Meanwhile, in Europe LECTURE 6

Macron and Merkel Allied? Trying to solve Europe s current challenges: Domestic economics Eurozone issues/brexit Migrant crisis

Domestic Economics - France Which problems need fixing? Relatively high, persistent unemployment (~10%) Particularly a problem for youth (under 35) Slow economic growth/innovation (relative to UK, Germany) Despite highly educated workforce Partly due to difficulty of investing in/creating a business in France For many in France, jobs mean stability, but no increase in standard of living

Domestic Economics - France Typical range of proposed solutions: Revise French labor laws to: Make it easier to hire/fire employees Improve conditions for younger workers Encourage self-employment, creation of new businesses Make benefits equal to workers, whether salaried or not Reverse the brain drain

Domestic Economics - France Typical solutions, cont. Labor laws, cont. Changes under Hollande s Presidency: Known as the El-Khomri law (after lead legislator, Myriam El-Khomri) More firm-level decision-making in salaries and overtime (versus industry-negotiated rules) Able to lay off employees in cases of economic trouble Established a cap for payments for wrongful dismissal Resulted in mass protests led by labor unions

Protests Against Hollande s Proposals

Domestic Economics - France Typical solutions, cont. Labor law, cont. PM Manuel Valls (PS) pushed it through the Assemblée in 2016 without a vote Evoked Article 49.3 of French Constitution Supremacy of government (PM and cabinet) over legislature Allows for acceptance of a law without a vote, unless legislature calls vote of no confidence

Domestic Economics - France Macron s reforms are similar Initially put in place by executive order (Sept. 2017) These executive actions need to pass the Assemblée Likely to do so since LREM controls it Carrot and stick approach Sticks are changes to labor law Carrots are compensating mechanisms

Summary on Macron s Reforms Now, companies will be able to negotiate job cuts and restructurings through voluntary departures directly with labor representatives inside the business, rather than under strict industrywide collective bargaining agreements. Multinationals can downsize loss-making French operations more easily, even if the overall business is profitable. Companies will face less risk of legal action over dismissals, and can hire new staff immediately, rather than waiting. New York Times, French Companies have Newfound Freedom to Fire (January 23, 2018)

Domestic Economics - France Typical solutions, cont. Compensating mechanisms Retraining programs 15 million Euros Research and Development (R&D) Some of the initial jobs lost in 2018 were in R&D But, 1.5 billion Euros going into AI alone from Macron s government High-tech firms now willing to locate in France (e.g. Samsung)

France Better for Investment Now? Yes, it has and yes, it s very much a result of President Macron s election. We saw, for example, the 3.5 billion in foreign investment announced by business leaders at the Choose France meeting at the Palace of Versailles, just outside Paris, on 22 January including investments by Google and Facebook in artificialintelligence research. I don t think this would have happened without the election of Macron. Confidence is not something that can be created by decree. quote from Science Minister, Frédérique Vidal

But Some Reforms Harder than Others Transportation Ongoing strikes (through June 2018) associated with changes to labor arrangements for SNCF, Air France SNCF (national rail service) afraid of privatization, end of long-term employment guarantee Government willing to continue to own a substantial part of SNCF (Edouard Philippe) Air France trying to renegotiate salaries

SNCF Strike Images

A little perspective These changes are always difficult, but have happened before France Telecom Orange French mail service now public-owned company with shares La Poste French public opinion still favors changes pragmatic 56% still oppose strikes (May 2018 polling)

Domestic Economics - Germany All is well for now Low unemployment Strong stock market earnings Limited inflation But frustration is high, voters annoyed with mainstream parties, and new coalition may require compromises More job security, more generous social safety net

Convergence between France and Gemany? Perhaps surprisingly Changes spurred on by new coalition in Germany Plus reforms Macron is putting into place May make French and German macroeconomics and positions on EU reform more similar (SPD similar to Macron) So the German election and subsequent coalition seems likely to increase ability to work together

Convergence between France and Gemany? If you want to read more, useful article link: https://www.nytimes.com/2018/03/14/business/economy/germany -merkel-economy-reforms.html Another useful link: https://www.ft.com/content/eb4126fe-fd30-11e7-9b32-d7d59aace167

Meeting between Macron and Merkel Note: the meeting on fixing the Eurozone was held right before vote on CDU/CSU and SPD coalition Jan. 19, 2018 NOT an accident of scheduling

German Economy s Connection to EU Germany s economy strong, but dependent on exports 46% of Germany s GDP comes from exports Potential threats: Brexit Economic instability in European Union (esp. decreases in consumption) Trade war with US? I.e. most of the solutions for Merkel lie with EU

Fixing the Eurozone 2009 crisis hit it hard, but crises aren t the only problem Single currency always was going to be difficult to maintain European Monetary System (EMS) 1979-2002 Attempt to keep European exchange rates within a band (in practice, around the Deutsche Mark) Key challenge: how to keep monetary policy steady across states with radically different fiscal policies

Fixing the Eurozone Macron campaigned on it Macron and Merkel met in January 2018 to plan Germany and France account for 50% of the Eurozone

Fixing the Eurozone Ideas for fixing it: Eurozone budget independent from EU overall budget Single Finance minister for Eurozone? (Future debate) Complete a banking union and capital markets union Tax convergence between France and Germany Creation of a European Monetary Fund (similar to IMF) Germany and France will exchange proposals this spring

Fixing the Eurozone When I see what the United States is doing, time is pressing for such a project. We also want a stable euro zone and strong external border protection... The euro zone must be avantgarde when it comes to competitiveness. Merkel, quote from meeting with Macron on January 19, 2018

Brexit For both France and Germany Need to keep trade ties with UK Or, engage in trade diversion to compensate Also need to discourage anyone else from leaving EU/trade area Make an example out of Britain

Brexit Macron on Brexit: price to pay for access to the single market: Contributions to the EU budget from Britain The four freedoms Free movement of goods, capital, services and people In Brexit people is the controversial element Jurisdiction of the European Court of Justice Convinced UK will not accept this price

Brexit As soon as you decide not to join these preconditions it s not full access, so it s something perhaps between this full access and a trade agreement. - Macron, comments from January 2018 i.e. no cherry picking Has offered Britain the chance to reverse course

Brexit Financial services where Macron can dig the knife in most London financial firms asking for continued preferential access post-brexit Currently have passporting rights that allow them to function throughout the EU, from London These will be lost French financial firms hoping to benefit

Brexit Merkel on Brexit Good cop? Has indicated a solution can be found that doesn t necessarily amount to cherry picking on UK s part Possible to find a fair balance between EU and UK objectives EU is open to partnership with UK, but up to UK what kind of partnership they want

Brexit Merkel s other concerns Wants stronger EU defense posture Could include UK (talks with May to this effect) Expressed concern with Northern Ireland/Rep. of Ireland border issue Solution must be found Rep. of Ireland had Germany s support

Brexit Both Macron and Merkel have expressed wish not to waste too much time on Brexit Let the negotiators do that Real objective for both: strengthen what remains of the EU

Migrant Crisis Macron s approach domestic policy: Rhetoric: France is a country of welcome Government initiatives: Expedite asylum paperwork processing Will get asylum seekers into the social support system more quickly But, also will expedite deportations of those deemed economic migrants Notoriously difficult to legally tease apart refugee vs. migrant designation

Migrant Crisis Macron s approach international policy Policies address those who wish to stay in France But for those who wish to go on e.g. to the UK these policies won t be effective Working on bilateral approach with UK to reinforce border at Calais But this just means some people end up trapped, can t move on or go back

Migrant Crisis Macron s approach Need to align French asylum policies with others in EU It is totally necessary regarding countries like Germany, France, Italy, the Netherlands, or Sweden that we have the same types of procedures. Because if you don t have the same types of procedures, clearly, one looks at where it is easiest to gain asylum, and then everyone goes to that country. Gerard Collomb, Minister of the Interior

Migrant Crisis Merkel s approach domestic policy Since 2015 policy, has focused on: Cap on new asylum applications (~200,000), curbing illegal immigration Expediting asylum paperwork processing, deportations Measures that appear to address concerns with extremism E.g. banning the burqa for state employees while at work

Migrant Crisis Merkel s approach International policy Need fair distribution of asylum seekers throughout EU Maybe even tie funding from EU budget (regional funds) to good behavior on this front, efforts to integrate? Along with respect for rule of law (aimed at Poland, Hungary) Macron also voiced support for this Increased efforts at border control throughout EU

Merkel and Macron Allied? It would certainly appear to be so Economic policy ideas may converge even more than expected (SPD in German coalition) Similar ideas for Eurozone Good cop/bad cop on Brexit? Similar approaches on migrant crisis domestic and international Whether this means they will succeed, only time can tell