Can Macron make the French connection strong enough to sway Germany?

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By Cormac Lucey

At the end of the 1972 movie The Candidate, Robert Redford’s character, Bill McKay, a young and attractive outsider who has won an improbable election victory, turns around to his campaign manager and asks: “What do we do now?” The newly elected president of France, the 39-year-old former banker Emmanuel Macron, must have similar feelings. Macron may know what he wants to do, but the question is how he can go about doing it.

On the face of it, with more than 65% of the national vote, Macron has a strong mandate. The size of his vote, however, may have more to do with voters’ dislike of Marine le Pen than support for Macron, who secured only 24% of the national vote on the first ballot.

The lurking political danger faced by Macron is that France’s main political parties will seek their revenge in next month’s parliamentary elections. Le Pen’s Front National will offer Macron outright opposition, as will the hard left represented in the presidential contest by Jean-Luc Mélenchon. The Republican party, led by François Fillon, will seek to smother Macron’s En Marche party at birth lest it rise to eventually overtake it.

Remember that Le Pen, Mélenchon and Fillon scored an aggregate 61% of the national vote in the first round of the presidential contest, compared with Macron’s 24%. So Macron has his work cut out for him, though he has already shown a surprising ability to overcome apparently insuperable obstacles.

Macron described himself as liberal in a 2015 interview with Le Monde. He plans similar reforms for France as those enacted in Germany more than a decade ago by former chancellor Gerhard Schröder, with labour law liberalisation, a relaxation of collective bargaining rules and tax reforms. Business organisations will like these plans. France’s belligerent trade unions will hate them.

Macron’s key policies would offer a French version of the pro-market social democratic policies of Schröder, Bill Clinton and Tony Blair. The new president wants to reform the French economy to be better able to contest the EU’s direction with Germany externally.

The irony is that France’s economy is not doing that badly. France and Germany have enjoyed almost identical levels of labour productivity for the past 50 years. The European Commission’s latest forecasts for economic growth in France are 1.4% for this year and 1.7% next year; the forecasts for Germany are 1.6% this year and 1.9% next year.

France’s problems lie in its weak public finances and high rate of unemployment. It ran a government deficit of 3.6% of GDP last year while Germany ran a surplus. Government debt equals 98% of GDP in France, compared with 69% in Germany.

The French unemployment rate exceeds 10%, while Germany’s is below 5%. France’s other problem is that the economies of Italy and Spain — its Latin allies — have been performing horribly.

With the French economy unreformed and underperforming, it is impossible for its leaders to persuade Germany that it must change course for the sake of the EU. The new president’s goal will therefore be to reform his country’s economy. With the eurozone enjoying a cyclical recovery, it is an ideal time for Macron to attempt reform before tackling the zone itself.

Macron wants Germany to agree to eurozone fiscal union. He wants Germany to cut its spiralling current account surplus, which is 8.6% of GDP and in clear breach of EU rules.

He wants to move towards a eurozone superstate with its own finance minister, its own budget, joint debt, and a banking union built on shared deposit insurance. This is to be consecrated politically by a new parliament for the currency bloc. The Five Presidents’ Report on the future of Europe set out five possible scenarios for the EU. As an avowed enthusiast for the European project, Macron favours scenario five: doing much more together.

This foresees member states sharing more power, resources and decision-making across the board. Co-operation between all member states would go further, and the euro area would be strengthened with the understanding that whatever is beneficial for countries sharing the currency is beneficial for all. Decisions would be agreed faster at European level and rapidly enforced.

This would pose serious problems for Ireland. During his election campaign, Macron referred to the “very important” EU ruling last year that Apple owes Ireland €13bn plus interest in back taxes. In answer to a question from RTE, he said: “I do believe that what we have to do in the coming years is to reduce the different gaps in social and tax considerations between member states.”

Similar noises are coming from the Social Democrat candidate for Germany’s chancellorship, Martin Schulz. He said the European parliament has been addressing how “tax evasion and tax avoidance can be combated effectively”, putting illegal tax evasion in the same breath as legal tax avoidance.

Seamus Coffey (above), an economist and chairman of the Irish Fiscal Advisory Council, cautioned last year that EU actions could be more damaging to the Irish economy than Donald Trump cutting corporate tax in the US. In particular, Coffey sees a threat from a regularly mooted EU common consolidated corporate tax base.

Like Macron, Schulz seems to view citizens and corporations as pieces on a chessboard that he should be free to move at his political whim, rather than sentient beings with their own free will. Like Macron, Schulz is no great friend of Ireland’s corporation tax policy.

With Britain exiting, the EU is likely to accelerate moves towards tax harmonisation. That likelihood just got greater with the election of Macron.

The pressure to move in this direction is likely to be all the greater as Macron probably represents French social democracy’s last chance to get the reforms it wants before the insurrectionist barbarians — as it sees them — climb over the political ramparts. If Project Macron fails, as Project Hollande failed politically before him, the road for the Front National to capture the French presidency would become a lot easier.


Published in The Sunday Times (Irish edition)
May 14th 2017