Like most of Mediterranean Europe, France suffered under the economic and financial crisis that gripped the world in 2008. The country had to absorb high levels of private debt that became unsustainable after the crisis struck, driving up government spending and expanding public debt from 68 percent of gross domestic product in 2008 to a current level of 97.5 percent of GDP. France's debt levels dwarf those of northern European countries (Germany's rests at 69.4 percent, with the Netherlands at 61.4 percent) but lag behind some in the south (Italy's is 132.7 percent; Portugal's is 133.4 percent).
With its Growth and Stability Pact, the European Union sets a debt target of 60 percent of GDP for member nations. While that figure is somewhat arbitrary, and the target is widely ignored, the principle is sound: High debt constrains a government's ability to maneuver fiscally, while increasing risk. France is unlikely to reach that threshold any time soon soon, considering that every year since 2008, its annual budget deficit has topped the 3 percent level required by the bloc, reaching as high as 7.2 percent in 2009. But in recent years, that deficit has shrunk, and if Macron can achieve the goals he outlines in his electoral platform, it could drop to under 3 percent this year. Since Le Pen remains dismissive of European requirements, and as such is more committed to spending, she would be unlikely to even attempt such a reduction.
Furthermore, the French economy is only slowly emerging from a recent period of quite weak growth. From 2011 to 2014, France did not crack 1 percent growth, a three-year stretch of stagnation not seen since 1950. That rate has nudged up only slightly since, reaching 1.2 percent in both 2015 and 2016, a striking contrast to previous recoveries (the economy went from a 0.6 percent contraction in 1993 to 2.3 percent growth in 1994, for example).
Over the five years of retiring President Francois Hollande's term, France's most politically pressing economic issue has been stubbornly high unemployment. Despite a focus on reducing joblessness during his term, it rose from 9.7 percent when Hollande took office in May 2012 to 10.5 percent by June 2015. It has remained above the 10 percent mark since. The nature of the French labor market with its strong employee protections, generous unemployment benefits and a shortage of workers trained in the skills demanded by employers has contributed to this phenomenon.
More than a decade ago, Germany faced a similarly intractable unemployment problem, phasing-in a set of reforms between 2003 and 2005. The so-called Hartz reforms instituted changes in the relationship between job seekers and employment centers with the aim of more quickly returning the unemployed to the labor force. Today, Germany's unemployment rate stands at 3.9 percent. France has attempted to implement labor reforms, including some that led to riots in 2016, but its efforts to retool the labor market continue to fall short of International Monetary Fund (IMF) recommendations.
Meanwhile, Paris is spending more money abroad than it is receiving in return. That deficit in its current account balance is a symptom of the lack of competitiveness of the French economy and points toward an increasing economic fragility. Contributing to French difficulties in that area are high levels of regulation — in the World Bank's Ease of Doing Business rankings, France is 29th, Germany is 17th, and the United Kingdom and United States are seventh and eighth, respectively. High levels of public spending further inhibit France's competitiveness. In 2015, France's government spent the equivalent of 57 percent of GDP, the highest rate in Europe. London banks exploring places to move personnel and operations in anticipation of Brexit cite French red tape and high taxes as reasons that Paris is not as attractive as other financial capitals such as Dublin or Frankfurt.
A Rosier Outlook
While the story of the last French presidency has been one of slow growth, stubbornly high unemployment and rising debt, signs of improvement have recently surfaced. In its April World Economic Outlook, the IMF predicted French economic growth would hit 1.4 percent in 2017, with 1.6 percent growth in 2018, suggesting a slow and steady recovery. The short-term data meanwhile has been positively rosy, with the Purchasing Managers Index — a measure of business confidence — reaching its highest level in six years in March.
But these improvements appear linked more to a general improvement in external circumstances than to any particular developments in France. Since mid-2016 inflation has risen in the global economy, led by higher producer prices in China, which have improved the general economic outlook across the board. Thus, while France's prospects have improved, this is a story common to the entire eurozone. Compared with other crisis-hit economies such as Spain or Ireland, French growth prospects are still sluggish. Spanish growth, which reached 3.2 percent in 2016, is expected to be 2.1 percent in 2017. In Ireland, where the economy expanded by 5.2 percent in 2016, growth of 3.5 percent is projected for 2017. Of its eurozone peers, France's economy does appear healthier than Italy's. But considering that Italy is struggling under the highest debt levels in Europe, has a banking sector teetering on the edge of crisis and has never experienced positive growth since joining the monetary union, this is a modest achievement.
There is also no guarantee that the wider improvement in the global economy will be sustained. Chinese producer prices appeared to peak in February, and if that plateau continues, inflationary pressure on Western markets may subside. Global economic optimism had also been elevated by the prospect of increased infrastructure spending and tax reform in the United States. But as those prospects look less and less likely, France and its new president cannot rely on the recent rising global tide of economic positivity to continue.
Either Macron or Le Pen will be injected into the situation, each armed with a different formula for how to tackle it. Le Pen's stated policies, if they were to be enacted, would likely lead to a swift deterioration in some of France's economic indicators. She will seek increases in defense and policing budgets, likely leading to more government spending, especially as she has deemed civil servant jobs to be sacrosanct. Any attempt by her administration to raise protectionist barriers would lead to a tangle with the European Union, which controls its members’ trade policies. Even if she prevailed, protectionist policies would likely have a negative effect on GDP growth. More dramatically, her suggestion of a potential withdrawal from the euro, a longstanding campaign position, would drive investors to rapidly sell French government bonds and bank shares, leading to increases in debt repayments and a weakening of the banking sector.
Macron, by contrast, has presented a more reformist program. While keeping the annual budget deficit under 3 percent of GDP, he would look to lower the corporate tax and inject 50 billion euros into the economy over five years to stimulate growth. He would also aim to trim public spending during his presidency, including eliminating 120,000 state jobs. He demonstrated his commitment to making the labor market more flexible when he was economy minister by crafting a reform package in 2015 called the Macron Law.
Political Constraints on the Next President
Election commitments have a habit of unraveling when a candidate makes it into office, and in France, winning the presidency is just the first step. The two-round legislative elections to be held June 11 and 18 will represent a sizable challenge for either candidate. The French parliament is currently dominated by the Socialist and Republican parties, of which neither candidate is a member.
The French semi-presidential system was designed to only function well if the president and National Assembly work together. If Le Pen wins, she would also need to see her National Front party, which currently only has two members in the 577-seat assembly, perform well. For Macron's part, besides introducing a large number of fresh candidates of his own En Marche! party, he would need to strike deals with the more centrist members of existing parties.
Both strategies are unprecedented in the decades-long history of the Fifth Republic. As a result, it appears likely at this point that the incoming president and the National Assembly will be at odds, forcing the formation of a "cohabitation" government. In the event that government is a weak one, neither candidate's policy platform would be easily brought into effect, and existing constraints remain to guide the future of the French economy.