron mean for France and Europe?

If the new president succeeds in pushing through long overdue reforms, France might recover some of the influence in the EU and versus Germany. A column by Charles Wyplosz.

Charles Wyplosz
«Expect massive strikes and street demonstrations after the summer break. This is when Macron will have to show his mettle.»

Beyond his fresh look, Emmanuel Macron exhibits two characteristics that make him stand out in French politics: he is genuinely convinced that deep economic reforms are needed and he is a true European. It has been decades that French presidents had no interest in economic reforms and thought of Europe as a convenient scapegoat for not spending more than they could raise and for policies that they quietly approved in Brussels.

Upon arrival at the Élysée Palace, they all commissioned reports on the French economy. Months later, they grandly received the report and proceeded to bury it in a remote drawer. For his electoral campaign, Macron has taken note of all these reports and adopted their bravest recommendations. The diagnosis and the medicine are correct, even if one may quibble here and there or wish for larger doses.

Of course, there is a good reason why previous presidents missed their chances of doing the right thing. France is an intensely ideological country with pervasive marxist influence and a strong preference for centralization, the result of the historical postwar agreement between De Gaulle and the Communist Party. To a surprising degree, France has never shaken this inheritance. As a result, reforms can only come from the center and their potentially beneficial effects are overshadowed by the fact that any change inevitably hurts those who benefit from the status quo. For decades, a myriad of interest groups have honed their skills at stunting any effort at doing away with increasingly crippling arrangements. Macron’s election is the victory of the dynamic part of the electorate over entrenched interests.

Rigid labor markets and oversized state

The pro-status quo forces have lost, not because they are a minority, but because they ended up divided between the far-left and the far-right, having lost faith in the traditional parties that could not stop the economic decline inherent to their lack of action. These forces are well aware of Macron’s intentions and as determined as ever to preserve the status quo.

A showdown is unavoidable. Macron intends to move fast, betting on political legitimacy from his electoral win, which must first be confirmed by the parliamentary elections. When he moves, probably over the summer, the reaction will be swift and powerful. Expect massive strikes and street demonstrations after the summer break. This is when Macron will have to show his mettle.

If he is able to beat back this «social round», he will have five years to deploy his program. Two components are key. First, flexing France’s notoriously rigid labor markets which makes firing legally difficult and costly and where politicized trade unions hold a lock on centralized negotiations regarding salaries, working time, dismissal rules, and much more. Second, reducing the size of the state, which spends more than half of GDP and yet does not deliver a better performance than in other countries where public spending is more modest. Public sector inefficiency is the other reason why France has been on an economic decline path for decades.

Merely grand gestures, again?

Both reforms are seen as dangerous by large segments of the population, which regard labor market rigidity and big government as a protection against the powerfully disrupting forces of technological change and globalization. This is wrong, of course, because disruption is the way the economy reinvents itself and keeps growing. However, creative disruption is not easy to understand. Those who stand to lose – including workers locked in declining sectors and civil servants with a lifetime job guarantee – understand that others will benefit. They are scared and angry, and they will fight as hard as they can. Macron’s biggest challenge is to protect them from his own reforms. Easier said than done.

If and when he jumps that hurdle, Macron will recover some of the influence in Europe that France has lost due to its inability to reform itself. It is often noted that Germany has driven European affairs singlehandedly for a couple of decades. The reason is that no other large country has been able to develop alternative strategies. France’s inability, in particular, has been striking. Successive presidents have championed similar views that the other European leaders see as vacuous and irrelevant, if not outright unacceptable. They have proposed to set up a so-called «economic government of Europe» and to appoint a Finance Minister for the eurozone. Short of a deep change in existing treaties, effectively ruled out in the current political climate, such proposals are seen as grand gestures with no practical effect. It is worrisome that Macron has articulated the same proposals during his electoral campaign.

It may be that he has not thought as seriously about European affairs as he did about the French economy. Yet, he has a window of opportunity because it is finally accepted in official circles that not all is well in the EU, especially in the eurozone. The problems, however, are not of the grand vision type that the French like so much. They are mostly about technical details. The need for fiscal discipline in the Eurozone is undeniable, as exemplified by the dramatic impact of the Greek crisis. The solution, the Stability and Growth Pact crafted in the 1990s by Germany, is fraught. It has failed repeatedly, and will fail again, simply because no national parliament will give its prerogative away.

In search of new concepts for the eurozone

Solving that riddle must involve complex and detailed thinking about the distribution of responsibilities within the eurozone, possibly shifting away from the German federal model, which stands behind the Stability and Growth Pact, toward the Swiss confederal model. Another weakness concerns the Banking Union, which remains incomplete. It needs to eventually include all banks and to include a fund to deal with failing banks.

Germany opposes both, largely for domestic reasons. One can also mention the very large public and private debts inherited from years of indiscipline and from the Great Financial Crisis. Germany’s answer, more discipline and faster growth, is impractical. Asking Germany to absorb these debts through some form of socialization is unrealistic. Solutions have been advanced, but they are highly technical and therefore unappealing to politicians. Finally, immigration is a hot issue everywhere. The current arrangements have not worked either. There is some room between principles and practice.

On all these issues, President Macron may be able to convince the German Chancellor, but he must come up with carefully crafted proposals. Once this is done, Europe will look a lot less like a broken arrangement.