One year into the Emmanuel Macron presidency, a check-list of implemented changes includes reforms to the labour market, education and vocational training; challenges to the rail unions and public pensions; reductions in public debt, and a wealth tax overhaul. All helped by an expanding economy, itself aided by growth in the Eurozone, global trade and low borrowing rates for consumers and companies.
There is still much to be done to turn around the French economy. And President Macron wants to persuade his fellow European leaders to back a more federal, self-confident European Union. At the moment he looks almost alone among his peers in promoting a vision for the bloc. To succeed at the EU level, the self-styled ‘business-friendly’ Macron needs to go further in France, by curbing unemployment, and by encouraging a continued expansion in corporate investment and a reduction in the tax burden.
There is reason to hurry. Some of the improvements in the French economy are no doubt the result of labour market reforms while Macron was still economy minister under President François Hollande. Macron’s government, which has a five-year mandate, has warned that reforms are unlikely to be noticeable in French growth, corporate investment or unemployment rates before the end of this year or mid-2019.
In Germany during the early 2000’s, for example, a similar reform process didn’t show up in the data for as much as two or three years.
There are also external expectations. The International Monetary Fund in September pointed to the need for France to cut public spending, which at 56.5% in 2017 was the highest in the EU as a percentage of GDP, standing out against an EU average of 45.8%. The government says that it aims to bring that figure to around 50%.
Last month France’s budget deficit fell to 2.6% of GDP, less than the EU’s 3% ceiling target for members for the first time since 2007 and lending weight to President Macron’s Europhile credentials. The government is now targeting a deficit of 2.3% for the full year.
Macron’s government has also reformed the ‘impôt sur la fortune’ (ISF) wealth tax in an effort to slow a three-decade old drain of wealthy French nationals leaving the country. The reform keeps in place a property tax – since bricks and mortar can’t leave the country – and introduces a flat 30% rate on interest, capital gains and dividends.
Planes, trains and universities
Macron’s decision to challenge the country’s indebted rail network has brought him into conflict with unions. Despite coinciding with the 50th anniversary of public protest best known for student riots in May 1968, nothing approaching a coherent opposition from within the traditional political parties has materialised, including from the extreme right and left.
Nor has any coordination come from France’s labour unions. Rolling strikes imposed by railway workers and a pay dispute at Air France are drawing dwindling support from the public. Even among students, backing for protests over access to university education looks increasingly marginal.
Leading by example
This is a key target for the Macron government as the President looks to persuade Germany to support his proposals for an EU finance ministry, a common Eurozone budget, and a bloc-wide economic policy. As long as Germany feels like a net subsidiser of poorer EU states, these are unlikely to progress.
Macron is a pro-European federalist pitching the EU as an antidote to wider threats to trade, the environment, security and diplomacy. “Of course there has been a change in leadership in Europe,” said Timothy Garton Ash, Oxford University professor of European Studies, on May 9. France now needs Germany’s help in defining the future for the EU, says Garton Ash, and “Macron needs an answer to that now and not in a year.”
Threats and risks
Twelve months into the job, President Macron’s 45% positive popularity rating among the French electorate, according to an Ipsos-Sopra Steria poll, even looks healthy in comparison to the same period for his three predecessors (François Hollande, Nicolas Sarkozy and Jacques Chirac). Only François Mitterrand in 1981 was more popular at the 12-month stage.
Even if they disagree with the policies, 73% of the electorate think the government’s decisions are in line with its pre-election promises. The French aren’t showing any signs that they believe anyone else would do a better job. In the nation that invented the guillotine, the most damaging label that opponents can muster is ‘Président des riches’.
The risk to Macron’s reforms instead smoulders in any indication that the economy is slowing. For now, expectations are that GDP will be 2.1% this year, double the average of François Hollande’s presidency, and 1.8% in 2019. What’s more, unemployment has reached a rate of 8.8%, its lowest level since 2009.
And while France’s improving economy has benefited from years of ultra-accommodative monetary measures in the euro area, change is coming with the European Central Bank widely expected to ease its foot off the accelerator this autumn. The impact of a different monetary policy on President Macron’s reforms will be worth watching.
This rather constructive reading leaves our preference for European equities unchanged, with respective 1.5%, 3.8% and 4.8% overweight allocations to conservative, balanced and growth portfolios. Attractive valuations in European stocks, a supportive domestic-driven economy, coupled with the European Central Bank’s commitment to a policy of negative deposit rates and continued asset purchases until September – mean that we expect markets to recover now.
Stéphane Monier (pictured) is chief investment officer at Lombard Odier.