With the eurozone and French economies in a cyclical upswing, consolidation beckons

Wolfgang Münchau

yesterday by: Wolfgang Münchau

This has been the first bit of genuinely good news for the eurozone since the outbreak of the financial crisis. Emmanuel Macron’s landslide victory gives Europe hope. France faced the starkest political choice of any large European country in many decades: between staying in the single currency and reforming, or quitting. The usual choice of muddling through was not on offer. The French were asked a clear question about the future of their country in Europe, and that of the continent itself. And they gave a clear answer.

Now Mr Macron has two big inter-related agendas for his presidency. One is to reform the French economy. The other is to reform the eurozone. Without change in the way the eurozone works, the impact of domestic reforms will be limited. And without reforms, he will lack the credibility to push for change at eurozone level. So he must do both. The domestic reforms will come first if only because the eurozone agenda will have to wait until after the German elections in September.

So what reforms does France need, and what should we expect from the new president? It is a common misconception, popular among commentators in the UK and the US, that France is an economic basket case. The evidence does not support this claim. France and Germany enjoyed almost identical levels of labour productivity for the past 50 years. According to Thomas Piketty, the French economist, gross domestic product per hour worked was the equivalent of just under €20 in both countries in 1970, and €55 in 2015. The European Commission’s latest forecasts for economic growth in France are 1.4 per cent for this year and 1.7 per cent for next; those for Germany are 1.6 per cent and 1.8 per cent respectively. The differences are rounding errors. The real gap with the eurozone is not between France and Germany, but between France and Italy. Italy has hardly generated any productivity growth since the start of the century. This is why the case for eurozone exit was not as strong in France as it will be in Italy.

Still, this does not mean that the French and German economies are aligned. Germany had a current account surplus of 8.7 per cent last year, which the commission expects to remain over 8 per cent for the next two years. France has a current account deficit of 2.3 per cent, forecast to rise to 2.7 per cent by 2018. The trajectory of German public sector debt to GDP is towards 60 per cent by the end of the decade. French debt is just under 100 per cent, with no visible tendency to decline.

These numbers tell the story of what needs to happen: France has to consolidate while Germany needs to expand. Mr Macron will have no alternative but to jump-start this process by front-loading fiscal consolidation. The good news is that regardless of whether Mr Macron’s party wins a majority in next month’s parliamentary elections, he should be able to forge a coalition that delivers reforms to the public sector and fiscal consolidation. Macron faces a huge task to restore faith in France If he succeeds, country can reassert itself as a force for reform and renewal

If Mr Macron is to have any chance of persuading Berlin of the virtues of a common eurozone budget and finance minister he will need to show that he is serious about fulfilling the rules of the European treaties. The eurozone and French economies are in a mild cyclical upswing. There is no better time to consolidate.

The bigger uncertainty is whether he will be able to persuade Germany to reform the eurozone. Berlin is relieved that it will not have to deal with Marine Le Pen. But not many German politicians have read Mr Macron’s manifesto, and if they did, they did not take the eurozone part seriously. The ruling Christian Democrats oppose every single part of his eurozone agenda. Martin Schulz of the Social Democrats may be more flexible, but he is also no fan of eurobonds.

Whoever wins the German elections, they will soon discover that Mr Macron is demanding changes that Germany’s establishment has explicitly ruled out. It is quite possible that Mr Macron finds it relatively easy to reform the French economy, but gets stuck in his negotiations with Berlin.

Mr Macron is the first European leader to be elected with an explicit mandate for eurozone reforms, but he may meet a German leader with an equally explicit mandate to reject them. To succeed, he will not only require an ability not to take “nein” for an answer, but to set out in detail what will happen to the eurozone if his reforms are turned down. That will take some steely determination.