The challenges facing French Prime Minister Michel Barnier make his previous job negotiating Brexit terms with former UK prime minister Boris Johnson look easy. French President Emmanuel Macron’s new No. 2 has to avert a budget crisis, navigate a gridlocked parliament and help the EU close a yawning economic gap with the US. There is also now talk of higher taxes just as economic growth starts to shrivel. It is an ominous sign.
Barnier is off to a credible start. He told French television last Sunday that the country’s financial situation was “serious,” spelling out the 50 billion euros (US$55.9 billion) of annual interest payments due on 3 trillion euros of debt. He pledged not to make things worse, whether by saddling future generations with more financial burden or a more polluted planet. He also promised to take a hard look at how the developed world’s No. 1 government spender could be smarter and more efficient.
The problem is Barnier has little time or wiggle room. Markets are growing testy, and Macron’s political rivals are sharpening their knives. Barnier’s call for the wealthy and big multinationals to “contribute” sounds like familiar territory for a country that already has the highest tax burden in the developed world and the third-highest hourly labor cost in Europe.
The message is being heard loud and clear: CMA CGM SA’s billionaire chief executive officer, Rodolphe Saade, said his firm was prepared to play its part but warned against hurting competitiveness. On the spending side of the ledger, it is unlikely he would have the gumption to tackle France’s above-average outlay for social protection — 24 percent of expenditures in 2022, according to UBS Group AG.
This could end up being exactly what the French and European economies do not need in terms of reviving growth, which is the other key aspect to improving public finances. New indicators already point to a private-sector downturn after a summertime Olympic boost, with French gross fixed investment set to fall this year, Bloomberg Economics said.
Productivity is declining. Mario Draghi’s recent prescription for lifting Europe out of economic “agony” called for more investment, and it is hard to see how taxing companies or bringing back the 2010s’ wealth tax achieves it. Nor are investors likely to be convinced by talk of temporary or one-time levies that have a habit of becoming permanent.
One alternative would be to keep hacking away at red tape and structural barriers to employment, a focus of much of Macron’s presidency. Catching up to the employment rate in the Netherlands, for example, would raise French GDP by 10 percent, according to Gilbert Cette, a professor at Neoma Business School. However, the vibes have long soured on the centrist “revolution,” with a majority of seats going to parties that want to roll back Macron’s contentious pension reform — an idea that is almost Liz Truss-like in its potential fiscal damage.
This leaves the next best option: A seriously overdue look at how to use taxpayer money more efficiently. Consider the subsidies that have gone into boosting jobs for the young, creating an unprecedented boom in apprenticeships, with 1 million announced last year. That is a good outcome and an investment in the future. However, the cost has been astronomical, estimated at about 25 billion euros last year, or about 26,000 euros per apprentice, according to economist Bruno Coquet. He projects that about 10 billion euros could be saved annually without seriously damaging the program’s attractiveness.
There is also the question of research and development tax credits for companies. The CAE economic think tank reckons that their 7 billion euros cost is not justified by outcomes, and their generosity tends to benefit big corporations rather than nimbler peers. Correcting some of these might boost return on investment, which the Draghi report said would be critical for boosting innovation and financing Europe’s welfare system.
There are obviously bigger examples of public spending that could do with reform, from education to health care. However, youth employment and research are two vital outlays to get right in the short term. Scrap them entirely, and France gives up on its future. Maintain them as is, and France risks further hurting its credibility. Budget crises can make or break countries, as the Bourbons discovered in 1789 — and Barnier’s government is already on borrowed time. Being Europe’s Mr. Brexit was tough; becoming France’s Mr. Deficit looks far tougher.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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