Will Macron's Overhaul of the French Economy Succeed?

French Election: Celebrations for Macron's victory at The Louvre. Flickr / Laurie Shaull

Macron has settled on an expedited process to implement his labor and tax reforms.

Emmanuel Macron is nothing if not ambitious. True to his campaign promises, he has put forward bold proposals to reform France’s stifling regulatory and tax regimes. Since his party has won a handsome majority in the assembly, prospects for his effort look good right now. Eventual public acceptance remains an open question, however, and it has been street protests more than votes that have killed reform efforts in the past. Still, his effort holds out a greater prospect for economic health in France than in a long time. It would also do much for the health of European Union.

Proposed reforms would begin to lift economic weight of France’s burdensome labor code, the 3,200-page Code du Travail. Its rules raise costs, impede growth, depress productivity and limit the economy’s flexibility at every turn. They, for instance, demand that all companies with fifty or more workers offer a minimum of five-weeks paid leave and 156 weeks parental leave. They limit the workweek to thirty-five hours and—in some cases—demand retirement when workers turn sixty-two years old. They obligate companies with one thousand or more employees to place laid-off workers in new positions and retrain them at the firm’s expense. They give employees the right to challenge their dismissal for up to five years and impose severe penalties on firms that lose such cases. Because the code insists on nationwide pay and work-rules, it limits the ability of management to adjust for changing economic conditions. The rules also discourage inward investment by forbidding international companies operating in France from laying off workers in the country while their subsidiaries elsewhere in the world are in good financial health.

These regulations, combined with high corporate taxes and complex—as well as restrictive—zoning rules, have done great harm to the French economy. During the past seven years, France’s gross domestic product has never grown above 1.5 percent a year in real terms. Because rules on layoffs and dismissals are so restrictive and expensive, management has shown a great reluctance to hire full-time help for fear that they could do nothing with them should economic circumstances change. Accordingly, job growth has stalled, while more than half of French workers now work on limited contracts, not as full-time employees. French unemployment overall verges on a high 10 percent of the workforce overall, and youth unemployment stands at almost 22 percent.

Macron would need the ambition of a Napoleon to take on all this. His recent proposals do, however, make a start. He would keep the economically stifling thirty-five-hour workweek and the equally burdensome rules that workers retire at what is considered today to be a relatively young sixty-two years of age. Otherwise, he would build on tentative reforms from the previous administration, called the El Khomri law, that he promoted when he worked for the Socialist government. His proposed changes would allow more firms to opt out of nationwide labor agreements on overtime pay and work rules. While the El Khomri law allows such deviations only after a union-called referendum, Macron would allow employers to call a referendum and shrink the number of consulting in-house bodies required to approve such changes. His reforms would also cap compensation amounts in employee dismissal cases and further limit the time employees have to make such complaints. To encourage inward investment, he would allow foreign employers in France to lay off workers regardless of the state of their other subsidiaries elsewhere in the world.

Outside the code, he would relieve the country’s tax burdens. Macron would cut the country’s onerous 33.33 percent corporate tax rate gradually toward a more internationally competitive 25 percent rate. To encourage investment generally, he would repeal the special 3 percent tax on dividend distributions, tax passive income at a flat 30 percent instead of today’s variable scheme that can go as high as 45 percent, and repeal France’s historical wealth tax, except on real estate. Reform would also aim to even burdens in society by reducing the difference between private and public pensions and extending unemployment benefits from only workers to the self-employed. To limit the budget impact of the tax cuts, he would trim the number of civil servants, thereby cutting public spending from 55 percent of the country’s GDP to 52 percent, and by doing so keep budget deficits within the EU-mandated 3 percent of GDP. He is, however, vague on how he would accomplish this.

In many ways, these new proposals constitute a Gallic equivalent of Germany’s Hartz reforms. Berlin instituted the reforms earlier in this century to free its economy from what then were similar burdens. Germany’s remarkable economic gains since then certainly make a powerful case for going in that direction. That country’s real economy has expanded at a faster rate than most of the rest of Europe, certainly faster than France. It has, at times, shown impressive growth spurts at annual rates or 3.5 and 4.0 percent. Germany’s unemployment rate recently came in at under 4 percent of the workforce, while its youth unemployment rate stood at on enviable 6.8 percent, especially if one is looking at it from Paris. France’s proposed reforms, as long as the list is, are nowhere near as extensive as the Hartz reforms, but any movement in the same direction clearly has promise.

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