Ne marche pas

Macron’s grand plan for reform has already failed Matthew Lynn

Its entrepreneurs would come home. Tech hubs would sprout up in every city, humming with buzzy young app designers. Major multinationals would make it their base for the region once again while radical reforms would create the freest, most dynamic market in the developed world. Under President Emmanuel Macron France was meant to be rebooted as a start-up, business-orientated nation.

There is a problem, however, and it is far from a minor one. Fifteen months into his presidency, it is becoming clear that Project Macron has failed. The latest economic figures out of France are dismal. Growth has petered out, industrial production is falling, and unemployment is starting to creep up again. Successful reforming leaders make some radical changes in their first year, and start getting results quickly. It now looks as if Macron has blown his opportunity.

With his bold redrawing of the French political map, Macron swept into the Élysée Palace last May on a tide of optimism and goodwill. A centrist, pro-business, pro-eu reformer, he promised to restore some dynamism to the French economy. New companies would be encouraged, and technology investment would be welcomed. As Britain left the EU, Paris would replace London as the Continent’s financial hub and deep reforms to the eurozone would help rebalance a continental economy. “France is back,” he told adoring delegates at the World Economic Forum in Davos in January this year. It was a good story, and one that lots of people bought into.

The claim was not completely without substance. Macron has managed to push through one overhaul of the country’s creaking labour laws. Station F, a massive incubator project to nurture new businesses, has been opened in Paris. A plan has been put in place to reduce the corporate tax rate from 33pc to 25pc over his five-year term while the wealth tax, which particularly hit entrepreneurs, has been reformed.

And yet, despite all that, the latest figures coming out of France are miserable. The economy is growing at a dismal 0.2pc quarter to quarter, lower than the UK despite the chaos surrounding our departure from the EU. Industrial production is falling again, down 1.3pc in the latest quarter, and factory output in what remains an industrial economy is still below its 1998 level. Retail sales fell in June, and there is little sign that even winning the World Cup has done anything to increase demand. The unemployment rate fell a little last year, but in the first quarter of this year it edged back up again, rising by 83,000 people.

France is back? It doesn’t exactly sound like it. In fact, with its main export market, Germany, slowing down sharply, and with tariffs looming on its exports to the US, it is probably only going to get worse from here.

Sure, the labour and tax reforms are helpful. But they are also painfully modest. France’s corporate tax rate remains one of the highest in the developed world and its employment laws remain some of the most restrictive in the world. There is little sign of inward investment picking up. Overall, France is nowhere in technology. In the IMD World Digital Competitiveness ranking for 2018, it dropped from 22nd to 26th place (the UK went up to 10th). In the background, it has been France that has been pushing most enthusiastically for an Europe-wide internet tax, which is hardly likely to help the sector. And its strategy for finance is about punishing the City rather than making Paris more attractive – for all the hype, there is no evidence of any banks or hedge funds moving across the Channel.

Meanwhile the state consumes a punishing 56pc of GDP. According to newly released data from the Parisbased Institut Molinari, France is not just the highest taxed nation in Europe, but that the gap between it and the rest is still widening. Tax and social security takes an eye-popping 56.73pc of the salary of the average worker in France compared with 54pc for second-place Austria, and thirdplace Belgium. The average for the EU, not exactly a low tax area, is only 44pc, according to the Institut’s calculations.

Any genuinely reforming leader scores their main victories in their first year in power. That was true of Ronald Reagan and Margaret Thatcher in the Eighties. It was true of Gerhard Schroeder in Germany in the Nineties and 2000s, and it increasingly looks like being true of Donald Trump this year. That is when they have the political capital to make real changes, and enough time left for their reforms to be yielding some positive results by the time they are up for re-election. It now looks certain that Macron will be another Nicolas Sarkozy, with lots of talk of reform and very little substance. It is incredibly difficult to reform an economy at the best of times, but against a backdrop of struggling demand it is virtually impossible. The real question will be what comes next? One thing is certain. It is unlikely to be another centrist.