Category: Economical and financial crisis

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Economical and financial crisis Economical policy

What a Misunderstanding of Economic Financing!

The Myth of Idle Bank Deposits

While much has been said about euro life insurance policies to re-establish their economic usefulness, the myth of “idle” bank deposits seems to persist. Yet bank deposits can in no way be described as “unproductive.”

As of mid-2025, total bank deposits amount to about €2.6 trillion. The total volume of loans granted by credit institutions to French residents stands at around €2.9 trillion — €1.4 trillion to businesses and €1.5 trillion to households.

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An Economic Aberration

Deposits do not sleep! Banks are massively financing the French economy — precisely thanks to these bank deposits, whatever their form: checking accounts, term deposits, savings accounts, and so on.

And while large companies and mid-sized firms can access financial markets directly — though they still rely partly on bank financing — small and medium-sized enterprises, self-employed professionals, shopkeepers, artisans, and households can only obtain financing through banks. Bank deposits are therefore indispensable to the French economy and intensely productive.

To impose a 1% tax on sight deposits — which earn nothing for their holders but are essential to the economy — would be an economic and financial absurdity. Rational savers would seek to reduce their sight deposits as much as possible. Alternatively, they might shift their savings to interest-bearing bank products, driving up banks’ funding costs and, consequently, the cost of credit. Such a shift would weigh on economic growth.

Another predictable consequence would be a transfer of savings to non-bank instruments, forcing banks to reduce lending to the economy — again hampering growth and employment.

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The Same Effect on Term Deposits

Currently, term deposits yield around 2% over 3–6 months, sometimes less. Their remuneration depends on the European Central Bank’s key interest rates. Taxing household deposits held by those subject to the “unproductive wealth tax” (i.e., those with total assets of at least €1 million) at 1% would wipe out at least half of that return — before income tax on savings is even applied.

Since these interest earnings are already taxed at the flat rate, the remaining net return after this double taxation would be negligible. The result would be an inevitable flight of funds.

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Let’s Avoid Misunderstanding the Basics of Economic Financing

As in many aspects of economics, what matters most is balance — an effective balance between consumption and saving, so that investment can take place and generate healthy, sustainable growth.

Savings placed in banks, life insurance, equities, or bonds finance the investments of households (in housing) and businesses. Bank deposits and life insurance are therefore not only useful — they are essential to financing investment and growth.

The figures, as well as the simple description of economic and financial mechanisms, make this clear. Out of ignorance or excess zeal, let us not create damage for the French economy and for society as a whole.

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Olivier Klein is a professor of economics at HEC and a bank C executive.

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Conjoncture Economical and financial crisis

Should Taxes Really Be Raised Again?

Can we still tax large companies and wealthy households even more? In France, this idea has become a false solution. It would only worsen an already worrying imbalance between one of the world’s highest levels of redistribution and a weakened capacity to create wealth.

France ranks among the five most redistributive countries in the OECD: the gap between the Gini indices before and after transfers is among the largest. More than half of households pay no income tax, while the top 10% account for nearly 75% of total payments. The tax wedge on lower brackets is below that of most European countries, but for upper brackets, it is the highest.

Increasing an already record-high tax burden would mean ignoring its negative effects on both growth and public finances. The supply-side policies of recent years — including the 30% flat tax, the partial alignment of corporate tax rates with our neighbors, and the general stabilization of levies — have helped raise the employment rate (still too low though) and reduce unemployment, while initiating reindustrialization. Any further rise in the tax burden would once again widen the competitiveness gap, discouraging investment.

The deterioration of public finances is not the result of these policies, but stems from the uncontrolled growth of the public wage bill, the cost of emergency Covid measures (useful but poorly calibrated in scope and duration), the abolition of the housing tax, and demographic aging without a completed pension reform.

The logic of “taxing more to share more” has become not only unjustified but also counterproductive. Beyond a threshold that has already been reached, it discourages talent, innovators, and investors. Another increase would accelerate the exodus of affluent households convinced that the process has no end. Young graduates are following suit: today, 23% more of them than ten years ago settle abroad immediately after graduation, and more than half plan to leave within three years, citing a sense of decline and insufficient economic recognition.

When the desire to redistribute outweighs the incentive to create new income, the pie itself shrinks. We are already there. The issue is not “tax justice,” which is largely achieved (though efforts against excessive optimization remain necessary), but collective efficiency. Raising taxes further would neither reduce debt nor the deficit as long as public spending remains unchecked. The French vicious circle would close in on itself: record-high taxes and spending, debt growing much faster than our neighbors’, and deteriorating growth as well as public services.

It is therefore on structural reforms that action must focus: integrating low-skilled youth into the labor market more quickly, promoting technical career paths, encouraging longer working lives when health allows, easing over-regulation that stifles growth and innovation, and strongly raising the level and performance of the education system, now lagging behind the best.

These reforms — successfully implemented by many of our neighbors, including social-democratic ones — belong to no political camp. Only these measures would allow France to regain stronger growth and sustainable public finances, an essential condition for preserving both solidarity and prosperity.

Olivier Klein
Professor of Economics, HEC

Categories
Economical and financial crisis Economical policy

Excessive Public Debt Can Lead to a Breakdown of Trust in Society

The idea that the central bank can, by cancelling the public debt it holds, erase the problem, is a recurring temptation. Yet such a strategy is ineffective while also carrying serious dangers. On the budgetary front, the cancellation of debt held by the central bank brings no lasting benefit to the Treasury. Indeed, the Banque de France, owned by the State, returns its profits—including those derived from the interest paid by the State on the bonds it issues and the Bank purchases—back to the Treasury in the form of dividends. Cancelling the debt therefore amounts to cancelling both the interest burden and the corresponding dividend flow.

Debt monetization—that is, its purchase by the central bank—can temporarily resolve the painful increase in interest costs that markets could impose in the event of heightened concern over debt levels. However, this solution nonetheless entails fundamental dangers as soon as it becomes repeted and permanent.

Unlimited monetization or outright cancellation of all or part of the debt can profoundly disrupt the functioning of economic actors. In fact, they remove the monetary constraint: the need to repay debt or refinance it under “normal” conditions.

Yet confidence in money corresponds to a reliable and efficient system for settling debts. Money is indeed the instrument that discharges the debts arising from commercial exchanges. A loss of confidence in the proper settlement of debts thus leads to a loss of confidence in the outcome of exchanges, and in money in the very essence of its function. Money is therefore the fundamental bedrock of social cohesion in market economies, as Michel Aglietta has analyzed.

The loss of confidence in money, stemming from the abusive use of debt that ultimately requires monetization or cancellation, is not just a theoretical risk. Many economic episodes—from Weimar Germany to more recent cases in emerging economies like Argentina—illustrate the distrust, even flight from money, when it is no longer anchored in sound management of public finances and monetary policy. This flight may then shift, for example, toward locally created alternative currencies, gold, or today’s crypto-assets. The resulting social, economic, and political crises are dramatic. In France, the euro mitigates this risk, but other member countries could sooner or later refuse to share in such a danger.

An uncontrolled rise in debt is therefore not just a technical or budgetary issue: it opens the way to a fundamental challenge to confidence in money and to the stability of society itself. Easy solutions that rely on discretionary monetization or debt cancellation in disregard of common rules expose society to a systemic danger.

Olivier Klein
Professor of Economics at HEC

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Conjoncture Economical and financial crisis Economical policy

Income Inequality: France Trapped by Treating Symptoms Rather than Root Causes

Published in L’Opinion, Tuesday, September 23

The response to income inequality cannot consist of endlessly fixing the symptoms through ever-greater redistribution. The real challenge for France is to address the root causes, starting with the excessively low employment rate.

The attention that should, with utmost seriousness, be devoted in France today to stabilizing our public debt ratio is temporarily diverted toward the issue of income equality and tax justice. Beyond the fact that even greater redistribution would only marginally address the debt problem in the short term—and could worsen it in the medium term for the reasons described below—it is important to carefully examine income inequality in France and to understand its dynamics, both before and after redistribution.

To this end, the Gini index is one of the key reference tools: the higher it is, the greater the income inequality; the lower it is, the more equal the distribution.

When comparing the following countries—the United States, the United Kingdom, Germany, Spain, Italy, Sweden, and France—before redistribution, France shows a Gini index of 0.49, higher than the average of the three most equal countries in the sample (0.453), and lower than the average of the three most unequal (0.517). Concretely, the gap between France and the most equal countries is +0.037, while the gap with the most unequal is –0.027. This places France among the countries where, before taxes and transfers, income disparities are relatively pronounced.

After redistribution, the picture is very different. The Gini index drops to 0.290, close to the average of the three most equal countries (0.270) and well below that of the three most unequal (0.353). The gap thus narrows significantly to +0.020 compared to the most equal countries, while widening sharply to –0.063 compared to the most unequal. This reflects the massive impact of France’s public transfers and redistributive system. After redistribution, France ranks among countries with relatively low income inequality.

Three key observations must be made to establish a relevant diagnosis for effective and fair action.

First observation: although France shows fairly strong income inequality before redistribution, it ends up among the less unequal countries after redistribution. Other measures of inequality confirm this result.

Second observation: the pre-redistribution situation is largely due to a relatively low employment rate. The Gini index includes the incomes of the unemployed and inactive. In France, a larger share of the working-age population than elsewhere is not employed—particularly among young people and those aged 60–65. This weighs on the measurement of initial inequality.

Third observation: redistribution—one of the strongest in the OECD—significantly corrects these gaps, ensuring necessary social cohesion. But at this level, our very high redistribution rate fuels a vicious circle. The lower the employment rate, the greater the pre-redistribution inequality. The more massive redistribution must be to correct it. But the more redistribution rises, the heavier the tax and social contribution burden becomes, weighing on business competitiveness and reducing work attractiveness. This mechanism, in turn, feeds a structurally low employment rate.

The response cannot therefore consist of endlessly repairing the symptoms through ever-greater redistribution. This cannot be a sustainable strategy. The real challenge for France is to address the root causes, starting with the excessively low employment rate. A significant increase in the activity rate, whether for young people or seniors, would radically change the situation. It would simultaneously reduce income inequality before redistribution, strengthen growth potential, and relieve public finances. According to very cautious estimates, raising the employment rate to Germany’s level (taking into account the lower productivity of new labor market entrants and differences in part-time work) could cut France’s primary public deficit in half.

Redistribution in France is therefore an essential instrument of solidarity. But it acts as a palliative, not as a preventive remedy. To avoid endlessly locking into the vicious circle of low employment – inequality – reinforced redistribution – further loss of business competitiveness and work attractiveness – low employment, the country must sustainably raise its employment rate. This is one of the key conditions for ensuring social cohesion in a sustainable way, with lower income inequality even before redistribution, preventing our GDP per capita from regularly lagging behind that of our neighbors, and giving our public finances a much better chance of consolidation. Misdiagnosing the issue by focusing solely on redistribution would inexorably damage both the economy and the social fabric.

Olivier Klein is Professor of Economics at HEC.

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Conjoncture Economical and financial crisis Economical policy

The French social and economic model is unsustainable

It would be more than reckless to claim that France does not have a serious public debt problem, nor that its social and administrative model does not require profound reforms to become sustainable. Admittedly, an immediate catastrophe on the markets is unlikely to arise solely from France’s financial situation, notably thanks to the protection offered by the euro. However, a lasting political chaos with no foreseeable solution could eventually trigger such a crisis.
In any case, the issue is to act deeply and swiftly to restore the sustainability of our economic and social model, which is now out of breath. Notably, the sharp rise in public debt interest payments, especially from 2026 onwards, will further weigh down the budgetary equation.

France’s Economic Disconnect

Our GDP per capita is increasingly lagging behind that of its neighbors. In 2024, Germany reached 116.2% of France’s GDP per capita, up from 105% in 2000; the Netherlands hit 136.4% versus 114; Denmark 129.3% versus 117.8; and Sweden 114.1% versus 100, for example. This serious disconnect, occurring over just two decades, reflects a decline in competitiveness and the exhaustion of the French productive model.
Meanwhile, since 2000, France’s public debt has risen from 59% to 113% of GDP—a 54-point increase. In comparison, the eurozone (excluding France) saw an increase of only 17 points, from 70% to 87% of GDP. This debt surge did not boost French growth, which has been slightly weaker over the period than in the rest of the eurozone.

116.2%

The tax burden in France reached 45.3% in 2024, compared to 40.3% for Germany, 40.6% for the eurozone (excluding France), and 34% on average in the OECD. Not to mention the growing overadministration and overregulation, which weigh heavily on our competitiveness and entrepreneurial spirit. Our employment rate (68%) is comparatively too low, while Northern European countries and Germany are between 75 and over 80%. The employment rate is strongly correlated with the level of social contributions paid by companies and with retirement rules. Meanwhile, the share of French merchandise exports in total eurozone exports has fallen from 16% to 11%, marking a significant decline in our industrial competitiveness.

It should also be noted that the redistribution rate in France is among the highest in the world. According to calculations by INSEE, the income gap between the top 10% and the bottom 10% drops from 18 to 3 after extended redistribution. The top 1% receive 7.2% of household income in France, compared to 8.7% in Sweden, 10.3% in Italy, and 14.4% in the United States.

Finally, public spending in France amounted to 57.1% of GDP in 2024, far ahead of Germany (49.5%), the eurozone (excluding France, 49.6%) and the OECD (42.6%). In the long term, there is no positive correlation across OECD countries between public spending and growth rates—quite the opposite beyond a certain threshold.

Work and Production Must Increase

Should we ignore these figures and, against all evidence, propose further increases in tax and public spending, instead of reducing them? Can we seriously fail to realize that the right answer for France is to increase the wealth produced, and not even more redistribution? That the issue also lies in the insufficient quantity of work, both annually and over a lifetime? Without understanding that this shortage only supports our standard of living and social protection at the cost of ever-increasing debt?
We must speak honestly and act justly to avoid the accelerated decline of our economic and social model. These observations are not ideological—they are neither right nor left. As Pierre Mendès France used to say: “Public accounts in disorder are the sign of nations in decline.”

Olivier Klein is Professor of Economics at HEC.

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Economical and financial crisis Economical policy

Bayrou’s Budget: Necessary, Whatever Happens

Published in Les Échos, August 28, 2025

It was urgent to put a stop to a dangerous drift that has been undermining our economic and social balance for far too long. The time for inaction is over, whatever the political outcomes in Parliament.
The budget must be part of a coherent, long-term strategy—no small feat in France today. It is essential to design a detailed and consistent plan for transforming the State and local authorities, making them leaner, less redundant, and more efficient. The engineering and support for change will also be crucial for the success of this transformation.

Responsibility

It is equally urgent to rethink our welfare state to make it sustainable. This requires greater accountability from everyone in regard to this fundamental common good: encouraging a more rational use of Social Security, avoiding overconsumption of healthcare or benefits, and introducing an individual contribution, however modest, to limit abuses without undermining solidarity. The amount of work in France—both the employment rate and the number of hours worked—must be structurally increased. If we had Germany’s employment rate, we would no longer face a primary public deficit or financing problems for our social protection system.

The current budget proposal touches on these issues. Public spending would continue to increase in 2026, but by 1.8% instead of the initially forecast 3.5% to 4%. This would be progress, but not the kind of cost-cutting seen in companies that need to reduce expenses. Criticisms of this budget proposal as “ultra-liberal” not only miss the urgency of the necessary recovery but are unfounded. Moreover, some of the supposed cuts are in fact hidden tax increases, such as the removal of the 10% tax allowance for retirees or the elimination of certain tax breaks.

Reform

The principle that “everyone must contribute to the effort” seems fair, but it must be applied with discernment. It is crucial to address excesses where they actually occur, not indiscriminately—otherwise the reform risks being unjust and undermining public support.

As for the idea that such efforts can only be accepted if accompanied by greater tax fairness, it must be placed in the French context. Our country is already one of the most redistributive in the OECD. In France, income inequality is reduced from a factor of 18 to 3 after redistribution. The top marginal tax rates are among the highest in Europe, while the lowest taxable incomes are among the least taxed. And 55% of French households do not pay income tax at all, while 10% pay 75% of the total.

More broadly, further increasing compulsory levies—already the highest in the OECD—would only further discourage investment, employment, and entrepreneurial risk-taking. The necessary balance requires fair pragmatism, reconciling social imperatives with economic solidity, without worsening the lack of work incentives or the insufficiency of competitiveness.

This budget proposal could therefore be a necessary—though insufficient—beginning, unless the confidence vote renders it meaningless. France will not escape, in any case, the imperative of a long-term vision that finally recognizes the country cannot live indefinitely on ever-rising debt and insufficient wealth creation. Let us have the courage to implement structural reforms before they are imposed on us. We must stop feeding the French vicious circle: ever-increasing taxes, uncontrolled spending—both already at world-record levels—resulting in a debt trajectory that is unsustainable and extremely perilous.

Olivier Klein is Professor of Economics at HEC.