France: Emmanuel Macron’s first reform under way – ING

The French National Assembly this week defined the limits of the executive orders the Government will be allowed to take to reform the labour market, which allows the Government to go faster on the reforms which should be finalized before the end of September, notes Julien Manceaux, Senior Economist at ING.

Key Quotes

“Hard discussions will take place in the coming weeks. As President Macron is facing his first domestic political crisis, he still needs to prove that reforms can work.”

“While Emmanuel Macron is facing his first political crisis, his party continues to make progress towards a reform of the labour market. This is the first reform President Macron wants to achieve, and in a relatively narrow agenda. The reform should be finalized before the end of September. It will be composed of several executive orders which will be worked on during the summer and finalized for 28 August. The first step was actually this week when the Assembly defined the limits of these executive orders and voted on the Government’s right to proceed through executive orders within these limits. The vote showed a wide support with 270 votes against 50.”

“The content of the executive orders will be negotiated in the coming weeks but discussions have already started at the end of June between the Government and the social partners. They will amend the so-called El Komhri Law (the watered down labour market reform PM Valls had to force through Parliament under François Hollande’s Presidency), especially on labour market flexibility. With unemployment still extremely high especially among the young (more than 20%), more flexibility around fixed-term contracts is essential to ensure their access to more attractive contracts.”

“A major step would be the definition of a rule to define severance payments. Indeed, as France has one of the lowest standards in Europe (20% of one month salary per year in the company), severance payments are most often determined through Courts. This makes it uncertain and expensive to dismiss workers on fixed-term contracts. For that reason, most of the job creation in recent years has taken the form of less attractive contracts.”

“On this chapter, it seems that a breakthrough can be envisaged as Labour Minister Penicaud evoked a maximum of 100% of one month salary per year in the company with a maximum of 20 months, a standard that would be closer to the norms in neighbouring countries like Belgium.”

“The labour market will of course contain much more elements. However, it will be a test for Mr Macron’s willingness to reform. His insistence on short-term spending cuts cost him his army chief this week (even though the army’s budget is settled to increase towards 2% of GDP in 2021) and complaining voices are already coming from the education sector and the municipalities against the first 2017 budget cuts announcements. Still, the Government is short EUR9bn it wants to reduce the deficit-toGDP ratio to 3% this year, a necessary condition to support Mr Macron’s pro-European policy. All in all, the coming months will be key for his Presidency: his successes on the international scene are already numerous, but if he wants to satisfy the French, he also has to show that there are other things than budget cuts on his menu. As essential as it is for the French economy, the labour law reform success looks even more essential to President Macron himself.”