France’s Presidential Election

February 19, 2017

Between now and the French Presidential election, Policy Exchange will be looking at the election, the candidates, and the character of the political and social challenges that France faces. We will examine the extent to which these challenges are specific to France, or may reflect a wider common set of challenges confronting advanced societies more generally. Some of the issues are clearly specific to France, such as the particular challenge that an anti-system popular party of the radical right presents to the political institutions of the Fifth Republic, which were originally tailored to suit General de Gaulle. Others exhibit common themes shared in other countries, such as the popular reaction against elites.

France’s political problem is a structural economic problem

The first of Policy Exchange’s engagements in this area is an essay on the contemporary French economy, and how France got itself into a position where it has, having had, for several decades, an astringent set of monetary arrangements that have delivered financial stability, but a set of emasculated product and labour markets that yield multiple structural rigidity. A central part of the political challenge of Marine Le Pen’s Front National is the high levels of unemployment and lack of opportunities that people have to get work, regardless of where France is in the economic cycle. At that heart of those problems is an unusually high level of public expenditure, a heavy tax burden, and extensive labour market regulations that make hiring and firing workers expensive and protracted, resulting in a sclerotic labour market that cannot adjust to changing circumstances. France’s inflexible labour market is the result of specific polices, but it reflects a wider dimension of modern French society, which is a more general difficulty with adapting to change. Much of French policy — whether it is directed to employment, agriculture or wider matters of culture and fashion — is a reflex, which attempts to set existing arrangements in aspic.

France economic policy illustrates an important aspect of market economies. While stable prices and low inflation are a necessary pre-condition for success, financial stability alone is insufficient. There also have to be product and labour markets that can adjust to change. The test of an economy is not how it motors along in the good times, but how it adjusts to an adverse malign shock. The French economy, and its labour market in particular, does not exhibit the flexibility needed to offer the kinds of levels of employment and levels of unemployment that other advanced OECD economies are able to. We know this by looking at the evolution of unemployment over the last thirty-five years. French policy has created a structural economic problem, and it is a political problem because it manifests itself as an unemployment problem.

France’s structural economic problem is not just a permanently relatively high rate of unemployment, but a labour market that excludes people from opportunity. There are high taxes, and expensive payroll social-security charges make employing labour expensive. Regulations limi the working week to thirty-five hours, and make it difficult to let go of workers in changed circumstances, which makes employers cautious about hiring in the first place. Employers are, therefore, highly selective about whom they take on. Education, training, and experience are rewarded in highly segmented, discrete labour markets where existing employee ‘insiders’ are rewarded at the expensive of the excluded. And the excluded are young people, and people with little education and experience. A labour market that rewards insiders is difficult for people to navigate who have experienced any difficulty or a protracted absence from employment. This includes those who have been ill, have taken time off to look after a relative, or have spent time in prison — and those who simply lose their job and then find that their once highly-prized specific experience in their previous work is irrelevant in a much harsher wider labour market.

Economic problems shaped by domestic French policy choices

Most of the causes of these problems are located in the domestic policy choices that French politicians have made over the last thirty-six years, since the election of the Mitterrand government in 1981. In the 1980s, most OECD economies, at least to some degree, overhauled the social models that they had developed from the 1940s. Their agenda was better control of public spending, an attempt to contain tax burdens, and periodic bouts of systematic labour-market reform. France went in a different direction: higher spending and taxation, and greater regulation. French governments, through their dogged commitment to the EU’s social action programme of employment directives and the Social Chapter of the Maastricht Treaty, attempted with varying degrees of success to apply their social model to other EU economies within the Single Market. The heart of France’s structural economic challenge is home grown. A General Government Expenditure to GDP ratio of over fifty per cent is too high, and regulation is too great, too.

Can France’s politicians create the momentum for reform?

Whether any of the candidates presenting themselves to occupy the Elysee have a programme to meet the challenge is not clear. France needs an audacious and radical liberal programme of reform. A programme of worthwhile-in-themselves discrete reforms of regulation would be insufficient to remedy the structural economic problem that arises from very high public spending and a heavy tax burden. Rhetoric is one thing, but mobilising public support for a coherent agenda of liberal reform, which goes beyond tinkering at the margins of France’s problems, is something else. Do French electors have the appetite for the structural reform that is needed?

The Eurozone, the 1930s Gold Bloc, and the National Front

In many respects, the Front National represents an important part of the political obstacle faced by reforming politicians of the centre and right. The transitional costs of a programme of reform would provide fertile opportunities for the radical right that opposes them. Marine Le Pen has placed on the agenda the provocative and difficult question of France’s place within the Eurozone. However, France’s problems should not be attributed principally, if at all, to participation in the Eurozone. The agenda of monetary stability that France has pursued since Francois Mitterrand and Jacques Delors embarked on the francfort policy in 1983 has brought great benefits in terms of price stability. This does not mean, however, that there is not an important and difficult question to be explored that examines the extent to which the Euro imposes an inappropriately tight monetary framework given France’s particular circumstances. To what extent could France achieve its present objective of stable prices with a domestic monetary policy, and an exchange rate that has scope to adjust to changing circumstances and to France’s competitive position, outside the Eurozone? In short, is the Euro’s performance as a monetary arrangement analogous to that of the gold bloc that France persevered with in the 1930s, imposing an unnecessarily tight monetary discipline? A mature and confident democracy should be able to debate all these issues on their merits from first principles. France’s presidential election will test the capacity of the political institutions of the Fifth Republic to explore these fundamental questions of economic and social policy.

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