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December 22, 2017

Will Macron be the new de Gaulle?

Emmanuel Macron has only been in power for six monthsr, but his impact on France is already being compared to that of Charles de Gaulle. He reduced his political adversaries to midgets, and won an election coming out of nowhere with a coherent programme he has already started to implement. In less than six months he has changed labour and taxation laws, and this is only the beginning of a long list of planned reforms. 

In Les Échos Jean Marc Vittori applauds this spectacular achievement, though he raises two profound doubts. One is about the real impact of his reform agenda. There is a long way from political statements on the campaign trail to practical results. Vittori gives two concrete examples: the scope of labour arbitration has been limited, but this may be challenged by a growing number of complaints of harassment and discrimination. And the scope for bargaining at company level could be narrowed by the extensions of collective agreements. 

The second doubt is about public finance. This is the blind spot in Macron's programme. Like his predecessors he has nothing to offer but a technocratic approach to spending cuts. But the choice is fundamentally a political one, writes Vittori. And right now Macron is, like others before him, avoiding a fundamental spending reform.

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December 22, 2017

2018 through the looking glass

As we end 2018, Emmanuel Macron is the strongest leader in the EU, Brexit is still on track, and Angela Merkel is facing an uncertain political future. It would have taken a brave forecaster a year ago to predict these turns of events. The mainstream predictions for 2017 were that Brexit would have derailed by now, that François Fillon would be the president of France, and that Merkel would be well into her fourth term of office.

As this year ends, we are not going to make predictions for 2018. Events will intrude just as they did last year. The best we can do is to try to understand the incentives of the various protagonists. In this short year-end essay, we focus on Germany, Brexit, and the future of the eurozone.

Nowhere is the gap between what people say and their incentives bigger than in the German coalition soap opera, now in its second - and possibly not even final - season.  We know that the SPD's leadership, the majority of MPs, and Merkel herself, want a coalition for largely personal reasons. Sigmar Gabriel is so keen to hang to his job as foreign minister, or even to become finance minister, that he suggested a big swing of the party to the right - anything that would enable to govern with Merkel. But, at the moment, our sense of the SPD grassroots is that it stands three-to-one, or even four-to-one, against a grand coalition. In the last few weeks we have seen no shift in grass-roots opinion. Nor do we see any one issue around which such a shift could occur. The SPD leadership's big idea for the coalition talks is the abolition of private health insurance, but this is not on the scale of the introduction of the minimum wage which was the big issue for the SPD in the 2013 coalition. We noted a comment by Norbert Lammert, the former president of the Bundestag and until recently one of Merkel's most loyal lieutenants. He expects the grand coalition talks to fail followed by new elections and another, this time successful, attempt at a Jamaica coalition. His forecast is a little too granular for our taste, but we see German politics in a not too different way.

In the UK, we see Brexit remaining on track although it will not always appear that way. The Brexit news coverage in the media is a massive noise amplifier, but there is no reason to think that talks should fail now, considering that trade deal negotiations are not going to start in earnest until after Brexit in any case. There is not much to negotiate about the transition - it's the status quo minus representation. We now know that the EU wants to end it in December 2020, to coincide with the end of the current EU budget period. The UK is ok with that. The trade deal on offer will be the Canada agreement, and there will be separate agreements on aviation, foreign policy co-operation, and nuclear materials, but crucially not on finance. 

The campaign for a Brexit reversal will continue, we predict. Theresa May probably finds it very useful because its main impact is to keep the Tory party united behind her leadership. The revocation argument is not only based on grand misjudgements of British politics. It also critically misjudges EU politics. The EU is not a willing accomplice to those who seek to reverse Brexit. The EU accepts that Brexit is happening, and wants it to happen as smoothly as possible.

Anatole Kaletsky writes in his latest column that reversing Brexit would necessitate, at a minimum, a collapse of the May government. On this point we agree, but we part company on all the rest he writes. It is nevertheless an interesting argument if only because it highlights in detail what is necessary for a reversal to occur. Kaletsky says this would come about by a Brexiteer rebellion when they realise that the UK will be locked in a permanent purgatory between membership and non-membership, a transition giving way to a Norway-style status with all the obligations of EU membership but none of the rights. When they realise that they have nothing to lose, the Brexiteers will rebel and get rid of May in the hope of securing a harder Brexit. At which point they would lose the elections.

That forecast is not only too granular, it also misjudges the likely dynamics of stage two of the Article 50 process. The UK could still end up in a world similar to the one Kaletsky describes - a Hotel California where you can check out but never leave. But, crucially, whether that happens or not will depend on events taking place after Brexit - most importantly, the outcome of the 2022 elections. Meaningful regulatory divergence will clearly not happen before then. Whether or not it should happen will be the subject of future decisions. So, why should people panic about this now? There is nothing this government can do to prevent it, or force it.

On eurozone reform, we are not holding our breath. Germany will eventually have a government, and it will eventually respond to some of Emmanuel Macron's proposals. A fake deal is indeed possible, likely even, one that will pool some national spending under a eurozone hat, plus some agreement to strengthen the powers of the ESM. Italy will be distracted by the all-consuming elections and their aftermath, so there will be nobody to insist on an abolition of the fiscal compact. There will be another pledge to complete the banking union, but without any formal shift in the German position, which is that the bad debts of national banking systems have to be cleared up before discussions on deposit insurance can even start. We are not ready to call this a glass-half-full type of reform. A better description would be smoke and mirrors. Real reforms will have to involve the creation of a common debt instrument. That will have to wait until the next crisis - which can be political or financial, or both in succession. The bad news is that leaders will once again miss an opportunity to lay the foundation for future crisis prevention. The good news is that we will probably not see such crisis in 2018 itself, given the robustness of the economic recovery.

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