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Advice on strategic issues for governments

France should think small

David Skilling
14 May 2017

The resounding victory of Emmanuel Macron in the French Presidential election last Sunday was great news. It is deeply encouraging to see a coherent voice for openness, globalisation and optimism. Despite the concerns, Continental Europe is holding firm against populist candidates (France, the Netherlands, and Austria). It is the large Anglo countries (the US and UK) that have been less resilient.

There is much to like about Mr Macron: his youth and energy, his willingness to break from political orthodoxy, and his reforming ideas. Of course, there are many challenges: the upcoming Legislative Assembly elections; the fact that the National Front won 34% of the vote; and that the radical left are likely to be in an uncompromising mood, all counsel a degree of caution.

So what should we make of the prospects of a Macron Presidency as he takes office today? It is a slightly mixed bag, partly because his platform is a mixture of small country and large country policies.

First, the symbolism of the victory is important. Although some of the commentary is overblown – a single election result is not going to stop populist dynamics in Europe and elsewhere – it does remove the imminent threat of policies that would have done substantial damage to regional integration, liberalisation more generally, and which would have emboldened protectionist, nationalist voices (perhaps including the current occupant of the White House). Instead, Mr Macron offers support for an open, liberal agenda as well as for candour and civility. This holding of the centre ground offers confidence that liberal ideas can be made attractive to electorates.

For small economies, from Europe to Asia, this is welcome news. Small economies have benefited substantially from intense globalisation over the past few decades. And for small economies in Europe, the European project has been highly beneficial in terms of allowing them to become part of the world’s largest single market. Protectionism, and the weakening of globalisation, exposes small economies to significant economic risks. These fears have been somewhat allayed, although significant political risks still remain.

Second, there is an expectation of domestic economic reform. The manifesto details a programme of action (albeit relatively modest) to reduce the size of government, to make labour markets more flexible, to undertake public sector reform, and so on (as well as positioning France to compete for foreign capital and talent, including in a post-Brexit world). One interpretation of this policy approach is that it is the small country Nordic model: high taxes, generous social insurance, highly flexible set of labour market institutions, and deeply integrated into the global economy.

However, this will be a challenging transition given the existing rigidities in the French economy. Following the Nordic model is all very good – although it runs close to Nobel Laureate Bob Lucas’s analogy of the limits of advising an aspiring basketball player to ‘follow the Michael Jordan model’. A series of hard policy choices need to be made, which will test the liberalising instincts of the new Administration. And these policies are perhaps easier to establish in a small country context, with a greater degree of social trust and facing the acute competitive discipline that small economies like the Nordics face. It is a long road to Sweden.

But even so, there is much value to France in learning from the Nordics, as well as other small countries such as Switzerland and the Netherlands. It is small economies that have been the most effective at managing the effects of globalisation, achieving strong economic outcomes as well as social outcomes. This small country experience could make a significant contribution to the French economic policy debate, showing how France can effectively engage with globalisation.

So far, so good. However, there is a third implication of a Macron Presidency that is less positive from a small economy perspective. Mr Macron is explicit that he wants a tighter model of European integration, involving a fiscal and banking union (such as a Eurozone budget with an accompanying Finance Minister). His manifesto also talks about some tax rate harmonisation within the Eurozone. He has recently cited Ireland’s low corporate tax rate (a key element of Ireland’s successful economic strategy) in this regard, suggesting that a greater degree of alignment should be achieved.

Aspects of this are not unreasonable: many economists believe that a strong fiscal and banking union is required to complete the Euro project (although I am not persuaded on the need for a fiscal union). But deep fiscal union runs counter to the views of small European economies such as the Nordics and the Netherlands. These countries are strongly committed to the European project, but they prize the use of core national competencies (including tax and social insurance) as part of a system that generates competitive advantage. And most small European countries are fiscal conservatives, with low fiscal deficits and public debt stocks. Many small countries are not inclined to share significantly more fiscal powers or to be required to align on tax rates.

Instead, there are a range of intermediate reform options available to strengthen the Eurozone building on existing institutions. Small economies would prioritise actions to support an open, liberal order in Europe and beyond, and to reform France’s domestic economy to create jobs and growth – and would move in a more measured way on a Eurozone fiscal union. Although France is the world’s 7th biggest economy, taking this small economy perspective seriously would be valuable. To succeed, France should act as a small country.

France has a decent starting point, with high levels of labour productivity, a strong base of human capital and innovation, and globally successful firms. Learning from small economies in terms of how to reform the domestic economy and engage with globalisation in a way that delivers strong economic and social outcomes could deliver significant upside. As I wrote in this note several weeks ago, France has the potential to surprise positively. En marche!

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