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Macron Impossible: French Labor Reform and the EU Budget

MI2

Emmanuel Macron won an important election in May, when the young Frenchman defeated right wing populist Marine Le Pen to win the Presidency. In June, Macron’s new En Marche! party claimed another major victory, taking firm control of the French parliament.

In the ensuing months, Macron’s popularity has dipped a bit. This is a non-issue, the regular ebbs and flows of politics; coming in riding so high, he was bound to come back down to earth. To his credit, Macron has not tried to restore his popularity with cheap or symbolic victories. Instead, he is going right for big ticket reforms–the French Labor Code (Code Du Travail) and instituting an EU budget. Should he succeed in these herculean tasks we can forget about his approval ratings, as he would cement himself as one of the great French politicians in modern history.

The French Labor Code, the Code Du Travail, is a 3,324 page document whose origins are over one hundred years old. While I am certainly no expert on this subject specifically, it is essentially the same economic argument often heard in different contexts–worker protections vs. flexibility and growth. (Note: Just because I am advocating for looser worker protections in this case does NOT mean this is the answer in all cases. Economics is always context-sensitive.)

Ultimately this is about risk and faith–the risk of the unknown and faith that private sector growth can unlock more employment and offer a better standard of living than the current system. People are inherently risk averse, and France has a history–even a national identity–tied to championing the proletariat, which is why the Labor code currently looks the way it does:

“That hyper-regulation of much of French life, including labor, was formed in the early 19th century as part of the country’s escape from the chaos of the French Revolution.

“The emerging law,” a prominent Socialist wrote triumphantly in 1903, seven years before the birth of the labor code, “is a Socialist law.”

Indeed, at the heart of the code’s language is the notion that the worker is inevitably an exploitable object needing blanket protection from rapacious capitalist predators.”

Clearly, reform will be an uphill battle. But where there’s a will, and a need, there may be a way. The political will clearly exists, in the form of a President with a parliamentary majority who is willing to take on powerful unions and other dissenters. There is certainly a need to reform; French unemployment is too high at 9.6%, and youth unemployment is significantly higher at a whopping 23.4%. This is France we are talking about here, one of the world’s most developed countries and a pillar of the EU. Such high levels of youth unemployment risk both France and the EU’s future if left unaddressed.

The make reform more palatable, Macron will rely heavily on the idea that market forces can improve people’s lives. Greater demand for French exports would help bolster this argument, which is where his championing of an EU Budget comes into play (at least partially, it is a good idea on its own merits as well).

An EU budget would help the block’s economic performance. Look at the U.S.; in an economic downturn, the Federal government transfers tax revenue from better performing areas to struggling areas via stimulus spending, helping to speed up recovery. The EU needs something analogous if it wants to gain parity with the U.S. in terms of economic clout:

“Elected in May, the French leader is trying to reshape and strengthen the euro currency bloc by creating a euro zone finance minister and parliament, as well as a stand-alone budget to cushion against economic shocks and head off future crises.

But he is running into German resistance despite conciliatory public signals from Chancellor Angela Merkel. Her finance minister has proposed transforming the euro zone’s rescue fund, the European Stability Mechanism (ESM), into a fully fledged EMF with more powers to support weaker members.

“We should head towards a European Monetary Fund but this should in no way be mixed up with a (euro zone) budget,” Macron told Greek President Prokopis Pavlopoulos.”

Make no mistake, an EU Monetary Fund is certainly a good idea as well. But a budget and a Monetary Fund would be complementary institutions–there is no reason the Euro Zone could not implement both.

On the surface Germany remains opposed to fiscally supporting poorer European countries with direct transfers (this has been its position for some time). However, Germany does seem to be on board with an EU budget in the context of an expanded Euro Zone:

“[German Finance Minister] Schaeuble said that Juncker had discussed with Chancellor Angela Merkel his annual State of the EU speech in which he spoke of a vision of a post-2019 EU where some 30 countries would be using the euro.

The plan also includes appointing an EU finance minister running key budgets to help states in trouble.

“It is good that he is putting pressure (to expand the euro zone) but the preconditions (for joining the euro zone) must be fulfilled,” Schaeuble told the ARD broadcaster in an interview.

“It is in fact so that EU countries who fulfill the preconditions become members of the euro under the Lisbon Treaty”.

He added that EU countries wishing to adopt the single currency should not do so before their public finances and economies are sound enough as they could face the fate of Greece, which had to be bailed out by the EU and IMF in 2010.”

Rigorous “ex-ante” preconditions are absolutely warranted in this situation. Failure to have such conditions for joining a currency union, and relying too much on wishful thinking, can have disastrous results (just ask the Greeks…).

It seems, however, that in the wake of Brexit and seeing what failures of economic governance can mean, that at last the EU’s power players share the same long term vision–now comes the hard work of how to get there. To me, Macron’s plan seems more logical than Juckner and Schaeuble’s for both political and economic reasons.

Politically, by establish a Euro Zone budget and Monetary Fund for the current group, the Euro Zone will be stronger economically, making membership more appealing to outside countries. This would give ammo to political leaders who may have to sell certain unpopular reforms to their citizenries in order to qualify. Economically, a stronger Euro Zone would result in stronger trading partners for non-Euro Zone countries, helping them reach the aforementioned preconditions needed to join.    

Maybe I am being overly optimistic, but perhaps neither of these “impossible” but very important reforms Macron is pursuing–to France’s Labor code and the EU’s economic institutions–are as impossible as they once seemed.

Update: The results of the German election are in. With the far-right Alternative for Germany (AfD) and anti-EU leftist Free Democrats (FDP) performing better than expected, the prospects of closer EU economic integration certainly took a hit (although, in a bit of positive news, the FDP has seemingly softened its anti-EU stance since the election).

It will take true leadership from German Chancellor Angela Merkel to sell these necessary reforms to her coalition members. She will have to become an unabashed champion of these ideas, positioning them as the only means to promote long term economic growth for both Germany and the EU as a whole. It is unclear whether she is willing to take this position, but perhaps in her now fourth term, she is willing to sacrifice her political future to help move Germany and the EU towards the future they need.

Macron’s, for his part, is continuing to drive his vision. One avenue he will propose is greater democratization of EU institutions, as a means to popularize his vision among voters who believe the EU is unaccountable to it’s people.

This uphill battle just got a whole lot steeper…

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Economic Outlook: Europe (Finally) Gets It’s Stimulus Program

Youth Unemployment Europe October 2013

After EU Parliamentary elections in late May, many people were concerned (or jubilant, depending on the circles you run in) about gains by anti-EU “Euroskeptic” parties. These parties did not gain enough seats to dictate policy, but they did gain a platform to push their agenda in future policy decisions.

For every action, their is a reaction. It seems that gains from anti-EU parties have refocused pro-European forces, forcing them to adopt more “people-friendly” policies to counter the depression level unemployment rates (which have hit young people particularly hard).

As any development economist will tell you, youth unemployment presents many unique problems, both individual (high depression rates, future income losses “wage scaring”) and societal (increases in criminal / anti social behavior, drags on economic growth).

Systematic under-investment in young people is short sighted economically and causes untold human suffering. Such under-investment, while always reprehensible, is not surprising in the worlds least developed countries (LDCs), but this is Europe we’re talking about here.

Europe’s leaders have responded with pragmatic policies in recent months (finally, it only took 5+ years!). In Early June, the European Central Bank took the unprecedented step of introducing negative interest rates for keeping deposits in the ECB, a policy likely to not be popular with people who have wealth to invest, but which nonetheless should help spark short-term economic growth.

In arguably more meaningful news, last week the European Parliament announced a “Public-Private” stimulus program:

Jean-Claude Juncker won a wide endorsement from the European Parliament on Tuesday to be the next head of the executive European Commission after setting out a “grand coalition” investment programme to help revive Europe’s economy.

Belying his reputation as a grey back-room fixer, Juncker spoke with passion of his ambition to “reindustrialise” Europe and put the European Union’s 25 million unemployed, many of them young, back into work.

He promised a 300-billion-euro ($409-billion) public-private investment programme over the next three years, combining existing and perhaps augmented resources from the EU budget and the European Investment Bank with private sector funds, to build energy, transport and broadband networks and industry clusters.

“We need a reindustrialisation of Europe,” the 59-year-old former Luxembourg prime minister said. He won support from the Socialists and Liberals as well as his own centre-right bloc, the largest in the EU legislature.

Juncker acknowledged many Europeans had lost confidence in the EU and said only economic results and full employment, not endless debate over EU institutions, would restore their trust.

…his emphasis on public investment, reaffirmation of a target of raising industry to 20 percent of EU economic output and call for a minimum wage in each EU country, were designed to appeal to the left.

In a speech delivered in French, German and English, Juncker sought to reassure Germany and other north European fiscal hawks that the 28-nation bloc’s strict rules on budget deficits and debt reduction would be maintained.

Juncker said euro zone countries should get financial incentives if they make ambitious structural economic reforms, funded by the creation of a separate budget for the 18 countries in the currency area.

He also vowed to protect public services in Europe from what he called “the whims of the age” – an apparent reference to privatisation and restrictions on state aid.

Europe’s stimulus act will not be a panacea. By all accounts, EU countries (with the exception of Germany) have recovered much more slowly from The Great Recession than the U.S. Unemployment remains too high, and is especially troubling in certain countries and demographics.

Compounding the problem, this stimulus budget is too small to adequately address the problems facing the EU. The American Reinvestment and Recovery Act (ARRA) was less effective than imagined largely because it wasn’t big enough, and it’s funds came in at almost twice as much as its European Counterpart ($831 billion vs. $490 billion).

However, only 2/3 of the ARRA was in the form of spending, while the remainder took the form of tax breaks (which, in the context in which it was passed, had a much lower “fiscal multiplier” than direct spending). The European program seems to be more spending focused, meaning dollar for dollar (or euro for euro) this smaller stimulus plan may go further in addressing the social and economic problems facing the EU. The EU plan also leverages public funds to stimulate private investment–Europe’s leaders are doing what they can given budgetary constraints barring a larger stimulus program.

Combined with the ECB’s negative interest rates, EU leadership is proving it has moved past “bleeding the patient” and is taking a more proactive approach to economic recovery. I know it is hard to get excited about European leadership learning lessons after 5+ years of policy failure, but better incomplete and late than never, right?

While generally well received, this program has its notable detractors, headed by “Euroskeptics”, fiscal hawks, and Britain. Britain and other non-Euro EU countries must make their own decisions about their future in the EU based on what they believe is in their country’s best interests. As French President Hollande said last year, “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Sometimes you have to cut off the limb to save the patient. For the euro zone to survive, closer fiscal, taxation, and regulatory integration are needed. If Britain or any other country cannot accept this reality, they must seriously questions their future position within the EU (which, it seems, Britain will do with a membership referendum next year).

Leaving the EU need not be marked with retaliatory economic barriers or deteriorating political relationships; it could be done in a way that largely preserves existing interdependence while opening avenues for greater policy flexibility. As no country has ever left the EU, the punitive impacts of such a move are undecided. Like any breakup, it could be ugly and painful, or it could be clean and leave the possibility of “remaining friends”. 

 


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Economic Outlook: The United States of Europe?

https://i2.wp.com/upload.wikimedia.org/wikipedia/commons/thumb/8/84/Supranational_European_Bodies.png/400px-Supranational_European_Bodies.png

The title of this post is a bit of a joke, even in the unlikely scenario that such a federation is established, I’m sure they would make it a point to make a name less similar to that of the USA. What is not a joke is the state of the European economy, whose unemployment rate and output gap makes America seem like the a model of economic efficiency. (It is impossible to find a single EU or Euro Zone output gap figure, but one can safely assume based on unemployment levels that it is significantly large).

French President Francois Hollande made strong, if not novel, points.

“The French proposal, which Hollande said he would submit to his eurozone partners, also calls for much deeper fiscal integration between the eurozone nations, with a common budget and the authority to issue debt. The government would also debate the main political and economic decisions to be taken by member states and launch a battle against tax fraud.”

“He acknowledged he could face resistance from Germany, Europe’s dominant power, which opposes mutualising debt among member states. Berlin is also reluctant to give the euro zone its own secretariat for fear of deepening division in the EU, between the 17 members of the single currency and the 10 others.

Non-euro Britain’s government already faces growing domestic pressure to hold a referendum on leaving the bloc.

Hollande said he wanted Britain to stay in the EU but added: “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.

He proposed bringing forward planned EU spending to combat record youth unemployment, pushing for an EU-wide transition to renewable energy sources, and envisaged “a budget capacity that would be granted to the euro zone along with the gradual possibility of raising debt”.

He also called for a 10-year public investment plan in the digital sector, the promised energy transition, public health and in big transport infrastructure projects.”

Indeed, these concepts are not new. There has always been doubt as to whether the Europe had the necessary preconditions for a strong currency union (based on the theory of optimal currency area). There is considerable economic interdependence, but differences in language and culture make labor less mobile (which is why some countries in the EU have unemployment rates above 25%, while others are high but more manageable).

The head of the Economics department at Fordham, Dominick Salvatore, (a man whom I greatly admire) wrote about the issue of having a currency union without fiscal coordination in the early 1990s. He was probably not the only one to identify this obvious flaw. European leaders thought that by creating the EU and Euro zone, that greater coordination would naturally occur, however this has largely not taken place (at least with respect to fiscal coordination).

The E.U. is at a cross-roads (it has been at it for some time). Britain will eventually have a referendum on whether or not to stay in the EU (a few high level officials have recently signaled they would vote to leave). The economic recovery in Europe has been non-existent. If a stronger European economic government make the Euro zone project more sustainable, it would be in the best interest of both the 17 Euro Zone countries and the 10 countries in the E.U. but without the Euro.

I used to be worried about a E.U. breakup, but I do not think such an outcome would be as painful as a Euro zone breakup. The E.U. was recently given the Nobel Prize, a symbolic move emphasizing the importance of the block of countries in promoting democracy and human rights globally. But if the E.U. wished to merely become a FTA or  common market, I do not see any of the countries drastically changing their political ideology. All of these countries still have a shared history in which peace and trade led to mutually beneficial outcomes, while war and isolation led to pain and suffering; allowing countries to leave the E.U. to sustain the Euro Zone would not change this. Indeed, I do not believe there is any foreseeable outcome that could change decades of hard learned lessons .

Economic integration would continue to exist between non Euro Zone and Euro Zone countries. The Euro Zone, with a more unified political and economic voice, would undoubtedly be a more meaningful partner with the U.S. in terms of global governance. The Euro Zone would become more effective in global security measures, with a strong unified military–in this sense having the Euro Zone move forward without all of the E.U. would help achieve many of the original goals of the E.U.

There is no question that a monetary union cannot be sustained without fiscal coordination. President Hollande was dead on when he said “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.” Sometimes you have to cut off the limb to save the patient, and it seems like this might be the case with the Euro Zone. E.U countries not in the Euro Zone could wake-up tomorrow, decide to leave, and as long as economic ties remained very little would change. If the Euro Zone fell apart, there would be unprecedented losses as countries scrambled to put the pieces of their monetary policies back together.

If allowing countries to leave the E.U. is what it takes to make the Euro Zone sustainable, then this option has to be explored. When has forcing someone to stay, when popular consensus is to go, ever led to a sustainable union? If countries want to go, they should be allowed to go, so that those who remain can move forward.

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