09 May 2017

The French press note that their UK counterparts are viewing Emmanuel Macron’s victory as bad news for Brexit. But Jill Rutter says that will be tempered by his number one priority: fixing the French economy.

Reforming France

Emmanuel Macron tried to reform the French economy as Economy Minister. He now must try again, this time as President. The chart below explains the challenge he faces. 

French and German labour costs

German reforms in the early 2000s brought down the relative cost of German labour. In the five years before the financial crash, German export prices rose by 0-1% a year, while French export prices rose by 2-3%. In short, the question is whether Macron can Schroederise the French economy, pushing through labour reform.

To have any chance of success, his immediate priority must be to establish a working majority in the National Assembly, which votes in June (his party starts from no seats at all). But seeing off a bunch of flawed candidates through a presidential election system that seems designed for an interloper may be easier than taking seats off hundreds of incumbents.

Reforming the Eurozone

His second big mission is Eurozone reform. While many portray this as unequivocally “more Europe”, for Macron it is about giving the Eurozone the institutional underpinning it needs to work. This was on the agenda back in 2015 when the UK was renegotiating the terms of its membership. Former Chancellor George Osborne went to Germany and made the case for Eurozone reform, to put the currency on “a sound legal basis” – but the UK also threatened to veto reform if its interests were not protected, as it did in 2011. 

Macron will find his Eurozone reform project easier without the UK’s concerns about future bailouts or potential discrimination against non-Eurozone countries. Macron warns that without this reform the euro will be “mort”. But success will mean he needs to persuade Germany, after its own elections – and with a potentially flagging Alternative für Deutschland – to support pooling more economic sovereignty for the benefit of other countries.

Brexit

Further down the Macron list (whatever we like to think) will be Brexit. Before the election, he gave interviews suggesting there needs to be a hard Brexit, taking similarly hard lines on other bilateral issues

Macron’s Brexit position is not very different from that of President Hollande or indeed President Fillon, although they probably would not have taken their victory walk to Ode to Joy. But he will also need to be very conscious of the potential impacts of the harder forms of Brexit – or the UK leaving the EU without any sort of a deal on the French economy. 

Tough line for the City

The Evening Standard poses Macron as a threat to the City. Indeed, it has clearly been an objective of the French Government to use Brexit to persuade some of London’s financial services business to relocate to Paris (rather than go to Frankfurt, New York or Zurich – or stay put).  

That suggests tough lines on passporting, regulatory equivalence and, to maximise the short-run incentives to move, no rush to offer an orderly transition. Against that, the UK’s 150,000 French citizens (according to the Office for National Statistics (ONS), the French Consulate puts the figure at over 200,000), who may prefer to stay in London, will be able to vote in the upcoming National Assembly elections. 

Their voice may mean that the new French government also prioritises guaranteeing their continuing rights to stay in the UK – though increasing their incentive to relocate back to France could help Macron’s economic reform project.

But what about goods?

If the UK leaves the EU with no agreement, and trades on World Trade Organization (WTO) terms, there would be impacts on UK exports. But trade disruption cuts both ways, and French business would lose too.  

French exports

Some of France’s largest exports to the UK are those that would be most affected by a disorderly Brexit. Medicines, the largest export sector, could be disrupted by the UK’s departure from the regulatory umbrella of the European Medicines Agency. Disruption at the border would also damage the lucrative car trade, where France is built into the UK supply chain – exporting almost as many parts to the UK as it does finished products.

The biggest challenge might be on agriculture. The UK consumes around 10% of France’s cheese exports, 15% of wine exports, 15% of chocolate exports and 20% of bread and cake exports. This trade might suffer if the UK goes through a disruptive exit from the EU’s food regulation regime. The UK has said that it intends, at least initially, to copy the EU’s schedule of tariffs at the WTO.

So, a “no deal” scenario could lead to the UK applying a 141 €/100 kg tariff to Roquefort, potentially adding 6% to the retail price, a 32 €/hl tariff to Champagne, and charging French chocolate according to its own version of the “biscuit matrix”

The border

The French border is the second trickiest border to deal with in the Brexit talks. After Ireland, the next most crucial entry points are between France and the UK. For people crossing the border, the important issue (a bilateral one) is whether France continues to allow UK border processing in France. It makes life easier for travellers – but is also what strands asylum seekers in Northern France. It is a deal done in the Treaty of Le Touquet – something Macron first said he wanted to tear up, then said he would renegotiate.

There is also the issue of customs. At the moment, the Customs Union means that goods can flow freely across the border. Borders have been honed to facilitate frictionless trade; they’ve been designed for speed and volume. But Brexit will mean increased checks; the UK will need the capacity to check EU imports in Dover and the French will be required to enforce the EU’s customs regime in places like Calais.

With British lorries currently leaving the ferry at Calais and joining the motorway in minutes, Macron will need to work out how much of a priority he is going to give to investing in the upgraded facilities that will be needed to process goods. But France’s real interest will be in making sure the UK’s ports are ready to cope with the trucks coming over with (perishable) French imports.

Fin

A new (and relatively inexperienced) French President has just become a key player in the Brexit talks. In the UK, we will interpret his every move through the lens of what it means for Brexit – indeed the French press reported the British press doing just that. But the key thing we need to remember is that his in-tray at the Elysee when he takes over next week has other more pressing issues on top.