News in Charts: France – new prime minister, old problems

The first days of 2024 brought with them a new French prime minister, Gabriel Attal, who at the age of 34 is the country’s youngest premier in modern history. Mr Attal replaces Élisabeth Borne, just the second woman in history to head France’s government, who had been in office for two years. While nothing by recent UK political standards, this turnover is still comparatively quick. Maybe French president Emmanuel Macron has a taste for breaking records — or, more likely, his prime ministers tend to pay the price when the administration runs into turbulence.

Under the French system the president sets general policies, but the prime minister is responsible for the day-to-day management of government. The now ex-prime minister Ms Borne may have carried the can for the beating that Mr Macron’s immigration bill took in parliament, passing only with many controversial changes imposed by the centre-right opposition. Mr Macron has placed great emphasis on his labour market reforms since he was first elected president in May 2017 and, unlike his predecessors, he has managed to pass them too. His reforms have been aimed at making the market more flexible and bringing down France’s stubbornly high unemployment rate by reducing barriers to hiring. Almost five years after his first election, the unemployment rate has indeed dropped from 9.5% to 7.3%, only just above its lowest point since 1983 (7%).

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However, the non-accelerating inflation rate of unemployment (NAIRU), which captures sticky unemployment, remains stubbornly high and indeed significantly higher than either the OECD average or other comparable European economies such as Germany. Even though a universally accepted estimation of NAIRU is still quite an elusive concept, with its rate (at 8.2% in 2022) only 0.7 percentage points lower than when he was first voted in, Mr Macron cannot yet claim victory on the unemployment front. On the contrary, such modest progress reveals that the president’s reforms have not yet managed to punch a significant hole in the structural problems besetting France’s labour market.

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These structural problems may relate to France’s generous unemployment benefits, that arguably put people off from working any more than strictly necessary. France is the second most generous country in the euro area after Spain, spending the equivalent of 2.3% of its GDP to support the unemployed. That generosity, basically the result of loose fiscal policies related to the labour market, contributes to the large deficit in France’s budget balance, a deficit which is now on a par with Italy’s — although the latter started from a worse position and now shows signs of significant improvement. The deficit has been picked up by Fathom’s proprietary Financial Vulnerability Indicator (FVI), with further analysis identifying France as particularly vulnerable to external shocks to yields, such as those that could be caused by the potential phase-out of Japan’s policy of yield curve control (see Japan’s global bond retreat ).

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Corporate France is also feeling the pain of these long-standing structural problems. Mr Macron’s efforts to deal with them are potentially the reason that the valuations of corporate earnings moved closer to the G7 average during his first term. Alarmingly, the gap has started widening again over the last seven months. France’s corporate earnings cannot command earnings multiples on a par with the G7 average; instead, they are trailing by three to four points. That is not the best start for 2024.

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In his second term in office Mr Macron’s domestic focus is on new laws on immigration and reforms to industry and education. The immigration laws have cost him a prime minister. He is now counting on Mr Attal’s skills for the industry and education reforms. At least Mr Attal’s youth may give him the stamina for the upcoming political battles: in parliament, in negotiations with the strong French unions and in coping with the pressure applied by financial markets.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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