Why Macron Will Fail

What a relief. It is President Macron who will sit on the table of the European Council, and not a President Le Pen. Macron presents himself as a true believer in the European Project, and he has good reasons for doing so as his fate depends to a large degree on substantial tailwind from the Eurozone. It is exactly this dependence why I argue that a Macron presidency will not be successful to lift France on a higher growth plateau.

At a round table on populism in Europe held in Vancouver the other day, he was presented as the young guy, entrepreneurial and smart who will soon be seen as the European version of Justin Trudeau -a saviour who not only renews France but at the same time returns Europe on a path of growth and prosperity. This optimism is nice but actually not founded in economic theory economic experience. When it comes to domestic reforms then Macron follows very much a supply-side project that wants to increase flexibility in the labor market, undermine some traditional professional monopolies, and to free the arcane animal spirit of small and medium sized companies . During his campaign he stated also to lower the corporate tax rate from 33.5% to 25%; to downsize the large public sector by cutting 120,000 public service jobs. He also said several times to keep France’s budget deficit below the 3%-marge as expected by the Stability and Growth Pact. Latter does not make a lot of macroeconomic sense but has strong strategic value as such fiscal restraint would be the way to convince a skeptical Germany that he is able and willing to do his homework – and thus may earn a small gratification when it comes to Eurozone affairs. Given that France’s main problems are low economic growth and even lower job creation dynamics, then his supply-side reforms will not be successful. As a matter of fact, there may always be good reasons for increased flexibility and so on but then we know that such reforms do nothing to speed up economic growth. The relatively low growth rate of France is not so much the result of institutional rigidities as it is the result of insufficient demand, domestically as well as internationally. Macron is somehow aware of that and thus suggests as a complementary policy a five-year, Euro 50 billion stimulus plan, which would include investments in infrastructure and green technologies, along with expanded training for unemployed workers, focused on young workers who have a low chance to enter the labor markets to acceptable conditions. The idea is a good one but then the volume is very small and nobody can seriously expect that a stimulus of about Euro 10 bn per year makes a big difference.

Those short-comings are the reason why Macron hopes to get some tailwind from the EU, and in particular from Germany as the largest creditor economy. The idea to establish a Eurozone finance minister with his own budget (plus the other reform ideas) is a good one, in particular if such a finance minister would be able to engage in serious investment programs. Is it realistic? I don’t think so, ands the reason is – Germany. Whatever the outcome of the September election will be, none of the two big German parties (and also not the Free democrats or the Green Party) are willing to commit political suicide by giving authority to a Eurozone finance minister who may then soon take over business also on the nation-state. There will be some lip-service but at the end of the day Macron will not get what he wants – additional growth stimulus from outside. Now, one can argue that it does not need Eurozone efforts to create additional demand. It may be already a good thing if Germany would actually be willing to deal with its extremely high current account surplus, that also violates the guidelines of the macroeconomic imbalance procedure. The surplus is not, as Finance Minister Schaeuble likes to argue. the result of German quality products and unreached competitiveness. Rather, it reflects the enormous imbalance between investment and savings in Germany. When a country runs over a long time much higher savings ares than investment rates, then a structural current account surplus is the result. Given the style low interest rate and the low yield of German bunds, it is high time to overcome the economically silly (but politically extremely successful) project of the ‘Black Zero’. Stimulating private investment by serious public spending in infrastructure, future technologies, education, housing and the more is the way to go. At least some of the multiplier effects and also some of the direct effects will end up within the Eurozone, and thus also within France.

Will this happen? Not at all. Such a project would need a revolutionary turnaround in economic philosophy in Germany, not only on the side of political parties but also on the side of the economic profession. Both have manipulated the public over such a long time, that German citizens would see such a project as the end of the economic stability and prosperity. The argument that such a fiscal policy approach may actually safe the Eurozone is without a value as each German citizen will tell you if only all the other member states would have behaved in the same way ads Germany, then the world would be a good one, at least the Eurozone world. It does not matter that this misreads the German story since 2010 and it does not matter that such a view does not make any macroeconomic sense -macroeconomics is not a winning political strategy nowadays in Germany. Things can get actually ugly in two years time (or even earlier) when ECB president Draghi is on his way out, and Jens Weidmann, the incorporation of German orthodoxy will take over. A combination of fiscal and monetary orthodoxy, all under German leadership, should make Paris shudder. Add to this tables a new President of the Commission who will need the support of Germany’s eternal chancellor, and France and the Eurozone will be trapped in a sea of orthodoxy.