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Money Matters

France’s economy needs reform not revolution

By Web Desk
Mon, 02, 17

Yet while France - with public debt about 97 per cent of national output - needs to make its public finances more sustainable, there are bigger threats to its economy than an infraction of the stability and growth pact.

Three of the leading candidates, Marine Le Pen, Benoît Hamon and François Fillon, believe that without radical change France is doomed to decline. This has for years been the consensus in the French establishment. Voters on the left and right now share that disillusion.

Ms Le Pen, who leads the polls for the first round of voting, wants to pull France out of the euro and redenominate most of its public debt in a new national currency. This would trigger the largest ever sovereign default and effectively end the European Union. It would make her other proposals minor details.

Mr Hamon, the Socialist candidate, has ideas almost as alarming for investors. He wants to reform the stability and growth pact and cancel the debts hobbling periphery economies. He favours mutualised EU debt issuance and a common fiscal policy. These ideas have their appeal but do not match political realities. His domestic proposals - reversing labour market reforms, cutting the working week to below 35 hours and taxing robots to fund a minimum income for all - will not create jobs. Mr Hamon is not expected to make it past the first round at present but an alliance with Jean-Luc Mélenchon, another candidate on the left, could change that.

Mr Fillon, in contrast, has promised a blitz of market-friendly reforms. His agenda includes lower corporate taxes, taxes on labour, a higher pension age, longer working hours and cuts to public sector jobs.

For a mainstream candidate, even one so firmly conservative, this too is a radical departure from the usual incremental approach to reform - although even Mr Fillon will not try to bring the budget deficit below 3 per cent any earlier than 2020.

Perhaps the most radical message of all would be to tell voters that France is, economically at least, not in such a terrible state. Yes, growth has lagged behind that in Germany. Yes, too many people are shut out of a labour market that protects insiders and penalises young people. Yes, there is a need to trim the size of the state.

France, however, has huge potential. Its demographics are far better than Germany’s. Workers are relatively productive. Successive governments have shied away from reform of the labour market. A sustained effort to raise participation and lengthen working hours could boost the trend growth rate. This in turn should make it possible to stabilise public debt without extreme austerity.

Emmanuel Macron is the only candidate offering economic optimism, proposing a blend of deregulation and traditional social protections. The policies he pursued as economy minister once seemed iconoclastic but they now look tame in comparison with those of his rivals. The problem is that he has not yet set out policies in detail. He needs to do so, and quickly.

French voters want to break with a status quo that has failed them. This is a useful sentiment if it does not tip into destructive despair.  France needs change. It does not need to burn down the system to achieve it.