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Berthold Busch iwd 13. April 2017

Presidential elections in France: A lot to do for the next President

Whatever the French may choose to be their new head of state at the beginning of May, he or she is faced with major economic challenges. Especially in the areas of labor market and public finances further reforms are bitterly necessary.

The first round of presidential elections will take place in France on 23 April; But the winner will not be selected until 7 May.

The fact that the whole of Europe is particularly stunned by Paris this time is especially due to the strong ratings of Marine Le Pen, the head of the Front National. She wants France to be out of the Euro area and eventually even out of the EU.

Even if one ignores this nightmare scenario, every election in France is relevant for Germany. The two countries are important political partners, which have given the EU a great deal of impetus. The economic ties between the two are also strong – France is the second largest export market for German companies behind the US. In 2016, the value of German goods sold to France amounted to 101 billion euros.

Germany cannot ignore that France is struggling with major economic problems. The French suffer from a shrinking per capita GDP (graph). In international competitiveness rankings, France is underperforming and only achieving mediocre results. The World Economic Forum's Global Competitiveness Index, for example, ranks France 21st out of 138 countries, which is much worse than Great Britain (7th place) and Germany (5th place). Particularly unfavorable is the situation on the labor market and in the field of public finances:

Labour Market. For years France has been struggling with high unemployment. During the term of office of President François Hollande, the number of job-seekers has risen even further: between May 2012 and January 2017, the number of registered unemployed in France rose from 2.8 million to almost 3 million - the unemployment rate rose from 9.7 to 10.0 percent.

It is especially difficult for young people to find a job. Currently, 654,000 under 25s are registered as unemployed - almost 24 per cent of all economically active population in this age category.The reason for the bad figures is the high labor costs and the strict regulations of the labor market. For example, France's dismissal protection provisions are among the most restrictive of all OECD countries. This is complemented by the 35-hour week and a gross minimum wage of 9.76 euros per hour since January 2017, which corresponds to a gross monthly wage of more than 1480 euros.

The French government has certainly tried to break down some barriers to employment through reforms. These include a tax credit for companies that employ low-income earners, as well as the so-called Pact for Responsibility and Solidarity. This pact lowers, among other things, the social insurance contributions of employers for low-wage recipients.

In addition, the so-called Macron Act reformed the labor market in parts. As a result, companies and employees can, for example, agree on wage reductions or longer working hours in economically difficult times in order to secure employment. For compensations in case of redundancies, there are now indicative values which are based on the period of employment. There has also been some progress in the services sector - businesses may have longer opening hours, and in some regulated professions more liberal pricing rules and market access conditions are now in place.

However, further reforms are needed to bring the labor market to a higher and more sustainable level. For this, the future French government needs to better cope with the resistance of trade unions.

Public finances. Action must also be taken in the field of fiscal policy. The country has almost never met the Maastricht criterion according to which the budget deficit should be less than 3 per cent of GDP in the past few years (graph): in the course of the economic and financial crisis, the budget deficit in 2009 rose to more than 7 percent of the economic output. Since then, the French government has only reduced it to 3.3 percent.

Consequently, debt has risen steadily over the last ten years - to almost 2150 billion euros at the end of 2016. There is no trend reversal to be expected in coming years, because the budget is still in the red even after the deduction of interest payments, and the economy is growing only moderately. If capital market interest rates rise again, debt will weigh even more on the French treasury.In order to deal with the finances, Paris must focus on expenditures: in 2015, the French government expenditure amounted to 57 per cent of GDP, which was significantly higher than in Germany (44 per cent) or the UK (43 per cent).

The above-average expenditure ratio is mainly attributable to social benefits, which most recently had a volume of 26 per cent of the economic output. However, the many employees in the public sector also play an important role - the salaries in the public service at 13 per cent of GDP are significantly higher than in comparable industrial countries.

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