France: merci Monsieur Philippe

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●  A change of guard: In France, it is the time-honoured prerogative of the president to change his government whenever it suits him. After a surge in support for the Greens in local elections last Sunday, Prime Minister Édouard Philippe, whose calm handling of the COVID-19 crisis had earned him popular praise, resigned today. With less than two years to the presidential elections in April and May 2022, President Emmanuel Macron may be shifting away from potentially unpopular reforms to softer and more costly policies that may go down better with voters.

●  Mid-term blues for Macron: Unlike German chancellor Angela Merkel, who managed to rally much of the nation around her, Macron enjoyed no more than a brief and shallow rise in his popularity after the outbreak of the pandemic. Like many other countries, France was ill-prepared for a calamity of such scale. Being hit early, France had little opportunity to learn from the mistakes of other advanced countries. Still, the over-centralised nature of the French state apparently hindered an efficient response to the first regional hotspots. The contrast between France and less-affected Germany, which is a frequent topic in the French media, seems to weigh on Macron’s popularity.

●  Philippe’s role: Macron owes his mercurial rise to power in 2017 partly to his ability to forge ties between the centre-right and centre-left. Philippe, who hailed from the conservative Republicans, switched his support to Macron early enough to help centre-left Macron broaden his appeal to the centre-right and win the presidency against right-wing Marine Le Pen with a clear margin of 66.1% versus 33.9%.

●  Two keen reformers: Ahead of the 2017 election, we made a big call: the pro-growth reforms, which Macron promised to pursue, would enable France to surpass an overly complacent Germany as the growth engine of Europe in the 2020s and deliver a golden decade of more dynamism and more employment to the country. As economics minister in the S0cialist administration, Macron had already made a start in 2015-16. His competent prime minister Philippe then helped him to steer key reforms through parliament, including serious changes to the labour market, business taxes, the welfare system and education. In the OECD’s last bi-annual assessment of pro-growth reforms published in July 2019, France took stellar positions for both the 2015/2016 and 2017/2018 periods, trailing only Latvia in the former and Estonia in the latter period. By and large, the results are encouraging. For example, the number of business start-ups has surged beyond that in Germany despite the latter’s 24% more inhabitants. Merci Monsieur Philippe, well done.

●  Reform pause: Just before the virus struck, Macron and Philippe had been on the verge of passing a signature pension reform. They put these and other plans on hold during the pandemic. We doubt that the new prime minister, Jean Castex, will pursue many reforms ahead of 2022. Still, that Castex also comes from the pro-reform centre-right is encouraging. Thanks to the prior reforms, France remains on track for more trend growth after the pandemic. But whether the gain will be strong enough to warrant the label “golden decade” is an open question. It will depend on Macron’s future moves, and those of his new prime minister. Fortunately, Le Pen has not impressed French voters with her reaction to the pandemic either. The probability that she could win over Macron in 2022 remains low, in our view.

Holger Schmieding

Chief Economist

+44 7771 920377

holger.schmieding@berenberg.com

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