Olly Russ

Can Macron usher in a Golden Decade for France?

Olly Russ

Olly Russ: Can Macron usher in a Golden Decade for France?

Given that his party was barely a year old before he swept to power in May 2017, Emmanuel Macron’s presidential victory was astounding, becoming the youngest ever French President at 39. A young outsider had been handed a mandate for change – but what changes could he actually achieve?

This question may be answered over the course of this summer, as Macron takes aim at the strongest bastion of union militancy – the French railway system. France has recently been held in the grip of a series of public transport sector protests. The once glorious days of the SNCF, the state-owned rail system, have given way to enormous indebtedness and outdated working practices, involving early retirement and jobs for life, which Macron proposes to remove for new recruits. Unsurprisingly, the rail unions are not entirely in favour of this reform, and have backed extensive strikes (currently underway) aimed at bringing the French rail network to its knees, and by extension, the Macron reforms at large.

So far, the strikes – although highly disruptive – seem to be losing momentum, and public opinion is turning against the strikers. If Macron manages to hold the line through the summer (be warned, more strikes are planned in holiday season), he will have shown that even the most resistant parts of the state can be reformed. If that transpires, then France could, as Holger Schmieding the Chief Economist of Berenberg Bank puts it, be standing at the beginning of a golden decade.

This would represent a sharp turnaround in fortunes following the dire Hollande years. Such was the extent to which France seemed to be losing her traditional power and prestige, that a genre of books lamenting the waning of the Fifth Republic justifies its own special entry in the dictionary - déclinisme.

France has a well-deserved reputation for resisting reform. Many a French president has tried to tinker with the welfare state, retirement ages and so on, only for the reforms to be watered down by a well-organised and active union, agricultural and public sector. Does Macron’s unique background as a socialist investment banker mean that he can change the direction of the country?

A stint as an investment banker, which reportedly led him to become a millionaire after working on several high profile French deals, might have helped to refine Macron’s views. In 2012, when working as economic adviser to Hollande, Macron damned a ‘supertax’ of 75% on earnings above €1m as ‘Cuba without the sun’. The never-popular policy forced even Gerard Depardieu to give up his French citizenship.

He then joined the staff of the Elysee, where he gamely tried to increase the totemic 35 hour working week to 37. After being rebuffed by Hollande, he reappeared as Minister of Economy and Finance in 2014. When he again met with resistance to reforms, Macron resigned in 2016 to form his own centrist political party En Marche!.

Progress since his election has been rapid. Macron’s main aim seems to be to improve industrial relations, making them closer to the German partnership model, instead of the rather 1970’s flavour of militancy more often seen in France. Reforms include such things as the limiting of unfair dismissal payouts and improving the ability of companies to hire and fire, long seen as a disincentive to hire in France.

On the fiscal side, Macron has attempted shrink the size of the state, aiming to lose 120,000 civil servants, and cutting 60bn in spending over 5 years. By doing this, he will return France to compliance with the EU’s growth and stability pact. Wealth taxes of up to 1.5% have now been cut in favour of a type of mansion tax. The idea is to lure back to France some of the super-rich driven out under the Hollande terror, hoping their money will help energise the French economy. Perhaps illuminated by his new best Presidential friend, Donald Trump, Macron intends to reduce corporation tax in France from 33.3% to 25% by 2022. Jobseekers will now be more closely monitored in their efforts to find work, and there will be a limit to how many job offers they can actually refuse before seeing their benefits terminated.

The economies of France and the UK are perhaps closer than many on either side would care to admit – they regularly swap places in the global 5th and 6th size stakes, chiefly dependent on currency fluctuations. Yet France’s employment rate (15yrs+) is 49.1% compared with 59.1% in the UK. It can compete with the UK despite this labour shortfall due to its superior productivity. France manages to fit more output into its 35 hour week than the UK does with much longer hours. Imagine how strong the French economy might be if labour reforms there (as everywhere else) led to higher levels of employment.

If economic reform leads to economic strength, the implications for investors in the French stockmarket can only be positive. We have invested almost 20% of the Liontrust European Income Fund into French stocks. While some of this allocation is to multinational businesses with broad geographic revenues, it also includes stocks which give the Fund good exposure to a domestic uplift in the French corporate earnings.

Vinci, for example, is a construction and infrastructure (airports, rail, toll motorways) play which generates around 60% of revenues in France. Kaufman & Broad, a housebuilder and real estate developer, has an even greater domestic focus – operating only in France. Since Macron came to power, he has overseen an extension to government initiatives that should support the French housing market for the next four years and support earnings momentum for Kaufman.

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Key Risks

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Wednesday, May 2, 2018, 9:09 AM