France

Macron’s Crisis Policy on Trial

Besides Belgium, France has been hit particularly hard by the second wave of the corona pandemic. As a result, the government has imposed a strict curfew for the second time. All “non-essential” shops are closed until 1 December, with a high likelihood of extension. This concerns companies especially in the pre-Christmas period, which in some industries defines the annual revenu. Updates to the 2020 forecasts have shown that the second lockdown is expected to reduce France’s GDP by 11 instead of 10 percentage points. By way of comparison, the forecast for GDP decline in Germany is 5.5 percentage points for the entire year of 2020.

In addition to this economic ordeal, France is currently exposed to at least two other forces that are exacerbating the divisions in the country: on the one hand, the country is once again affected by terrorism – the attacks in Paris and Nice were a painful reminder, shaking French society to its core. On the other hand, there is a fundamental mistrust toward the political elite, which, despite the government reshuffle remains and continues to grow among the current leadership around Prime Minister Jean Castex and President Emmanuel Macron.

How can this triad of challenges be met? In any case, an indispensable element of an effective counter-strategy is a forward-looking economic policy that takes into account the lines of division and ensures a way to maintain the competitiveness and innovative strength of companies. Such a forward-looking economic policy in France should complement Germany’s measures and, in tandem, advance the EU as a whole. Three aspects should be given priority.

1. Economic Recovery Through Innovation and Future Technologies

With “France Relance”, France presented its economic recovery programme in September 2020, launching an economic stimulus package of historic extent. This package encompasses 100 billion Euros, 40% of which will be financed by the European Union. Three priorities will each receive almost a third of the budget: 30 billion Euros to accelerate environmental transformation, e.g. by investing in the rail network, renovating buildings or decarbonising industry. 34 billion Euros will directly benefit businesses, by reducing taxes and providing business support. In addition, the reshoring of production back to France in order to build “industrial sovereignty” will be supported with €1 billion Euros. Lastly, 35 billion Euros will be allocated to the promotion of  social and territorial cohesion, in particular boosting employment, for example through a youth aid programme for hiring vocational trainees or skills development.

Using post-corona recovery measures to foster investment in future industries is essentially a good idea. However, the guiding principle for a future industrial policy should follow the guideline of defining goals by leaving space for implementation. Both Germany and France agree that digital transformation and a more climate-friendly economy are necessary to achieve innovation. This was also the conclusion of the Franco-German Business Day, co-organised by the Friedrich Naumann Foundation for Freedom and attended by high-ranking German and French economic stakeholders. Yet, in order to promote innovation, it is fundamental to not intervening  in the market too extensively, by being open to different types of technology. Indirect incentives for innovation, such as R&D tax credits or the definition of common standards for intellectual property rights, are more effective than direct support for individual technologies. Innovations cannot be enforced but rather facilitated by the state, which can set appropriate incentives and targets (e.g. a C02 cap) and create ideal framework conditions (e.g. by removing bureaucratic hurdles for establishing a business) in which companies can further develop their technologies.

2. Smart Reshoring Instead of State Protectionism

In recent years, France has repeatedly expressed its desire to return to its former industrial strength. At the beginning of September, Bruno Le Maire, Minister for Economic Affairs, together with Barbara Pompili, Minister for the Green Transformation, announced France’s ambition to become the European leader in hydrogen technology. These and other initiatives must be seen not least against the background of the decline of the manufacturing sector, which today accounts for only 13.5% of the GDP, in contrast to around 30% in the 1980s. 

This development encourages populist tendencies, since progressive deindustrialisation leads to the vanishing of well-paid jobs. Consequently, globalisation and the EU, but also especially the euro and free competition are being blamed in a stereotypical way – Marine Le Pen’s (hate) tirades are the best proof for that.

It is true that the corona pandemic has shown that the EU as a whole was not crisis-proof in certain key sectors and that Europe must guarantee its supply. Reviewing and diversifying supply chains may therefore be appropriate at one point or another, but the crisis is above all a reflection of a lack of preparation for such an emergency. There must not be a return of state protectionist policies and programmes. For a functioning economy and recovery from the crisis, free world trade and open competition – between European and non-European companies – are the guarantees for innovation and value creation. If whole industry branches were to be relocated back to Europe or even individual countries on a large scale, Europe would forego the advantages of the international division of labour.

3. No Reconstruction at the Expense of the Next Generation

An almost casual discussion is now being held on the question of who will ultimately have to pay for the enormous support services for the economy. There is no doubt, that the Franco-German agreement in the summer and the subsequent breakthrough in negotiations at European level on a joint support programme (Next Generation EU) was a necessary political prerequisite for overcoming the crisis. However, the varying framing in Germany and France was striking in this respect: In Germany there was a discussion from the outset that the financing of such an economic stimulus package through new borrowing should be one-off and limited in time, and that the distribution between loans and direct grants should be appropriate. Meanwhile, in France there was almost a celebration of the departure from the German dogma of budgetary discipline and a celebration of mutualising debts.

However, debt must not become an end in itself and the debate on intergenerational debt justice must not be forgotten. According to current forecasts of OECD, the national debt ratio in the EU is expected to increase from 79.4%to 95.1% of the GDP as a result of the Corona crisis. Yet, such massive support measures can only be based on sound finances in stable times. For this reason, compliance with the criteria of the Stability and Growth Pact should become a defining factor in determining the course of the economy again as soon as possible. For example, France plans, with the help of the France Relance programme, to already reach its 2019 GDP by of the end of 2022 and to repay the newly contracted debt by 2025 at the latest.

Enabling Cross-Border Cooperation for the Entire EU

Against the background of these challenges, a coordinated approach of German and French economic and industrial policy is particularly important. Mutual exchange and cooperation in initiatives such as “Gaia X” or in industrial production (Airbus) can drive forward jointly defined key sectors by creating an ideal investment and research climate, which other players can join. It is important that this remains an open process and that bilateral initiatives launched by Germany and France can also become pan-European initiatives. The creation of a European Agency for Jump Innovations or European start-up camps are still pious hopes; Germany and France can move forward together and prepare the ground bilaterally for further initiatives.