The last published figures, and especially the high level of job creations during the 1st quarter, give a positive image of France which contrasts with many years of doubts and critics. The growth trend is now in the European average, even if it is not strong enough to generate a significant reduction of unemployment and several sectors, like for instance home building, are enjoying a significant turnaround. Emmanuel Macron election and the huge majority his government will get at the national Assembly, even if his economic program is not precisely known, appeared as very positive factors to the international community.
France has a young president who knows very well the world, which is in contrast with his predecessor. Emmanuel Macron will take advantage of a stable and solid political support during several years, on the opposite with others large industrial countries. The United States are put through Donald Trump tweets and mood swings. The American president has also to brave Congress to put in practice his policy. It is today impossible to predict the result of that confrontation. United Kingdom was already destabilized by its choice in favor of the Brexit. Now it is its government which is weakened by the defeat of the Tories at the last elections where they lost absolute majority. Italy has to cope with a banking crisis, whose importance should not be underestimated. The consequences of current institutional reforms and the results of the next elections are also impossible to predict in this country. At last, Germany will elect its deputies at the Bundestag next September and the future of the large coalition which runs the country today is not sure. At the national level, the SPD seemed to have regained ground against its rival, the CDU but the last local elections have stopped that trend.
So France appears, for international investors, as a privileged area due to these combined factors: improvement of the political situation in the country and political instability in the other ones. Paris stock market reached a high level and, against many alarmist forecasts, financing conditions of the State are still very favorable. After some months during the electoral campaign where rates rose slightly, 10-year interest rate fell in June to stabilize around 0.6%. The spread with the German bund has regained its structural level, 30 basis points, justified by the larger liquidity of the German debt. If the Agence France Trésor doesn’t returned to its damaging practice of the last two years, the reduction of the cost of the public debt should accelerate, which will contribute to the reduction of the public deficit. Regarding only April, the saving was near 1.1 billion euro thanks to the redemption of a 30 billion bond, arriving at maturity in April last year and carrying a 3.75% rate. The same situation will occur next October when it will not be necessary to pay a 5% interest rate to a 26 billion euro bond carrying a 5% rate which has been redeemed in 2016. These two bonds were refinanced by issuances carrying three to four times cheaper rates. So the reduction of the cost of the public debt is substantial and long-lasting.
The rise of the euro, once more against the many worries it creates, should continue after the narrowing which is forecast between the policies of the central banks of the two sides of the Atlantic Ocean. Anticipations about interest rate increases by the Fed are less important due the doubts about American growth when the ECB, on its side, will reduce its accommodative monetary policy. The cost of France energy bill, which is paid in dollars, will be reduced, which is good both for the industry and for households.. At last, price stability (0.8% year on year) is also good for purchasing power.
The continuation of employment improvement permits to hope that France is entering a virtuous circle: the reduction of household worries about their jobs incites them to consume more and to save less. New jobs generate National Insurance contributions which will reduce the deficits. Regarding State deficit, it will probably not meet the too much optimistic 2.8% target decided by the previous government but it would be inferior to the 2016 deficit ratio. It is definitely remarkable because it is very rare that a new political majority does not provoke an increase of the deficit due to electoral promises made by the candidates. But honeymoons never last a long period and the confidence which is given to the president and to his government is, by nature, fragile. The massive support they received from electors is more, if not essentially, due to the disappointment caused by their predecessors, than from the hope put in the realization of their program.
The weak point of the French economy is its inability to achieve a significant trade surplus, unlike its neighbors, with very different profiles, like Germany, Switzerland or Italy. The policy consisting in increasing corporate margins to allow them to regain market shares and to create jobs has failed because French trade deficit has increased. Behind growth figures about 1st quarter, there is a cruel reality: the highly negative contribution of foreign trade has only been compensated by inventories increase, which is, by nature, temporary. The State is not the main responsible for this atypical situation which results from private agent behaviors, both consumers and enterprises. But if political leaders are not aware about that situation, they will not be able to delive the appropriate messages and the measures they will adopt will miss their objectives. Consumers are not acting like patriots when they buy local products. In doing so, it is in their interest and they will be the first to profit of that. It is the role of the government to explain them the point. Company attitude is also inappropriate, mainly in retail, when they ask for an increase of their margins and more flexibility when they hire, and, after obtaining these “reforms”, when they put more pressure on their suppliers to increase their profits and they buy products outside of the country. It is also the duty of the State to make them understand that it not any more naïve.
Any accentuation of the supply-side oriented policy, especially if it is accompanied by measures affecting the legal protection of workers, carries the heavy risk to give no more results than in the past and to break the return of households confidence which is necessary to the growth. It would be then the end of the honeymoon with economic results which will make time to appear and with the start of a degradation of the social environment. The turnaround of the public opinion during the autumn would then have the same magnitude than the enthusiasm we see during this spring.