It took brave, radical thinking for President Emmanuel Macron to transform French politics so completely. Reforming the French economy will demand no less focus and ambition.

To judge by the speech he gave at Versailles last week, there’ll be no lack of ambition: It was positively regal. Focus, though, was less apparent. Once he turns to the task of governing, he needs to make structural economic reform -- especially to France’s broken labor market -- his overriding priority. Instead, France’s new government is now intent on spending precious political capital and energies on a different goal: deficit reduction.

The main message Macron’s prime minister, Edouard Philippe, had for lawmakers last week was that budget tightening comes first. He’s advocating spending cuts, calls the government’s reliance on borrowing “intolerable,” and likens the public debt to a “volcano.”

Taxes and public spending in France are too high, so fiscal discipline is important. But meeting the EU’s borrowing target this year is not. The deficit is only a little above 3 percent of GDP -- smaller than the US budget deficit in both nominal and cyclically adjusted terms.

In truth, the urgency of deficit cutting for France is a matter of European Union politics rather than economic necessity. Last week Bank of France Governor Francois Villeroy de Galhau said the 3 percent target should be respected “if only to ensure France’s credibility in Europe.”

It’s hard to believe, but some things matter even more than France’s credibility in Europe -- and structural reform is top of the list. Macron’s predecessor, Francois Hollande, tried to impose fiscal stringency alongside structural reform, and failed.

During his campaign for the presidency, Macron appeared to understand that far-reaching reform of France’s labor code is essential. He has a mandate to pursue it. Cutting taxes on labor -- France has some of the highest payroll taxes in the developed world -- is no less urgent. But the government has sent muddled signals about its plans for tax reform generally, postponing some tax cuts and then seeming to backtrack.

Putting those goals at risk for the sake of a fiscal target which is questionable in principle and widely ignored in practice would be a mistake.


(Bloomberg)