The Macron effect

Emmanuel Macron has implemented a swathe of reforms since his election as President of France in May 2017, but further challenges lie ahead to revitalise the economy.

4 minute read

Emmanuel Macron

In the year since becoming the youngest ever President of France, Emmanuel Macron has looked to exploit his overwhelming parliamentary majority and a major shift in public attitudes to push through reforms previous leaders have attempted in vain. Macron’s government has already eased labour regulations, abolished the wealth tax on assets, simplified capital gains tax, and reformed and cut corporation tax. However, key battles lie ahead.

The French economy has certainly improved since Macron walked through the doors of the Élysée Palace. The economy grew by 2.2 per cent in 2017, the fastest growth rate since 20071&2. Admittedly, growth has slowed in 2018 but that may prove a temporary blip, reflecting harsh weather in the first quarter3. Meanwhile, the budget deficit fell below three percent for the first time in a decade in 20174 and foreign direct investment also reached a 10-year high5.

While it would be generous to give Macron all the credit for the pick up in growth or fall in the budget deficit, a sharp improvement in business sentiment following his election augurs well, says Larissa Brunner, Western Europe analyst for Oxford Analytica, a consultancy. Macron has said it will take 18 months to two years before the impact of the reforms will be seen and that most will only be effective in the medium to long term.

Reforms on track?

Macron’s current battle to reform the debt-ridden national state-owned railway SNCF will prove pivotal to his presidency, says Geoffroy Lenoir, head of European sovereign rates, Aviva Investors. “The government needs to disengage from SNCF and make sure it is competitive given the company’s domestic passenger rail monopoly will come to an end soon under European Union rules,” says Lenoir.

Macron has proposed ending job security, early retirement (workers can retire as early as 52 due to rules introduced in the much more physically-demanding steam age) and special pensions. But these reforms would only apply to new recruits. The country’s powerful rail unions responded to these relatively modest measures by launching a series of rolling strikes, which began in April.

Comparisons have been made with 1995, when paralysing strikes forced the conservative government of Prime Minister Alain Juppé to backtrack over welfare and pension reforms. However, Brunner believes Margaret Thatcher’s showdown with the mineworkers in the 1980s could prove a better parallel.

“Like Thatcher, Macron can’t afford to back down. His credibility would be destroyed and the opportunity to implement further reforms would disappear; he would be a lame duck for the reminder of his term,” argues Brunner.

Fortunately for Macron, he could be taking on organised labour at an opportune time.

“People backed the unions when Juppé tried to implement reforms,” says Frédéric Tassin, head of equities, Aviva Investors France. “Today, most French people do not understand why strikes are taking place and want the disruption to end. The fact Macron encountered little opposition when he introduced laws making it much easier to fire workers highlights the shift in mood.”

A poll released by the French Institute of Public Opinion on 20 May showed 58 percent of respondents thought the strikes were “completely” or “rather” unjustified, while nearly two-thirds wanted Macron to continue “all the way” with his policy changes6.

Start-up nation

Tassin believes a profound change in overall attitudes to the economy is taking place. “France is a very conservative country where people don't like to take risks,” he says. “Today many graduates are now creating start-ups rather than seeking to work for a large company or the public sector, and banks are adapting, making it easier for entrepreneurs to access finance. That trend will drive the country in a different direction over the next 10 years.”

Macron’s promise to transform France into a 'nation of start-ups’ seems to be coming to fruition. Total new business creations per month have increased from under 48,000 in April 2017 to nearly 56,000 in April 20187. Reforming the unemployment benefit system is another target for Macron. “That should not prove controversial as it won’t require sacrifices by workers but will help freelancers and others in the ‘gig economy’”, says Brunner. Macron also wants to reform the system so that incentives are structured to encourage people to return to work as quickly as possible.

But reform of the highly-fragmented mandatory pension system, another item on Macron’s agenda, could prove much more difficult. “That will require some to make sacrifices,” argues Brunner. Private sector and public sector pension regimes currently differ in terms of the retirement age and how benefits are determined. Macron has pledged that workers’ contributions solely should determine monthly pension benefits and not their profession or sector.  

Tackling the government’s finances is likely to prove Macron’s biggest domestic challenge, however. Government spending continues to rise, even though the public sector already accounts for nearly 56 per cent of GDP8.

“That is simply too high a level and means many initiatives, such as dramatically cutting taxes, are impossible. Even though Macron has cut corporate taxes, the overall tax burden is higher, particularly for the middle classes. That hampers the ability of individuals to consume and corporates to invest,” says Tassin.

“Macron promised that public spending will have fallen as a percentage of GDP by the time he leaves office and that will prove a key test of whether his administration can be regarded as a success,” he adds.

Investor sentiment

Nevertheless, Macron’s relatively positive progress to date means France’s appeal to investors is increasing. “The mood among domestic and foreign equity investors across all sectors of the economy has improved,” says Tassin. The country’s CAC 60 large-cap index outperformed both Germany’s Dax and the pan-European Euro Stoxx 50 over Macron’s first year in office9.

Meanwhile, French government bonds offer “fair value” to investors, according to Lenoir. “The spread between French government bonds and bunds has tightened since Macron’s election, but the same could be said of Portuguese and Spanish bonds,” says Lenoir, while adding that reducing government debt – which reached 97 per cent of GDP in 201710 – remains a key issue.

However, Macron’s ability to drive European political integration, which would be positive for sovereign debt, could ultimately define his presidency, adds Lenoir. Macron’s proposals include the creation of a eurozone budget, a finance minister, a single deposit-guarantee fund to complete the banking union and tax harmonisation, which would pave the way for the eventual pooling of eurozone debt. The question now is whether Macron can persuade Germany, the bloc’s largest and most significant contributor, to agree.


1French growth revised upwards’, Reuters, 15 March 2018

2Economic growth revised upwards’, AFP, 15 May 2018

3Growth slips’, AFP, 27 April 2018

4French deficit falls below three per cent’, Reuters, 26 March 2018

5Foreign investments in France hit 10-year high’, Radio France Internationale

6Macron is winning public opinion’, The Wall Street Journal, 21 May 2018

7Measuring France under Macron’, Reuters, 3 May 2018

82017 Article IV Consultation Press Release’, IMF, September 2017

9French momentum marks Macron anniversary’, Financial Times, 7 May 2018

10France government debt to GDP’, Trading Economics, May 2018


Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.