Macron’s chance to prove that he can walk the talk

David Meier is economist at Julius Baer.

At Sunday’s legislative elections, President Macron’s La République En Marche (LREM) movement and its ally Mouvement Démocrate secured an absolute majority. The 350 seats won were not the landslide victory predicted by pollsters (calculating a whopping win of 450 seats or more), nor was it sufficient to win the popular vote with 48.9% of votes.

Notably the record-low turnout for legislative elections of only 42.6% suggests that the French electorate is not overly enthusiastic about the political change Marcon promises. It seems that France has simply given Macron a chance to prove that he can walk the talk, but his actions over the next weeks will be closely scrutinised.

Nonetheless, President Macron does dispose of a stable political backing for the tenure until 2022, and can begin with proposed economic reforms. After all, the National Assembly has the final say for passing such laws which suggests that LREM may introduce reforms quickly.

However, the Senate (upper house) enjoys the final say for constitutional changes, which seem necessary for Macron’s plans to cut red tape and improve political ethics. The senatorial elections on 24 September will therefore also be of importance to assess Macron’s power.

Two-thirds of the 348 seats will be re-elected in September by so-called “Grands Electeurs”, which are in the hands of the centre-right parties and the socialists. It therefore looks more difficult for LREM to gain a large number of seats in the Senate, complicating the process to pass constitutional changes.

The perspectives for France to benefit from long-needed reforms seem to be as favourable as ever before in recent history. For the improvement of potential growth, the proposed labour market and tax reforms will clearly be key.

With tax reforms rather a topic for next year, Macron’s plans to circumvent the legislative process to implement labour market reforms via presidential decrees could raise some discussions. However, resistance within the parliament will not be the largest; opposition will rather come from outside such as labour unions and on the streets.

The main goals of the immediate labour market reform (decentralising bargaining process, merging layers of representative bodies, capping severance pay) are a small first step forward when compared to announced plans – softening of the 35-hour week and making the retirement age more flexible.

We believe that a success in the first steps could indicate that broader reforms are indeed possible, although the longer-term impact may not be felt until years beyond. Luckily Macron is inheriting an economy in an overall cyclical upswing, easing the pressure to deliver an impact in the short term.

Overall, the market reaction has been calm as the LREM majority was already priced in. Probably more important for financial markets than longer-term reforms is the regained confidence in the cohesion of the European Union through wide support for EU-friendly Macron.

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