France is gearing up to propose a new “growth contract” with its eurozone trade partners, hoping to encourage more countries in Northern Europe to invest in their southern neighbours, and thereby continue to encourage additional economic reforms. The proposed growth contract would encourage financially weaker, and less competitive states to undertake reforms, in exchange for addition investment from economically stronger states like Germany, the Netherlands, and Finland.
Finance Minister, Bruno Le Maire, had set out to present his proposal at a recent G7 meeting in Washington.
“We can’t just stand there with our arms crossed in the face of the marked and worrying global slowdown”, Le Maire told a French parliamentary finance commission. “I think eurozone finance and economy ministers have a responsibility to take action.”
Nor is this the first time France has made the call for increased investment from Northern Europe. Though so far, such appeals have largely gone unheeded. In 2014, then-economy minister, Emmanuel Macron, had urged Germany to spend an addition 50 billion euros on investments to support the European economy. However, this time Le Maire insisted that this was not merely a repeat of such a request, highlighting the fact that France was already pushing ahead with its own economic reforms.
Still, he would prefer the rest of Europe also get involved: “Solidarity requires that they make the necessary public investments, so that overall the eurozone does better. If it is everyman for himself, there is no point in being in a monetary union”, he said.
Ideally, this investment, paired with stronger reforms in Southern Europe, would help bolster against future economic shocks. However, Le Maire is also pushing efforts, such as having a shared budget, to rule out economic divergences, finalising a planned backstop for bad loans, and better integration of financial markets, in order to ensure a more stable economy for Europe in the long run.
Le Maire makes his current proposal amid a global economic slowdown – in the midst of trade tensions – particularly the US-China trade war, and Brexit anxiety. The IMF also downgraded its outlook on the economy recently, for the third time since October. Even regional powerhouses like Germany and Italy are feeling the pinch. Though things look slightly less grim in France: while the IMF forecast growth in Germany at 0.8% and Italy at only 0.1%, France was forecast to grow at a rate of 1.3%. The global economy is only expected to grow 3.3% this year – the lowest increase since 2016. And next year’s forecast is only a marginally improved 3.6% expected growth.
The IMF advocated that major economies, such as China and Germany, take short-term actions to forestall the worst. “This is a delicate moment for the global economy”, said IMF chief economist Gita Gopinath.
“In this context, avoiding policy missteps that could harm economic activity should be the main priority”, the IMF said in its report.
On top of that, the Organisation for Economic Cooperation and Development (OECD) warned France, that despite ongoing unrest with the Yellow Vests and slowed growth, France must still maintain its rate of economic reforms. After Macron quickly rewrote labour laws to make hiring and firing easier at the start of his five-year term in 2017, France, which is the second-largest economy in the eurozone after Germany, has since lagged in instituting economic reforms.
In its biannual country report on France, OECD wrote, “Continuing pro-growth reforms, in line with recent measures, is key to further reducing unemployment.”
“However, short-term negative impacts on some categories of the population should be compensated, to ensure the social acceptability of the reform process”, it added.
If Macron were to continue with his reforms, the OECD reports that it could boost GDP by 3.2% over the next decade. Additional ambitious reforms, like faster spending cuts, or raising the retirement age, could potentially make that boost a full 5%. The benefits would mostly be felt in middle and lower-middle income households.
Nevertheless, in a bit of good news, the IMF also expects the economy to pick back up shortly afterwards – if things go well. Expecting pressures like social unrest in France, or the shock of new car CO2 emission rules on Germany’s auto sector to abate, and depending on an orderly Brexit, the IMF anticipates domestic demand will pick up the slack and drive further growth.
Poul Thomsen, director of the IMF’s European Department, told CNBC that “The European slowdown (…) has been pretty pronounced. We expected some slowdown, growth had been above potential for a while, it’s quite a mature recovery, (but) we were surprised by the softness and the depth of the slowdown.”
Speaking also with CNBC at the IMF Spring Meetings, was Klaus Regling, the Managing Director of the European Stability Mechanism. Regling noted that eurozone economic growth is not likely to return to a 2017-era boom, neither is the region entering a recession.
“We will not see in the next two, three years, the growth rates of 2017. It’s quite OK to say that the best is over, but it doesn’t mean that there is a crisis.”
Furthermore, OCED estimates that a coordinated package of reforms and stimulus, like what Le Maire suggests, could boost growth by 0.5% over the next three years.
