France's conflicting goals: More jobs, less borrowing - HSBC

In view of Olivier Vigna, Economist at HSBC, French President Macron has ambitious plans to reform the French labour market, but he is also facing tight fiscal constraints set by Brussels, which means there will be scant room for handling possible negative side-effects and to compensate potential losers

Key Quotes

“The pledge of more jobs…

“Reforming the labour market is a key symbolic challenge for President Macron after his predecessor François Hollande was unable to do so in any meaningful way last year. It is also crucial for the credibility of Mr Macron abroad — and particularly with Germany — to be able to push through his ambitious agenda of a deeper European integration.”

“President Macron obtained a majority in June’s legislative election, which reduces the risk of his planned reforms being blocked in parliament. There is also the possibility that he could hold a referendum if parliament impedes the introduction of reforms.”

“However, to see his labour market reforms bear fruit sooner, and to accelerate the fall in the high unemployment rate, Mr Macron has pledged to use presidential decrees (under which the government passes laws without parliamentary debate) to implement some changes before end-September.”

“In particular, increasing flexibility for employee negotiations at the company level rather than on a sectoral basis, reducing the cost to employers of dismissals and cutting the administrative cost of hiring, are expected to sustain job creation, thus improving the French economic outlook significantly.”

…runs into the reality of weak public finances

“However, a national auditor’s recent report has indicated that public finances are in a fragile state. The Cour de Comptes estimated that if no drastic spending cuts were made in the next few months, the 2017 fiscal deficit could reach 3.2% of GDP, well above the 2.8% promised to the European Commission in the April budgetary update.”

“Throughout the presidential election Mr Macron pledged that borrowing would not exceed 3% of GDP over his mandate. Good news on the economic front will help, but probably will not be enough, in our view. So the 3% target reaffirmed by Mr Macron's cabinet could mean painful spending cuts this year, and suggests that the delivery of some electoral promises in terms of reducing taxes could be delayed or postponed.”

“At a time when labour market reform is under discussion with unions, these fiscal constraints will be a concern for the authorities. There will be scant room for handling possible negative side-effects and compensating potential losers. The momentum of Mr Macron’s reformist plans is clearly at stake in the face of tough realities.”