A more coherent government is a condition for progress, not a guarantee
After the reshuffle, France now has a more coherent government with a reform minded new economy and industry minister, Emmanuel Macron. As such, that’s good news. The short-lived cabinet Valls I was meant to be a “combat government”. A lot of fighting did actually take place but mostly within the government. From the cabinet Valls II, President Hollande demands “coherence, respect and solidarity.”
What changes beyond names?
The French business confederation Medef – whose chariman recently called the economic situation in France “catastrophic” – welcomed the reshuffle. But what changes beyond names? There will probably be new initiatives to improve conditions for growth and investment. There was talk about a VAT hike to fund cuts in direct taxes or social security contributions. There is no clarity at all at this point. We see two reasons for being cautious rather than optimistic:
- First, for many members of in the socialist party, the new minister, a former investment banker, is a provocation. Dissenters among the socialist members of parliament could make life for the government difficult.
- Second, and more important: The key person in the reform process is neither the minister for economics and nor the prime minister but the president. The reform process in France will take up speed only if President Hollande wants that to happen and wants to take the necessary fights with vested interests. He did not want to do that up to now.
The best thing that could happen is significantly more effort in France on the structural side that will be rewarded by Brussels and Berlin according more time for deficit reduction. In our view, ECB President Draghi was completely right in his Jackson Hole speechwhere he implicitly advocated a less restrictive fiscal policy. And maybe Draghi had France in mind when he said another important sentence, stating the obvious but doing that can be necessary from time to time:
“No amount of fiscal or monetary accommodation, however, can compensate for the necessary structural reforms in the euro area.”
Nordea