The writer is chair of Rockefeller International
French president Emmanuel Macron’s re-election victory may be a triumph for what remains of Europe’s pragmatic political centre, but voters in France are in no mood for more economic reform. Though increasingly angry about the state of the nation, they won’t support any leader who tries to fix what ails it most: the bloated state.
Outside a few tiny outliers and possibly communist North Korea, France’s government spends more heavily than any other in the world.
In 2017, the French had a real choice on this key issue. Macron vowed to downsize the state and his rival Marine Le Pen promised to expand it further. Voters chose Macron by a large margin, giving him what appeared to be a clear mandate for change. Ever the reluctant capitalists, the French public hit the streets in protest when Macron tried to deliver.
Macron had promised to reduce state spending — then a record at more than 56 per cent of gross domestic product — by about 5 percentage points. Instead, under pressure from protests and the pandemic, state spending rose to a staggering 60 per cent of GDP.
France’s government spending is 15 points above the average for developed economies. Moreover, that gap is explained less by heavy spending on education, health or housing than on welfare programmes, which at 18 per cent of GDP is nearly double the average for developed economies.
France is stuck in a welfare trap, spending generously on income transfers but pushed by voters to spend even more, given discontent with the rising cost of living and with inequality.
Despite its strengths, from large-scale manufacturing to luxury goods, France remains at best an average economic competitor. Its growth rate has long hovered at or below the developed world average. And though GDP growth has picked up under Macron, it averaged just 1 per cent a year in his first term, which ranks 13th among the top 20 developed economies over that period.
The French state, taxing heavily to fund its spending habits and muscular regulatory arms, is a major reason for this mediocrity. France’s government deficit is 7 per cent of GDP and its public debt is 112 per cent, both among the heaviest burdens of any developed country.
The French ship of state stays afloat owing in part to wealth accumulated over generations — but even that has a downside. Demands for social levelling are fuelled by one of the most top-heavy billionaire elites in the developed world. Total billionaire wealth doubled under Macron to 17 per cent of GDP, and nearly 80 per cent of French billionaires’ wealth is inherited — among the highest in the world.
To his credit, Macron’s reforms did create pockets of dynamism. He loosened up the labour market, making French labour costs competitive with Germany’s for the first time in years. He scrapped a contentious wealth tax, slowing an exodus of high-end talent.
Above all, those reforms helped drive investment up to 25 per cent of GDP, fourth highest among large developed countries. Concentrated in the private sector, investment is fuelling a new start-up culture and a comeback in cities beyond Paris. But Macron was re-elected at the weekend with a narrower margin of victory and a weaker mandate for reform, so this was probably as good as progress gets for France.
As the first round of voting showed, the parties of the far left and right have expanded, shrinking the traditional parties of the centre to the brink of extinction, and both extremes are united in favour of bigger government. Squeezed from both sides, Macron has retreated from “radical” centrist reform — recently watering down plans to raise the retirement age, for example. Meanwhile, Le Pen’s proposals unequivocally favour a bigger government.
Though it is hard to say how much government is too much, robust economic growth requires balance. Countries need to be aware when the state is too fat or too thin — both can be harmful. France’s government is so oversized relative to the competition, especially when it comes to welfare payments, it is a wonder the country isn’t facing a financial crisis. The state-led model stays solvent because tax compliance is relatively high in France, and because its borrowing is enabled by low eurozone interest rates.
The downside: by avoiding crises, France faces little pressure to accept major reform. So it is almost certain to get more of what voters signal they want, an even fatter state. For all its richness in history, culture and wealth, a nation of reluctant capitalists looks destined to muddle through.
Source: Economy - ft.com
