Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election

marion_amiot_focuseconomics.jpgMarion Amiot is a Senior Economist at Oxford Economics, where she has been working since 2015 specialising on the French economy and the Eurozone. Prior to that, Marion worked in various macroeconomics research teams in the financial sector and independent macroeconomic research firms. She holds an MSc in Political Economy of Europe from the London School of Economics and a Master in Economics from the University Paris Dauphine. Follow Marion Amiot on Twitter @mapamiot.

FocusEconomics: The candidates offer economic programs that differ greatly from each other. Who has the best economic plan? Why?

Marion Amiot: In terms of boosting growth and potential output, Macron’s programme is best. His €50bn investment plan and a reduction of taxes on corporates would boost investment and productivity gains and accelerate the labour market recovery, raising GDP growth by 0.5pp above baseline by 2022. In terms of bringing the government deficit to equilibrium, Fillon’s programme is best as he plans to outsource some public services to the private sector. However, austerity measures would weigh on growth.

FE: The government and the EU have been at odds over government spending and the country’s fiscal deficit over the past years. What can we expect of the central government’s deficit in the next five years under each candidate’s plan?

MA: Fillon would likely bring the government budget to balance by 2022. Macron is likely to follow the EU fiscal rules, continuing the gradual reduction of the public deficit below 3%. Le Pen would likely break the Stability and Growth Pact rules and widen France’s public deficit below 3% as soon as 2018.

FE: Front National leader Marine Le Pen is set to pass through the first round of voting with no major obstacles. What could we expect of a possible Le Pen presidency and how would it shift the balance of power in Europe and the EU? What could we expect of the role of France in the EU with the other candidates?

MA: In the case of a Le Pen presidency, it is still unlikely that she would gain a majority in parliament and thus it would be difficult for her to hold a referendum on EU membership. Nonetheless, if that were to happen, Le Pen would first need to renegotiate France’s relationship with the EU, sparking uncertainty about the future of the Euro and weakening France’s position as a leader of EU integration processes. But we would expect the period of negotiations to last around two years and Le Pen ultimately to back down on her claims. In the case of Macron or Fillon as president, we should see a push for further integration at all levels of the EU. Macron has a more federalist view. He would push for the creation of a Eurozone budget governed by a Eurozone minister of finance. Fillon is more confederalist and would push for more EU integration governed by heads of state. He would push for some debt mutualization mechanism in the Eurozone backed by a political union.

FE: Macron has an ambitious reform agenda. Do you think he will be able to implement this? What is your outlook for the parliamentary elections and how will this affect policy making in France? Will Macron have support in parliament?

MA: Emmanuel Macron is the most likely candidate to win the French presidential elections based on what polls suggest. Yet, it is fair to say that if elected on the 7th of May, he is unlikely to implement his reform agenda in full. Although French voters have traditionally given a majority at the National Assembly to their newly elected President, this time could be different. The French party landscape is very fragmented this year with four parties attracting 20% or more of voters’ approval ratings. Interestingly, Macron’s party En Marche! has followed the candidate’s trajectory in polls and now ranks first ahead of the Front National and the Republicans, suggesting it might be the largest party in the parliament. However, En Marche! is a new party and thus polls are less reliable than for the establishment parties. Moreover, a large part of En Marche! candidates for the legislative elections are inexperienced politicians as they come from civil society, which could put some voters off as the campaign for the legislative starts.

A likely scenario is that without a majority in parliament, Macron may have to seek to form a coalition in government. Positioned on the centre-left of the political landscape, En Marche! would find natural allies in the centre and socialist parties, of which numerous members have already given their support to Macron. At the same time, Macron’s most liberal reforms (e.g. lowering the corporate tax rate) should find support among the right-wing Republicans.

That said, policy making in France is likely to be more constrained if Macron has no majority in parliament. The French political system and thus policy-makers have traditionally operated in a biparty system, with the Republican and Socialist parties opposing each other rather than seeking to build consensus across fractions. The question would thus be whether political practices could change to a more consensus-building equilibrium.

FE: Macron aims to bring unemployment down from 10% in 2016 to 7% in 2022. The drop in unemployment is expected to come from faster growth but also from the implementation of reforms. What key reforms are needed to achieve this?

MA: Macron’s programme includes a €50bn public investment plan, which would inevitably boost activity and thus employment, especially because it is coupled with only a few austerity measures. The key structural reforms needed to reabsorb unemployment in France in the long-term are threefold. First, companies need more incentives to hire. These can be given by lowering the tax and administrative burden linked to labour for firms, i.e. a reduction of social security contributions, changing the thresholds for unionization, etc. Second, the labour law and industrial relations could be simplified (e.g. set at firm- instead of sector-level) to give firms more scope to respond to the idiosyncrasies of their activities’ business cycle. Third, there is a need to focus on training, particularly for the long-term unemployed, but also for younger workers, which struggle to enter the workforce.

FE: Macron plans to deepen European integration and wants to push for a common euro area budget managed by an EU finance minister. Do you think this is feasible or would these measures run into fierce opposition? What would be the outcome for the economy?

MA: Macron’s European vision sounds a bit too ambitious for a European Union which is currently barely coping with the rise of populist parties. Adding to that, the German vision on Eurozone integration remains opposed to debt mutualization, and I don’t think this would change even if SPD Martin Schulz were to become German chancellor in the autumn. Nonetheless, elections in France and Germany this year, coupled with the start of Brexit, are likely to result in some form of increased cooperation in the Eurozone. We should expect first steps towards some kind of fiscal and political union. But as with most European projects, it will take a few years until all EU member states’ interests are aligned, especially if they have to clarify their position on Brexit at the same time.  Overall though, any form of fiscal and political union would be a welcome addition to the Eurozone, as it would add a buffer mechanism for the Eurozone countries and should ease their ability to respond to crises, as well as contributing to bringing the economies economic cycles closer together and thus facilitating the transmission of a common monetary policy.

FE: Macron plans to increase investment by reforming capital taxation, what other reforms can he pursue to boost investment?

MA: There are two other axes of Macron’s private investment boost. One is improving productivity of the French economy as a whole, with a government investment plan focused on improving infrastructure and public services, which should raise the relative return on investment for companies. This seems sensible as cuts to public investment to lower the government budget deficit since the Eurozone crisis have brought public investment to below its 2000 levels. The second axis involves reducing the burden of taxes on labour for firms. By boosting companies’ profit margins, this should also raise investment.

FE: What impact will Macron’s proposed implementation of a universal pension system have on the country’s finances?

MA: The universal pension system presented by Macron should only have a marginally positive and short-term impact on country’s finances. The main idea behind it is to streamline the existing system, which is already universal but complex. Macron wants to merge the roughly 37 different pension systems into one. Admittedly it would make it an easier system to reform going forward. However, as the reform does not plan to amend the legal retirement age or any other metric that would change the pension system balance, it will have a limited impact on the country’s long-run finances.

FE: Macron has placed a lot of emphasis on education and how educational outcomes in France are affected by socioeconomic factors. What impact are the main aspects of Macron´s educational reforms expected to have on the economy in the short- and long-run?

MA: It is difficult to assess the economic impact of education reforms as it is difficult to measure the quality of education. Nonetheless, research does suggest that educational outcomes are determined from a young age. Thus, Macron’s proposal to invest more in the early stages of the education system and in schools with children from more deprived backgrounds should have a positive on educational outcomes and broaden access to higher education – a positive outcome for long-run economic growth. There is however a reason to be cautious. Over the past ten years or so, most of the investments and education reforms have not yielded significant improvements in the French education system. This raises the question of whether the system as a whole needs rethinking, rather than just small investment programmes.


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