Encore M. Macron

The media focuses on identity politics …

Large parts of the western world breathed a sigh of relief that Emmanuel Macron was yesterday re-elected French President, thereby avoiding the prospect of a far-right leader in the form of Marine Le Pen whose Eurosceptic views would have posed a threat to the integrity of the EU. Macron’s victory margin of 59% to 41% was narrower than the 66% to 34% margin achieved five years ago, prompting a lot of media discussion as to why some voters have switched their allegiance to a more radical candidate, but it was still wide enough. Today, the moderates can celebrate that the worst-case geopolitical outcome has been avoided – for now. For my own part, Macron’s victory fulfils the prediction I made at the start of the year that he would be re-elected to the Elysée Palace.

Much of the commentary in the UK reflects the view I expressed five years ago – “a tinge of envy because it represented everything which is lacking from the UK scene.” But like the US and UK in recent years, the defining feature of the electoral debate in France was identity politics – something which is not likely to go away. Having lost two consecutive elections in the final run-off, Le Pen may not be the go-to candidate for French voters dissatisfied with the status quo but there is no room for complacency. Indeed, she may well have polled better had her links with Putin not been quite so close. The fact that large numbers of voters spoiled their ballot papers, reducing the turnout to 63%, suggests that voters were not particularly enthused about either candidate.

… But the economy matters more

One of the problems with identity politics is that it deflects attention from substantial economic issues, and it is the economics which ultimately matters most in the long-run. Macron may be able to consolidate his position over the next five years if he is able to give the French economy a boost from which voters can benefit. Failure to do so may mean that a centrist candidate is presented with a more difficult challenge in 2027. Recall that Macron was elected in 2017 on a promise to "liberate work and the spirit of enterprise." He has certainly attempted to liberalise the economy but as the gilets jaunes protests showed in 2018 there are limits as to how much voters will accept.

On the surface the French economy has performed reasonably well, the pandemic notwithstanding, with the unemployment rate by the end of last year falling to its lowest since 2008 (7.4%). But the figures are not what they appear on the surface, driven in part by a fall in labour participation, whilst the average number of hours worked per week is still 3.5% below pre-pandemic levels. The government has also relaxed labour laws, allowing companies to make lay-offs more easily. As a result, the proportion of workers on temporary or short-term contracts has risen and as of 2020 it stood at 12.3% of total employment. Macron also presided over an end to the wealth tax, replacing it with a fixed one-time levy on capital gains. The upshot appears to have been a rise in income inequality over the past five years. According to a study by the Institute for Public Policies, the top 1% of wealthy individuals enjoyed a 2.8% income gain (after taxes and benefits) whilst the bottom 5% saw incomes fall by 0.5%. Increasing the extent to which the French economy copies these aspects of the Anglo-Saxon economy is not universally popular with voters. They may not wear more of the same policies over the next five years.

In the near-term, the survey evidence suggests that as in other western economies, cost of living issues are at the top of the electorate’s agenda. Macron has already placed curbs on the extent to which domestic energy bills can rise, with the burden falling on the profits of state-owned utilities, whilst some households will receive an energy rebate. However such measures will add to the fiscal burden, whilst plans to reduce carbon emissions which include the construction of new nuclear facilities will further add to the deficit. This comes after the IMF called in January for a plan to gradually tighten the fiscal stance.

All this raises the question as to how Macron intends to pay for his fiscal largesse. His policies are predicated on strong growth but following the downgrade in the latest IMF forecast for GDP growth of 2.9% this year (from 3.5% in the October projection), growth is likely to slow further. In common with nearly all western countries, trend growth in France is set to decelerate with the IMF’s forecast implying a potential growth rate of just 1.3% per year in the medium-term – considerably below the average of 2.1% estimated over the period 1990-2008.

One plan under discussion to free up resources is reform of the pension system with suggestions that the retirement age could be raised from 62 today to 65 by 2031. This will be a hugely contentious policy which will almost certainly result in significant opposition. Towards the end of the election campaign Macron was already backing away from his original position, suggesting a longer transition beyond 2031 and increasing the age only to 64. It is, however, clear that some form of fiscal action will be necessary. According to the IMF’s latest Fiscal Monitor, the French debt-to-GDP ratio is set to edge up to 114% by 2027, putting it significantly behind only the traditionally indebted economies of Italy and Greece amongst EMU countries.

Final thoughts

Macron’s re-election is good news for an EU that is seeking to tighten ties in the response to the military threat posed by Russia and the economic challenge posed by China (and to some extent the US). In many ways he represents the political centre with ambitious plans to modernise the French economy and reinvigorate the EU. But many French presidents have talked about the need for economic reform only to find that their policies were derailed by domestic opposition. Some of Macron’s economic agenda is very radical and we can expect significant pushback from an electorate that is already feeling the squeeze. If he pushes ahead with plans that alienate voters – notably on pension reform – there is no guarantee that a moderate will necessarily win the 2027 election, particularly if the challenger is someone other than Marine Le Pen.