Jury out on Macron's structural reforms of the French economy

EmmanuelEmmanuel Macron, who officially began his five-year term of office as French president on Sunday, has a busy agenda ahead, and not the least of his pressing tasks is his intention to rapidly implement the “structural reforms” that were at the heart of his campaign manifesto. Indeed, German Chancellor Angela Merkel and European Commission president Jean-Claude Juncker underlined the point just hours after his election victory on May 7th.

The reforms are more than simple measures, and are the linchpin of his programme. Macron believes his ability to engage on what he called “the reforms that have for too long been put off” will determine the return to growth in France, and as a result the renaissance of French influence in Europe and the world,  and the defusing of social tensions in the country.

Everything, then, hinges on the reforms. This approach is not something born from Emmanuel Macron’s vision alone, but rather reflects a theory that has been reiterated over the past 30 years. Recurrent reports by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have called for “structural reforms” in France (but not only), and the majority of bank economists also believe that growth will not pick up in France without them. At his regular press conferences every six weeks, European Central Bank (ECB) chief Mario Draghi concludes his comments by demanding that eurozone countries accelerate “structural reforms”. It is the same mantra from the European Commission and, of course, the German government which now regards Macron as being a president at last capable of reforming France.  

This obsession with reforms is based on a patently liberal economic vision. What is implied by the necessity for reforms of the structure of the economy is the reduction of the obstacles to the functioning of the markets of goods, services and labour. They are therefore aimed at doing away as much as possible with market regulations in order to allow for the most ‘perfect’ price-setting possible. This means “individualizing” economic relations as much as possible, to establish a market that is the most “balanced” as possible.

“Structural reforms” are therefore an application of neoclassical theory onto the real economy. What is, in theory, the expected result? A fall in prices of goods and services, and also salaries, thanks to an increase in competition. This deflationist effect is supposed, in return, to favour activity thanks to several effects: an increase in purchasing power, the incitement of innovation, the increase in external competitiveness and an increase in the appeal for foreign investors. Lastly, a trickling of wealth from the most well-off towards those underneath would supposedly contribute to the general wellbeing and a reinforcement of growth.

This vision is deeply anchored in the beliefs of the new French president, who has pledged to overcome the “blockages” in society and to “liberate energies”. It is because these reforms are essential to all the rest of Macron’s programme that he has made clear that he will rapidly set them in motion by government edicts. The first of these reforms will concern employment, including a reduction in the perceived rigidities of labour laws and restructuring of unemployment benefits in order to encourage the jobless into work, reducing the unemployment rate and improving the country’s competitiveness. Everything else would follow on from that. But would these reforms really be a panacea for France’s economy? Nothing is less certain.

A recovery that is multiplying inequalities

Contrary to what Emmanuel Macron repeated throughout his election campaign, in a position shared by his conservative rival François Fillon, France has not “put off” reforms. The application of structural reforms is a general phenomenon which has accelerated with globalization because, for many, they have been perceived as an answer to increased competition. The OECD establishes a ranking (indicators) of deregulation reforms introduced by countries which makes clear that France, along with other developed nations, has engaged in the process.

So it is that, according to the OECD, between 1998 and 2013, France has reduced regulations of its goods markets (what the organisation calls “product market regulations”, or PMRs) by -39%. While that is less than in Germany (-43%), it is far more than in two countries that traditionally show superior growth to that of France and Germany, namely Switzerland (-28%) or the United States (-3%). So the link between reforms and growth is not established by the facts.

The OECD also provides rankings of employment protection legislation, what might be termed as the rigidity in a country’s labour market, which measures the legal difficulties for employers to fire individual or collective numbers of staff. It finds that France has reduced these by -3% between 2003 and 2013. Furthermore, the OECD ranking does not take into account the French labour reforms known as the Rebsamen law, in 2015, and the El Khomri law of 2016, both of which further reduced the protection of employees’ protection rights. But the evolution can appear to be a modest one, when taking into account the measures introduced in European countries, notably Spain, under the pressure of the so-called “troika” (the EU, the IMF and the ECB) in response to the European debt crisis. Nevertheless, it is factually inaccurate to argue that France has not engaged in reforms, that it has a more rigid labour market than others or that, as claimed by Emmanuel Macron, it is  “the only country that has not dealt with mass unemployment”.

The OECD indicators also place doubt on the supposed link between unemployment and rigid labour market laws. For if that suggestion was true, it would not be posible to explain why Germany, which the OECD considers has more rigid laws governing its labour market than France (despite Gerhard Schröder's “Agenda 2010” reforms), is today at a situation of virtual full employment. How also can it be explained that Spain, which now has much more relaxed labour market laws than in France, has not far from double the rate of unemployment than in France (10.1% of the active population in France, 18.2% in Spain)?

It is true that unemployment in Spain is falling fast, but that is logical given that it was previously at almost 25%. The fall is a coherent one set against the country’s economic recovery, but nothing indicates this to be the effect of reforms and, despite the economic turnaround, the number of jobless in Spain is forecast to remain high over the years to come. Last month, the Spanish government announced that it expects the unemployment rate to be 11.1% by the end of the year 2020, which would represent a higher level than that currently reached by France.

It is therefore quite uncertain that the worsening of unemployment in France since 2008 is due to an absence of “reforms”, along with the rigidity of its labour laws. The US Center for Economic and Policy Research, a think tank that declares itself to be “non-partisan”, published a study in April in which it observed that in France, the “substantial decline in employment since 2008 is not easily explainable by the “structural” problems singled out by advocates of neoliberal reforms. For example, it is difficult to point to any major changes in the structure of labor market institutions over the past decade, such as disincentives to work, that would explain this fall-off in employment. If anything, reforms have moved in the opposite direction”. That means that there is no compelling evidence that new reforms would alone lead to a massive fall in unemployment in France, as claimed by Emmanuel Macron.

In some countries, structural reforms have effectively encouraged a fall in the number of jobless, principally by reducing the length of working hours along with the development of part-time work. That is notably the case in Germany and in the Netherlands. Between 2007 and 2016, the proportion of the active population engaged in part-time work in Germany rose from 18.2% to 26.8%, according to the European Commission’s statistics office Eurostat. In parallel, France, where the number of those engaged in part-time work currently represents 18.1% of the active population, the trend has been a decrease in part-time employment. The gap in unemployment rates between the two countries is in large part situated within this context, where a reduction in working hours naturally leads to a fall in unemployment, but which also places active populations in a more vulnerable situation.

It is therefore no surprise that the OECD sounded the alarm last November over the nature of the current economic recovery which paradoxically is creating more inequalities despite the fall in unemployment. In Germany, between 2007 and 2014, the Gini coefficient which is used to measure income inequality, showed a 0.007% degradation of the situation there, which was more than the average across OECD member countries. That also compared with a positive figure (i.e. a trend towards greater income equality) in France over the same period of 0.001%. The logic here is that a statistical drop in unemployment would come at the price of a rise in part-time employment and inequality. But in his interview with Mediapart on May 5th (see the full video version in French here, and extracts in English here), 48 hours before his election, Emmanuel Macron declared: “On the economic and social issue, that of unemployment like that of inequalities, if I fail to sort it out, to provide an answer, in five years it will be even worse.” To succeed in meeting this double challenge through reforms alone will not be an easy task.   

Eurozone reforms often striggered negative spirals

To reach a true reduction in unemployment, there must obviously be economic growth. But here, once more, liberal economic theory has it that only structural reforms are capable of speeding up French growth because the other levers, notably budgetary, are either ineffective or impossible. But the gamble with this is even more audacious than that with the question of unemployment, for a link between structural reform and growth is the most uncertain. In an article published last December by German economist Daniel Gros, director of the Brussels-based think tank Centre for European Policy Studies, he observed: “The mantra that structural reforms will deliver vigorous growth cannot be verified based on the EU’s own growth record.”

The successive waves of European policies (like the “Lisbon Strategy” aimed at making the EU “the most competitive and the most dynamic knowledge-based economy in the world” by 2010) have not produced an acceleration of economic activity. Between 1995 and 2010, the rate of growth in the EU shrunk by 11.9% in comparison to the period 1980-1995 – however much that earlier period appears to some as having been a regulatory nightmare. The phenomenon is not isolated: the potential for growth in all advanced economies, which have all engaged in “reforms”, has receded over the past 30 years. Why would it be that France, which is not a country locked down by regulations, contrary to what some pretend, enter a period of economic splendour thanks to such reforms?

There are of course counter examples which are often cited, such as Germany and Spain. But these two economies are hardly comparable with France. In Spain, the reforms led to a significant fall in the cost of labour, which in itself led to the mechanical rise in competitivity in sectors highly sensitive to costs. Growth was indeed strong, reaching, over the past two years, between 2.5% and 3% annually, but for the moment it has only allowed for the effects of the crisis to be contained. To copy the Spanish model would be absurd for a country like France – unless one seeks to impose a brutal fall in household revenue.

As for growth in Germany, it is superior to that of both France and the eurozone average, but remains below 2% (1.9% in 2016 and a forecasted 1.7% this year) which is hardly exceptional given this economy’s full employment, high industrialization and strong exports.

In fact many people, beginning with Emmanuel Macron himself, believe that Germany should stimulate its growth in the interests of the eurozone. Let’s not forget either that the German recovery came about in ‘ideal’ conditions. The adjustment was isolated, without competition from other states in the eurozone; growth was achieved with a temporary but inevitable increase in the budgetary deficit and it occurred when there was a strong demand for German products from emerging countries. None of this resembles the situation in France in 2017, where the current industrial situation has little in common with that of Germany’s productive fabric in 2002, far more industrialized and exporting, notably turning out equipment and top-of-the-range goods.

In a note published on May 7th, Christopher Dembik, an economist with the French subsidiary of Danish investment bank Saxo Bank, underlined that the challenge for the new French president will be less the question of reducing labour costs than improving productivity. “The two traditional engines of French growth are demography and productivity,” he wrote. French growth has fallen significantly over recent decades, from an average 2% between 1990-2000, down to 0.8% between 2009-2014 (while nevertheless remaining relatively high). The pro-reform camp believes that their introduction would favour competition and company profits, but in reality they would lead to the opposite. Over the past 30 years, the growth in productivity has been slowing down everywhere, even in Germany.

The United Kingdom, one of the most economically liberal of any country, according to OECD criteria, is experiencing a virtually inexistent, even negative, growth in productivity. Here again, it is difficult to see how Emmanuel Macron’s structural reforms can escape the trend. US economist Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research, co-authored a study on the French economy in which he underlined that companies would not in theory need such reforms in order to invest given the weak cost of borrowing in France.   

How can the fall in productivity despite reforms be explained? There is obviously the effect of the financial crisis which, by reducing the capacity for the financing of the economy, has reduced the capacity of businesses to invest. Another reason may be the “secular stagnation”, a concept theorized by US economist Lawrence Summers; this would have it that technical evolution, the development of the service sector, and the demographic transition, no longer allows for the strong growth witnessed in the past. In this case, the “reforms” would be able to compensate a part of this slow-down. But that is far from certain. In a highly finance-bound economy, where the governance of companies is centred on financial returns, investment in the real economy is less attractive, while the fall in investment weighs on productivity and future growth. That is a theory notably argued by French economist Michel Aglietta.

According to that perspective, the reforms, by encouraging the financial returns of companies and by lowering labour costs, could even have a more negative effect. Especially given that, as was underlined in a 2013 study by the British think tank, the Institute for Fiscal Studies, low real wages lead companies to employ more people than they otherwise could have done, and thus reduce their productivity. Reduced labour costs make investment less urgent.

The British economy is the perfect example of this underlying fall in productivity, to which the practice of “zero-hour contracts" among other things, contributes. It can be argued that the fall in unemployment has the consequence of reducing productivity and, as a result, the potential future growth. This choice might be understandable from a political standpoint, but it carries with it important medium-term risks. It cannot be an answer to the problems in France, and it could even put an end to the French economy’s strength, which is its high productivity, notably in the service sector.

There remains one other issue: even liberal economists agree that structural reforms carry short- and medium-term risks. The liberalization of the labour market can incite companies to rapidly reduce their overcapacity, and the effect on household demand could initially be negative. Which is why, in 2003, Gerhard Schröder demanded budgetary room for manoeuvre to cushion that effect. In France in 2017, that cushion would not exist because of the continuing drive to balance the budget. But above all, these necessarily deflationist policies would be introduced while inflation is still very weak, and when the ECB readies for a tightening of monetary policy. All of which means that the dangers of a negative impact on the economy cannot be excluded. Could that impact be a limited one? Perhaps, but the outcome is uncertain while the global economic situation, despite a slight upturn, remains fragile.   

So just what purpose do structural reforms serve? German economist Daniel Gros observes that they allow for “better resistance” to crises. But from that point of view France has already demonstrated a capacity to resist, thanks to its automatic stabilisers in the 2007-2013 crisis. Since 2007, its Gross Domestic Product (GDP) has grown, perhaps in a more linear manner than in other countries, by 5.26%, which is more than the eurozone average growth in GDP of 3.23%. With business leaders counting on their introduction, structural reforms could have a positive effect on confidence, but that would soon disappear if it is not accompanied by solid growth, or support for that growth.

That is the lesson of the eurozone, where reforms have often opened up a negative spiral. From that point of view, a unilateral French adjustment would be problematic at a time when Germany has no intention of changing its policies nor of modifying the budgetary rules of the eurozone, as confirmed by Chancellor Angela Merkel on May 8th. Yet during the financial crisis, the French automatic stabilisers played a protective role for all the European economy.

The consequences of the reforms will not be necessarily entirely negative, but their importance appears largely overestimated by France’s new president. It appears very much as if the mantra that structural reforms are the only way forward serves to hide an incapacity to define economic policies specifically adapted to France.

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• The French version of this article can be found here.

English version by Graham Tearse