Fortune favours the bold. Emmanuel Macron took a huge gamble and won. Now he has to turn victory into success. He has given his country, Europe, and the cause of outward-looking democracy a fresh opportunity.
The question is whether he can seize it. If he is to do so, he will need not only clarity and courage, but also luck. The reforms he plans could work, economically and politically, provided the eurozone’s recovery continues.
Mr Macron’s challenges are initially political. He must turn his personal victory into a hold on effective domestic power. The obstacles are huge. He is, after all, a leader lacking an established party. But beyond this loom the economic challenges.
His difficulty is that France’s economic plight is not bad enough to persuade a cynical public to tolerate decisive change. Exactly the same applies to attempts to transform the operation of the eurozone. In the eyes of the German establishment, no eurozone crisis exists, just the failure of the French to “do their homework”.
Yet France is no basket case. It is a wealthy country with excellent infrastructure and public services. According to the International Monetary Fund, the purchasing power of French gross domestic product per head was the same as that of the UK in 2016, though 12 per cent below Germany's.
According to the Conference Board, French labour productivity per hour is the same as Germany’s and 28 per cent above the UK’s. Its distribution of disposable income is far less unequal than in the US or UK but similar to Germany’s. In sum, France is a wealthy country with excellent infrastructure and public services.
So what are its economic problems? Essentially, there are three: low employment; the low rate of economic growth; and the sheer scale of public spending.
The overall rate of French unemployment was 10.1 per cent in March 2017, against 3.9 per cent in Germany and 4.5 per cent in the UK. Worse, the unemployment rate was still higher than it had been in 2009, after the global financial crisis.
In 2015, only 72 per cent of French men and women aged 25 to 64 were employed. This was far below Germany’s 79 per cent and the UK’s 78 per cent, but close to the US’s 73 per cent.
In terms of economic growth, the most important fact is that real GDP per head was more or less the same in 2016 as in 2007. This, then, has been a lost decade. British GDP per head, much worse affected by the crisis than that of France, rose to 2 per cent above its 2007 level last year – a dire performance, yet better than that of France. Italy has done worse, with real GDP per head in 2016 11 per cent below 2007 levels. But Germany’s real GDP per head in 2016 was 7 per cent above 2007 levels.
Finally, the public finances are stretched. Their most striking feature is the scale of the state’s activities: public spending was 56 per cent of GDP in 2016, according to the IMF, much the highest ratio in the group of seven leading economies. Germany’s was 44 per cent and the UK’s just 39 per cent. Sustaining the taxes needed to finance such spending is a huge challenge for an open economy. French net public debt was 88 per cent of GDP in 2016, against 45 per cent in Germany. But the debt ratio was 81 per cent in the UK and US.
So what has to be done? The first priority is to pray for a strong recovery. The persistently high unemployment must be at least partly cyclical. The IMF thinks the output gap (a measure of excess capacity) is a little under 2 per cent of potential GDP. It might be larger still. Moreover, core euro zone year-on-year consumer price inflation (less energy and food) has been at or well below 2 per cent in every month since early 2009.
Most recently, it was just 1.2 per cent. We have good reason to expect the prolonged continuation of a highly supportive monetary policy from Mario Draghi's European Central Bank.
In the context of such a recovering economy, Mr Macron needs to legislate his labour market and public spending reforms quickly. The most important priority with the former is to reduce protection for permanent workers: few will hire if they cannot hope to fire.
The essential requirement on the latter is to bring about permanent changes in the trajectory of spending. French spending is so much higher than in comparable European countries that this has to be feasible. But France is not close to bankruptcy. Cutting the deficit is, in the French case, far less important than cutting the trajectory of spending. The government should dare to cut taxes, instead, particularly on employment.
Given luck, actions of this kind will reinforce confidence and encourage investment. Then Mr Macron can turn to reform of the euro zone. The reality is that any plausible reforms will not make much difference to the performance of the French economy in the short to medium term. Nevertheless, once he has proved he is committed to reform of the French economy, the new president will need to force a debate on fixing the more serious ills of the euro zone.
Germany will resist this. But it must understand that rebuffing Mr Macron would be very dangerous. If a man as enthusiastic about the European project as Mr Macron is ignored, Marine Le Pen and the death of the European project wait in the wings. That would be a disaster for Germany.
Post-unification Germany agreed to the single currency as the price of cementing its strategic relationship with France. It needs to accept reform of the euro zone, again in order to cement its relationship with France.
A euro zone that is seen to work well mainly for Germany will fail, maybe not tomorrow, but in time. Yet the euro zone cannot be run like the US: a full federation is politically unavailable. So what must be done to improve its operation? That is to be my topic for next week.
Copyright The Financial Times Limited 2017