July 5, 2017 – This post was written by Suzie Bombarde Gough and Athanasia Kokkinogeni, Europe Analyst
On June 18, Macron’s liberal En Marche! party won 350 out of 577 seats in France’s parliament, securing majority. In view of Macron’s reformist agenda, this could bode well for MNCs conducting business in France. While we are likely to raise our forecasts for the market, we remain cautious about the scale and speed of the positive effect on the market as Macron will face significant opposition to his most meaningful reforms.
If his reformist agenda is implemented, MNCs will see improved consumer and business prospects as France’s economic health strengthens. Additionally, markets linked to France through trade, tourism, or investment, such as countries in the MENA and Francophone West Africa regions, may see a gradual boost to demand that supports their economic outlooks. Improved expectations were already reflected in the euro exchange rate, which strengthened against the US dollar to 0.89 (1.12). Euro appreciation also contributed to lower consumer prices in France, 0.8% YOY in May, down from 1.3% YOY in January.
Macron has committed to legislate a list of reforms including of the labor code, unemployment, pension, public spending, and the Eurozone (see detail in the table below.) Amongst these, the labor code reform will likely be implemented first, because it is a continuation of a failed similar attempt by France’s previous prime minister, Manuel Valls, and hence could be the most contested. Second and third on his agenda are unemployment and pension reforms, which will likely be delayed due to public opposition. MNCs can expect some positive domestic reforms during Macron’s term, such as labor reform, but shouldn’t expect ambitious pension and unemployment reforms to be passed within the given time frame, or within their currently intended scopes.
Additionally, Macron is proposing to revamp the EU project by 2022, creating a eurozone budget, finance minister, and parliament with fiscal duties, structuring European defense, as well as toughening the EU’s stance on foreign trade and dumping (20% likelihood). The eurozone budget, parliament, and minister reforms appears unlikely: although German Chancellor Angela Merkel publicized her support for Macron, she will be cautious given the approaching German federal elections. While the CDU/CSU is set to win the elections and create a coalition with the Socialists, fear for a stronger populist Alternative for Germany (AfD) means Merkel is likely to tread lightly with controversial reform programs before then.
Boosting European defense wouldn’t appeal to the indebted South but would still be supported by fears surrounding terrorism and possible lobbyists, and hence could be more likely than the proposed EU reforms.
Lastly, Macron’s tougher stance on foreign trade will face resistance from EU members reliant on exports, such as Central Western Europe, and firms dependent on foreign imports, making it unlikely to succeed; if implemented, this reform could reduce imports, notably from China, but also increase import costs.
As a result of implementing this agenda, Macron claims that by 2022, the end of his first term, unemployment in France will have fallen to 7% of the labor force from the current 9.5% rate, and economic growth will increase to 1.8% YOY from 1.4% YOY for 2017. B2B MNCs in technology, defense, renewable energy, education sectors, healthcare MNCs, and B2C MNCs can hope for improved prospects. However, MNCs should expect resistance from parliamentary opposition and unions, especially for pension and unemployment reform, to cause delays and potentially scaling back some of the current promises.
Macron’s current approval rating is rising, reaching 64% in June from 62% in May after the presidential elections, but his government could face decreasing popularity because of opposition to his labor, pension, and unemployment reforms. France is likely to see protests and strikes organized by unions like the General Confederation of Labor (GCT), which are likely to cause delays in the implementation of the reform agenda. The Socialist, National Front, Republican, and France Unbowed parties stated their opposition, but with 167 seats, they aren’t able to stop a vote.
Macron’s presidency and parliamentary majority have been an optimism boost, calming political uncertainty in the EU, and MNCs are likely to experience a more meaningful benefit from them only in the medium to long term. By 2022, B2B, B2C, and B2G MNCs could see an improved economic environment, but should monitor French political activity closely, and maintain conservative expectations for the time being.
MACRON’S DETAILED REFORM PLAN: WHAT IT MEANS FOR MNCS
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