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Can Macron turn around France’s economic fortunes?

Articles | 6 July 2017

With the election of Emanuel Macron as President of France on the 7th of May and the parliamentary majority for his La République En Marche! party on the 18th of June, optimism in Europe is on the rise. This optimism has seen investors bid the French to German 10 year bond spread in by 40bp since early April and has helped see a strong performance for the French and European equity markets (at least until the recent concerns following more hawkish ECB commentary). 

But it’s not just investors who are feeling more positive on the outlook for Europe and France. French consumer confidence in June showed an impressive 5.1pts increase to 107.9, a 10 year high. Consumers are not only optimistic about the current situation but also the outlook, with the forward looking measure rising 15.2pts to 1.2 on the month. Given the historical unpopularity of former President Hollande (with an approval rating of just 4%!) and the improvement in the growth outlook, the improvement in consumer confidence in France is not particularly surprising. The question will now be, can it be sustained and can President Macron follow through on his promises?

French consumer confidence reaches 10 year high following elections



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Source: Bloomberg, CFSGAM. Data as at 30 June 2017.

One of the first, and most urgent, orders of business for President Macron and his young party will be to reform the rigid French labour market and welfare system. Prime Minister Edouard Philippe has stated that the new government is aiming to agree on a labour market reform bill by September, a potentially optimistic timeline in a country known for its bureaucracy and strong unions.

The planned reforms intend to make it easier to hire and fire employees, spur job growth and move labour bargaining from the sector to the firm level. While most economists agree the reforms are badly needed, President Macron will have a tough task ahead of him in a country where unions and protest have toppled more than one leader.

With France topping the Euro area in both government spending and tax burden (56% and 48% of GDP respectively), the other key area of focus will be fiscal reform. PM Philippe has referred to this reliance on government spending as an “addiction” that requires “will and courage to detox”. The recently announced budget proposes cutting spending by 3% and taxes by 1% over the next 5 years, with a focus on cutting the corporate tax rate from 33.3% now to 25% by 2022. These fiscal reforms and reducing the budget deficit will be key if President Macron is to succeed on another key goal- closer European financial integration. 

This goal will not be possible without support elsewhere in Europe, especially in Germany, where Angela Merkel looks all but assured to be returned for a fourth term as Chancellor. The only remaining uncertainty being what her coalition looks like, particularly whether it will include the SPD (the main opposition party). Merkel has so far held back full support of further integration stating she could back a Eurozone budget and finance minister “if the circumstances are right”, carefully balancing the need for an alliance with President Macron against the concerns of the German electorate.

While this recent improvement in optimism is significant, it is however important to note that similar trends in confidence have been observed leading up to and following other French elections (particularly 2007 and 2012) with most of the gains given back by October. Is it different this time? Without the global financial crisis or throws of the European debt crisis hanging over the continent it just might be!


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