In May 2016, reports indicated that every third gas station lacked fuel for drivers and that the country’s electricity supply was decreasing. After days of union strikes at oil refineries, effectively blockading oil imports, workers from more than a dozen nuclear power plants walked off the job. Even nature seemed to join the demonstrations, as deadly storms caused the worst flooding France had seen in 35 years, leading to a “national emergency.”
The real showdown began on June 10th, when the Euro 2016 football tournament kicked-off with matches in ten French cities. Ahead of the tournament, a number of railway unions called for a rolling strike, as well as an open-ended strike on the Paris underground and suburban commuter train network. Air traffic controllers have also planned a three-day strike – their 47th since 2009.
Nevertheless, France’s economic uncertainty and market volatility are just beginning. When socialist politician François Hollande replaced the conservative Nicolas Sarkozy as the French president in May 2012, the latter’s ratings plunged. In contrast, Hollande’s ratings hovered at around 58 percent. Today, Hollande’s ratings are at a new low of 15 percent. The government is hammering the message that “things will get better,” but the French aren’t convinced. According to the polls, some 60 percent of the population sides with the General Confederation of Labor (GCT), one of the country’s largest unions and staunch opponent of the proposed labor law changes.
In France, efforts to change the labor code have often resulted in conflict between the government and the unions. In 1995, huge strikes forced President Jacques Chirac to back down from proposed changes to the pension system. Strikes also erupted in fierce opposition to President Sarkozy’s attempt to raise the retirement age. Now, as France’s Socialist government is pitted against the country’s unions and the radical left, the net effect is bitter disappointment and fragmentation.
Today, Valls’ popularity has fallen to 24 percent, the lowest it has ever been. Economy Minister Emmanuel Macron’s approval remains around 45 percent, which makes him the most popular member of the government and may result in him launching his own “great march” for the presidency in France’s upcoming 2017 election. Macron was a member of the Socialist Party only briefly, from 2006 to 2009.
Reflective of “labor aristocracy,” rather than labor, Hollande, Valls, and Macron may no longer understand the constituencies they represent. Most tragically, they offer little in terms of new, radical Keynesian or socially minded fiscal and monetary policies that could serve as a viable alternative. This is particularly true within the framework of what PS die-hards regard as a neoliberal class war seeking to undermine union power, eliminate workers’ rights, and reinforce income polarization. Critics call Hollande “Flanby,” a cheap, sugary, bland pudding sold at French supermarkets – an apt metaphor for the government’s not-right, not-left, not-even-in-the-center economic policies.
After half a decade of stagnation, the French economy is finally benefiting from a cyclical rebound, thanks to a more accommodative external environment – including lower oil prices, a depreciated euro, record low interest rates, and the European Central Bank’s (ECB) quantitative easing. Nevertheless, the shifts in the external environment cannot compensate for France’s longstanding internal rigidities, which continue to overshadow the economy’s medium-term potential.
The November 2015 Paris terror attacks adversely impacted the country’s growth as its tourist industry suffered. Almost half of the French now view the country’s large Muslim minority as “mainly a threat” – bolstering support for Marine Le Pen, the leader of the anti-immigrant National Front, to 20-30 percent in polls. Le Pen poses a risk to both socialist and conservative contenders in the 2017 elections.
Ironically, President Hollande, who won the election in 2012 with promises to take down the wealthy and reinforce social safety nets, now seems determined to reverse both objectives. As Hollande’s government continues to struggle amid escalating opposition, growth will deteriorate, debt will climb, and fiscal flexibility will decline further. As a result, a sovereign downgrade is no longer excluded in 2016-17. In that case, yields may rise, which would reinforce negative feedback scenarios.
Even if Hollande’s government can realize labor reforms, growth will only amount to 1.5 percent in 2017, at best. Afterwards, France may face a period of deepening stagnation, with growth declining to below 1.0 percent by the early 2020s. At this point, cutting general government debt from 100 percent to the low 90th percentile by the mid 2020s is illusionary.
Politically, President Hollande cannot afford to give in to the opposition or acquiesce to the demands of the strikers. However, neither can the unions remain complacent. In the absence of strong political support, French Prime Minister Manuel Valls forced the new labor legislation through the lower chamber of Parliament, relying on rarely invoked executive power. The French Senate will begin talks about the legislation after mid-June. The El Khomri law, named for France’s labor minister, proposes reduced pay or longer working hours, but no changes to the 35-hour workweek. After backlash from the unions in response to the proposed labor reforms, President Hollande diluted the proposed reforms, which will not be adequate to revive the economy, according to the International Monetary Fund (IMF).
Thanks to their substantial role in the Eurozone economy, French banks, given their size and interconnectedness, could generate concerning effects, not just domestically, but also through spillovers in Italy and emerging European markets. If the government fails to boost investment and business confidence, consumer confidence will suffer from protracted stagnation. Ultimately, should the external environment grow less accommodative and should reform progress slowly, the world’s sixth largest economy will begin to shake – leading to a prolonged period of financial volatility that will move beyond France’s borders to cause devastating ripple effect impacting other ailing European economies.