analysis
As of: 04/25/2022 5:56 p.m
France’s economy has recently grown faster than Germany’s. However, it is questionable whether the re-elected President Macron will be able to continue on the path to economic success.
The re-election of Emmanuel Macron as French President has brought relief to the financial markets and to the boardrooms of many European companies. If the right-wing nationalist Marine Le Pen had made it into the Elysée, France would probably have become even more protectionist and would have accumulated more debt. Both the French unions and the employers’ association Medef expressed their relief at Macron’s election. “The worst was prevented,” said the general secretary of the CFDT union. “The republic is saved,” tweeted another union boss.
“German industry relieved”
The German economy also welcomed the election result. Macron’s re-election is an important sign for France and a united Europe, said the head of the Federation of German Industries (BDI), Siegfried Russwurm. “German industry is relieved that France remains a strong partner in a time of international crisis.” There were similar tones from the association of mechanical and plant engineering companies. “A French President Marine Le Pen would have led France and the European Union into a deep internal crisis,” said VDMA President Karl Haeusgen.
“The French voters saved France and Europe from major problems,” said the President of the Munich Ifo Institute, Clemens Fuest. According to the economist Friedrich Heinemann from the ZEW Institute, the outcome of the election is a blessing for France’s economic perspective. The expansion of the state economy and a populist debt policy under Le Pen would have greatly clouded France’s growth prospects. “A victory for Le Pen would have shaken the EU to its very foundations and in the long term would have put a question mark over the viability of the European common currency,” speculates Thomas Gitzel, chief economist at VP Bank.
Le Pen would have hurt the economy more
If Le Pen were to win the election, the liberal research institute Institut Montaigne calculated that there would have been a loss of government revenue of more than 100 billion euros – after evaluating the election program of the right-wing extremist candidate. But even with Macron’s program, the institute estimates that there will be a loss of 44.5 billion euros in revenue.
The current and incoming president has promised to continue labor market reforms, raise the retirement age from 62 to 65 and cut taxes on companies. How much of it he can implement is uncertain. The pension reform in particular is met with widespread resistance from the population. During Macron’s first term in office, tens of thousands of people took to the streets to protest over the pension plans. Macron then suspended his pension reform – also because of Corona. During the election campaign, the President was unusually vague. A pension at the age of 65 is not a dogma, he stressed.
Will the pension reform succeed at the second attempt?
Whether Macron gets the pension reform through in his second term will also depend largely on the parliamentary elections in June. If his party “La République en Marche” does not get a majority, it will be difficult. Macron’s party would then have to form an alliance with the Greens or even with Jean-Luc Mélenchon’s far-left party. Such a government would then probably make big concessions to the socially disadvantaged – and significantly increase social spending.
Economists expect Macron’s reform drive to slow down in his second term of office. Armin Steinbach, economist at HEC Paris, does not believe in “courageous” economic reforms like those of 2017 and 2018 with the abolition of wealth tax, the privilege of income from capital or the easing of protection against dismissal. Because the President must reconcile the divided “Grande Nation” and win back the trust of many disappointed citizens. Many see Macron as the “president of the rich” and therefore stayed away from the election – or voted for the extremist parties. Strengthening purchasing power – a topic that dominated the election campaign – should initially be at the top of Macron’s agenda. With the latest relief package to cushion high energy prices, the French government has hardly been able to appease many angry French people.
“France has left Germany behind economically”
France’s economy is doing better than it has for a long time. Last year, gross domestic product (GDP) grew by seven percent, the fastest for half a century. For comparison: In Germany, economic output increased by only 2.9 percent. “France has left Germany behind economically,” said Berenberg chief economist Holger Schmieding.
In particular, increasing private consumption proved to be a growth engine. “It has developed more dynamically than in other countries in the euro zone,” says an analysis by the French investment bank Natixis.
So far there is no threat of recession
Even the Omicron wave survived the French economy better than Germany. In the fourth quarter, GDP increased by 0.7 percent, while it shrank by 0.3 percent in Germany. Unlike in this country, there is no threat of a recession in France for the time being.
The French job market also developed splendidly. The unemployment rate fell from 9.5 percent to 7.4 percent during Macron’s first term. Even when it comes to start-ups, France has blossomed into a model student in Europe. The number of young companies has almost doubled to around one million within five years. 26 tech start-ups are now worth more than one billion euros and are considered so-called “unicorns”.
Upswing on credit
However, Macron failed to stem the industrial downturn. The number of jobs in industry fell. In addition, the general economic upswing was bought at a high price. France’s national debt climbed to almost 115 percent of GDP. The country is now running up bigger debts than Italy. In the corona pandemic, Paris spent an additional 600 billion euros on support measures. For comparison: In Germany, the national debt is 71.4 percent of economic output.
In his second term, Macron could be tempted to further increase the debt in order to strengthen or at least maintain the purchasing power of the French. Could France thus become a “powder keg” in the euro zone? Berenberg chief economist Schmieding does not believe that. As long as growth dynamics remain high, France’s growing debt will not be a major problem.
For the EU and Germany, an economic policy based on credit would certainly have noticeable consequences. Macron has indicated several times that he wants to relax European debt rules. The 60 percent limit for government debt is no longer up to date. According to the Maastricht Treaty, the public debt of EU countries must not exceed 60 percent of GDP. Hardly any European country has followed this rule for a long time.