Mind the Gaps

In May, France handed the reins of its future to Emmanuel Macron, a 39-year-old former investment banker, expecting him to effect reforms that will help the country strengthen its economy and plug existing gaps.

With the legislative elections coming up later this month, all eyes are now on Macron. His actions have implications for the entire Europe, given that France is one of the biggest economies in the region.

But expectations are probably the highest from the French, who believe Macron – someone with experience both as a bureaucrat and an executive - is more in touch with their needs. These needs range from more jobs and higher disposable income to training opportunities, lower taxes and greater corporate investments.

Ludovic Subran, Allianz global head of macroeconomic research and a Frenchman, does a reality check...

France’s unemployment rate hovered around 10 percent in 2016, according to the ‘Excuse My French (Elections)’ report by Allianz and Euler Hermes.

The forecast of 9.7 percent for this year suggests a dramatic improvement is not expected anytime soon. Corporate insolvency rate last year staying above the levels seen before the global financial crisis also doesn’t inspire hope. The result is that inequalities of opportunities have risen between the so-called insiders (those with often open-ended job contracts) and the outsiders (the unemployed).

Millennials - those born between the 1980s and the mid-1990s - are an ambitious lot. Faced with modern-day challenges and intense competition, they’re worried about their job prospects.

Flexicurity – the right balance between flexibility and security in the labor market - is the key. People should have the flexibility to change jobs easily and work without compromising their private lives.

At the same time, they should have job security, with opportunities to upgrade their skills and the promise of adequate unemployment benefits should a job loss occur.

France can reach this balance by lowering labor costs through payroll tax cuts and adaptive labor laws and by increasing employability through improved intermediation and training opportunities.

France’s per-capita gross domestic product – economic output divided by total population (an indicator of a country’s standard of living) - was just slightly higher in 2016 versus 2007. Over the past decade, purchasing power has risen just 1.6 percent annually on average, mainly due to record low inflation. Most households have kept their purse strings tight as a precaution, keeping demand stagnant.

Rising populism and inequalities are a concern that only a more inclusive growth can solve. Restoring confidence among the French is necessary to stimulate consumption. Payroll tax cuts and lower income taxes can put more disposable income into the hands of the French middle-class, encouraging them to spend.

France benefits from a very generous social protection system, which is jeopardized by a lack of trust and financing. A pension system overhaul (points and voluntary savings for example) could help smooth disposable income and put wealth to productive use.

Demand and corporate balance sheets do not seem to be good enough to drive a decisive rebound in investment by companies. Despite an improvement in 2016, corporate investment is more or less stuck at the 2007 level. The corporate sector is losing production capacity, eroding overall potential economic growth.

One of the explanations is the fiscal burden - overall taxes make up 60 percent of gross profits in France compared with the average of just 40 percent for Organisation for Economic Co-operation and Development (OECD) countries. With margins of French companies stagnating below 2007 levels, there exists a 38-billion-euro investment gap for the private sector, even though there are signs of recovery in their plans.

For more on the corporate investment climate in France, read the Euler Hermes France 2017 Barometer.

A reduced, and more importantly stable, tax environment is the need of the hour not just for households but also for companies. This will, in turn, help French companies improve their competitiveness and increase their export opportunities.

In addition, it is time to revive and transform France’s major sectors such as transport and energy, finance, agriculture and pharmaceutical to name a few, and bank on the promising entrepreneurial ecosystem to boost productivity, and eventually, income.

Macron’s nearest-term challenge is to secure a majority in the legislative election. Then, focus will shift to his election promises and how he keeps them. Everyone wants France to be stronger, or at least to give it a try.

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