After pouring tens of billions of euros into the economy to cushion the effects of the coronavirus shutdown, the French government is now planning to inject €100bn of fresh stimulus. With the eurozone’s second-largest economy set to contract by an eye-watering 11 per cent this year — and with the region’s recovery losing momentum and the single currency climbing against the dollar — there is a powerful case for a further fiscal injection to boost growth.
Freed from the shackles of EU fiscal rules, President Emmanuel Macron can afford to be bold. Worth 4 per cent of gross domestic product over two and a bit years, France’s stimulus is slightly larger as a share of national output than the German plan launched in June. In other respects, the French package is markedly different from the one adopted by Berlin. It is as if the two countries have swapped roles. Abandoning ordoliberal orthodoxy, Germany cut value added tax and made direct payments to households to boost demand and consumption, the kind of Keynesian approach France tried for decades with little enduring benefit.
This time Paris has steered away from stimulating consumption directly, arguing that incomes have barely shrunk during the crisis thanks to generous job subsidies and ample household savings. Instead, Mr Macron is pursuing a structural reform agenda under the guise of stimulus. The centrepiece of his plan is a €20bn tax cut for French companies which, almost alone in Europe, have to pay hefty levies according to the value added in their production on top of heavy social charges and corporation tax. Mr Macron has long wanted to ease the tax burden on French companies in the hope of boosting investment and job creation. Now he has the fiscal space to do so.
The stimulus will also pour some €30bn into reducing carbon emissions in transport, buildings, industry and agriculture and developing low-carbon technology. It is a massive public investment programme to help France meet its climate goals without the kind of punitive carbon taxes that triggered the gilets jaunes anti-government protests of 2018.
Finally, €35bn is being earmarked for social and regional cohesion, the lion’s share going to job protection, vocational training, apprenticeships and hiring subsidies. France is maintaining its furlough scheme for two years, but limiting it to sectors still badly affected by social distancing requirements and restricting it to part-time subsidies, which might help avoid a problem of “zombie” jobs.
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By focusing on competitiveness, the green transition and human capital the French plan is coherent with the EU’s €750bn recovery fund agreed in July. Paris is counting on an EU contribution of €40bn to its stimulus. And Mr Macron is keen to show that Europe is now a help rather than a constraint. The risk is that a stimulus that largely hinges on complex spending programmes and EU funding is too slow to materialise. Paris is assuming that the plan will return French output to pre-crisis levels by 2022, with public debt topping out at 120 per cent of GDP thanks to higher growth. Both assumptions look optimistic.
With 21 months to the presidential election, this stimulus plan is helping to define Mr Macron’s pitch for a second term. He remains commendably committed to liberal reforms to boost competitiveness and growth. But his plans will also appeal to green voters and those yearning for a more Nordic-style welfare state. He is counting on €100bn to relaunch the French economy and to revive his political fortunes.