The next occupant of the Elysée, the French official presidential residence, will enjoy a very favorable economic configuration. This will give the new leader greater leeway in the day-to-day running of the country and also provide more room for manoeuver in preparing the reforms the president wishes to implement. It is always easier to change the rules of the economy when there are fewer limitations on it.
The first reason for optimism is that the euro area is doing much better. Growth is set to move up a gear in 2017 as compared with the 1.7% witnessed in 2016. Spain, Germany and even Italy are displaying convincing uptrends, and France is taking the same track. Trade is therefore set to increase in the euro area and promote expansion.
It is worth remembering that a European product is partly manufactured in France and partly in other countries in the zone. An improvement in activity in one country therefore has a positive impact on the other countries along this value chain. This situation means more a tight-knit dynamic overall, encouraging an upsurge in trade and hence growth. This is one of the advantages of the creation of the euro area. Meanwhile, companies do not run into currency hitches when they trade between one country and another. So we can instantly see the impact for business of a change in France’s currency as compared with its main trading partners. A reintroduction of the franc would be disastrous and would trigger severe uncertainty. The value chain would be broken and all countries in the zone would be hit.
One of the main reasons behind this economic improvement is the stability and greater clarity of economic policies. In the euro area and France, fiscal policy is neutral and sometimes slightly expansionary. This policy does not lead to uncertainty, unlike the implementation of austerity policies between 2011 and 2013. Changes in fiscal policy no longer dictate behavior. Mario Draghi’s monetary policy is clear: he does not want to change his low interest rate-based monetary policy as growth must be further improved, while inflation is still low.
This policy mix leads to lesser uncertainty and greater visibility over the longer term for all economic players, and this visibility encourages more risk-taking: this is why investment is becoming more robust again. In France for example, capital goods orders are stepping up a pace, pointing to a forthcoming expansion in French companies’ investment. Industrial investment surveys also point to the same conclusion.
Job growth is also picking up, and this is particularly noticeable in the retail sector. A more robust outlook, less uncertainty and clearer long-term visibility are encouraging companies to recruit. This is a strong signal from business leaders. The ensuing increase in revenues strengthens cycle momentum.
With stronger job creation and increasing investment, the economic cycle becomes virtuous and more self-sustaining. It will even benefit from a more favorable international context as international trade is speeding up. Trade between the euro area and the rest of the world is set to surge, which will bolster economic activity momentum.
As Mario Draghi has no intention of changing his monetary policy, in order to avoid a negative shock on activity, the cycle can gather speed. This situation is a bit like the growth trend seen at the end of the 1980s and the end of the 1990s: world economic activity is firming up and the cycle in the euro area is more virtuous and self-sustaining. At the time, in the late 80s and late 90s, this situation led to a sharp acceleration in the pace of growth. We cannot expect growth in 2017 and 2018 to reach the same rate, but we are set to witness faster growth than performances over the years since 2013 i.e. 1.6% for the euro area and 1% for France. We are now poised to see figures well above these recent statistics.
So the economic situation for the new President is much better than for the previous occupant of the Elysée palace when he arrived in 2012: so we will therefore expect more from the new President. In 2012, growth was close to 0% with no signs of a swift recovery. France’s partners within the euro area were also struggling; Italy and Spain were in the throes of a recession, while Germany was suffering sluggish growth. So François Hollande had limited leeway, but the situation in 2017 will be much less restrictive.
The new President will be buoyed by the traditional post-election surge in public enthusiasm, and this usually generally creates a parliament where the incoming President holds a majority. French citizens are legitimists and will give the new leader a comfortable number of seats in the French parliament: this is what the first polls on the June general election suggest.
At the same time, the change in economic policy could be a source of uncertainty for households and businesses. The cycle that is currently developing is partly based on a reduction in uncertainty, so it is vital that a shock be avoided in order to restrict the risk of a full-blown fracture. Looking at the reasons behind this uncertainty, I would particularly mention ordinances on labor market measures that could be taken by if Emmanuel Macron wins on Sunday. This is a very touchy issue, as shown during the adoption of the labor reform bill known as the El Khomry law.
So major efforts will be required to explain policies to the French population, a bit like the Federal Reserve’s actions in the US, as it makes a great song and dance about announcing the schedule for its rate hikes so that investors can change their projections, making for seamless transition. This approach works fairly well: rate hikes have not led to an uncontrolled rise in long-term rates, nor dramatic capital outflows from emerging countries. The new French President will have to adopt a similar approach to avoid the risk of pushing things to breaking point, which would be bad news for all concerned. The President will have to drive the message home again and again to win over the country.
In a disjointed and dissatisfied nation, the decision will be between support for the new President by giving him/her a majority in the forthcoming parliamentary elections, and the risk of uncertainty triggered by the new economic policy. In view of France’s divided society, there will be no honeymoon period and disgruntled voters who did not get what they voted for in the first round of voting will not miss out on any available opportunity. The new President’s efforts to explain measures will be key in setting the French economy on the path to faster and sustainable growth. This is the impetus that is really required.