A man looks at campaign posters of the 11 candidates who are running in the 2017 French presidential election in Enghien-les-Bains, near Paris, France, on Wednesday.     Picture: REUTERS
A man looks at campaign posters of the 11 candidates who are running in the 2017 French presidential election in Enghien-les-Bains, near Paris, France, on Wednesday. Picture: REUTERS

Paris — Voters in France’s presidential election are being asked to choose between supply-side economic reform, as offered by candidates such as centrist Emmanuel Macron and centre-right François Fillon, and demand-side reform, as promoted by the National Front’s Marine Le Pen and Jean-Luc Mélenchon.

The reality is that France needs both at the same time — one without the other won’t work. In other words, what France needs is "l'Abenomics".

It’s unusual to see comparisons between France and Japan, yet the countries’ macro-economic pictures share some common features. The drags on growth are broadly similar: large public debts, an aging population, deflationary pressures, a two-tiered labour market, an over-regulated service sector, a tradition of industrial policy, and a revolving door between the upper echelons of business and government. Growth has been disappointing in both countries despite world-class infrastructure, a highly skilled workforce, world-beating firms and cultural prestige.

Like France, Japan, in recent years, was torn between those advising supply-side reforms and those advocating demand-side reforms. Japan’s Prime Minister Shinzo Abe essentially decided to slice the Gordian knot by saying "do both".

Since then, Abenomics has proved largely successful. Headline GDP growth has been slow, given that Japan’s population is shrinking, but per-capita real growth has been relatively strong given the slowdown of China, according to the World Bank. Unemployment has dropped to levels not seen since the mid-1990s — 2.8%, and this amid efforts to increase women’s labour force participation rate. Japan is also showing strong credit growth. And all this has been accompanied by an ambitious programme of structural reform, including new rules on corporate governance. Abenomics has its critics, but Japan, it must be said, is doing better than many expected given its challenges.

Presidential candidates from left to right: Jean-Luc Melenchon, Francois Fillon, Francois Asselineau, Jean Lassalle, Nathalie Arthaud, Marine Le Pen, Benoit Hamon, Jacques Cheminade, Nicolas Dupont-Aignan and Emmanuel Macron. Picture:  REUTERS/LIONEL BONAVENTURE
Presidential candidates from left to right: Jean-Luc Melenchon, Francois Fillon, Francois Asselineau, Jean Lassalle, Nathalie Arthaud, Marine Le Pen, Benoit Hamon, Jacques Cheminade, Nicolas Dupont-Aignan and Emmanuel Macron. Picture: REUTERS/LIONEL BONAVENTURE

The case that France, too, suffers from both demand-side and supply-side constraints is strong. On the demand side, there is a consensus among macro-economists not employed by the European Central Bank or the German Ministry of Finance that the eurozone’s monetary policies have depressed aggregate demand, worsening the impact of the currency crisis and of austerity policies, as the Mercatus Centre’s David Beckworth has convincingly argued.

While government spending increased under socialist President François Hollande, so did taxes, particularly on capital gains and upper-middle-class households. According to France’s OFCE, an economic policy research institute of Sciences Po University, tax increases under Hollande shaved 0.8 points off growth every year between 2012 and 2017. One of the key indicators of a demand problem is that the proceeds of corporate tax cuts under Hollande went to increased profit margins and dividends rather than investment or hiring.

On the supply side, France is infamous for its red tape, ranking a measly 29 in the World Bank’s ease of doing business index, below countries such as Malaysia and Portugal; and a striking 72 in the Heritage Foundation’s index of economic freedom, below Romania and Peru.

One of the key indicators of a demand problem is that the proceeds of corporate tax cuts under Hollande went to increased profit margins and dividends rather than investment or hiring

So France needs both a jolt in aggregate demand and structural reform. But it needs both at the same time, as the author Nicolas Goetzmann argued in his 2013 book, Pulling Europe out of the Slump. Under conditions of deflation and mass unemployment, it’s hard to see how regulatory reform alone would help much. For example, one of the major barriers to hiring is labour regulation — but it is also very high payroll taxes.

Removing the regulations without the other barriers to hiring will certainly lead to lay-offs, and it is not certain if it will lead to the hiring that makes up for it. Meanwhile, without structural reform, injecting money into the economy could provide a momentary spurt, but would not lead to a self-sustaining cycle of growth.

The new French president should take advantage of historically low interest rates to invest in infrastructure and cut taxes across the board, particularly on labour. It should encourage small-business lending as a way to increase the flow of money in the economy.

The government should also embark on an ambitious agenda of labour market reform and opening up industries, such as retail, pharmacies and the legal profession, that currently have high regulatory barriers to entry. One kind of reform without the other will fail.

The problem is that none of France’s presidential candidates propose doing both.

Pascal-Emmanuel Gobry is a Paris-based writer and fellow at the Ethics and Public Policy Centre; this column does not necessarily reflect the opinion of the editorial board or Bloomberg and its owners.

Bloomberg

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