The French presidential elections verdict is here. The final result was a much closer fight, as I had expected, whatever the hype for Emmanuel Macron was. Macron was not expected to win in the First Round. Francois Fillion, the nominee of the right-wing Republican Party, should have won but he got caught in a financial scandal, employing his wife out of public funds.
Macron is a strange phenomenon. He set himself up as a leader, and then founded a party, ‘En Marche!’. He was in Francois Hollande’s cabinet as the economics minister. Hollande was convinced of the need to reform France’s sclerotic economy, but failed in face of trade union resistance to lengthening the working week beyond 35 hours and the refusal of the French elite to face higher taxes.
France does have the problem of falling growth and old labour practices. It has fallen way behind Germany as a leading economy in the European Union. It does need reform. Inside the Euro zone, it needs a much more deflationary policy than it has. If it were outside the Euro zone (as Marine Le Pen, the other presidential candidate, would advocate), it could depreciate its currency and boost its exports. Macron would not contemplating leaving the Euro. He does, however, advocate market-friendly reform.
France, like the United States, is divided along the lines of the gainers and losers from globalisation. In the first round, Jean-Luc Mélenchon reflected the dissatisfaction from a Left perspective while Le Pen was on the Right. Between them, they polled 40% with the official candidate of the Socialist Party polling 6%. If Le Pen were not burdened with her party, Front Nationale—mainly her father Jean-Marie Le Pen’s denial of Holocaust—she would have been in a much stronger position. When Jean- Marie made it to the Second Round 15 years ago, the Socialists voted for Chirac ‘holding their noses’ and Jean-Marie polled only 12%. This time, his daughter got a little over 33%.
The French system is such that the real elections are for the National Assembly. The party that gets the majority will have its leader as the prime minister. Macron’s party is too new, with no structure. It will win a few seats but the majority will be with the Republicans—Fillon’s party. The prime minister and the president will be from different parties—cohabitation as it is called. The National Front may well end up as the second-largest party surpassing the Socialists.
With such fractured politics, it is unlikely that Macron will be able to pursue the reforms he wants. He would like France to be much more like the UK after Margaret Thatcher’s reforms, but it is highly unlikely that the Assembly will grant him the legislation he would need.
It is not just France but the Euro zone as a whole that has had problems of low growth and high unemployment ever since the crisis of 2008. Europe was upset when America reneged on the Gold Dollar link back in 1971. It has a horror of flexible exchange rates, and to escape the volatility of exchange rates, the leaders set about inventing schemes which would restrict these movements in exchange rates. After the Exchange Rate Mechanism which allowed 2.5% range of variations between currencies, it moved to the Euro which removed individual national currencies and put a common currency in their stead.
The Euro takes away the freedom to devalue. It also takes away a national government’s control over its money supply. The European Central Bank is not allowed to buy government bonds in the primary market. No money creation via the central bank. Thus, the two weapons of monetary policy—exchange rate variation and money creation—are forbidden. In addition, no country is allowed to run a budget deficit above 3% . Thus, fiscal policy is also not available.
Germany and some other Northern European countries have done well by running a hard deflationary regime. It requires a strict control on wages and on production costs generally. Many South European countries have floundered. Greece has been in constant trouble since 2010 and has suffered 25% unemployment. It has huge debts to service and requires drastic deflation with cuts in pensions and other welfare benefits. Italy is also facing a lot of problems with a fragile banking industry which may collapse any day.
Europe has inflicted these wounds on itself. The European Union is neither a Federation nor a Confederation. There is no central budget to effect fiscal transfers from surplus states to deficit ones. The Euro is modelled after the Gold Standard. There is insufficient will to break out of the Euro, even in Greece which has suffered so much.
Had Le Pen won, the Euro straitjacket could have been broken by France. But chance is always a fine thing.