Category: Economical and financial crisis

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Economical and financial crisis Economical policy

And now, what policy for the ECB?

By mid-2025, core inflation in the euro area appears to be stabilizing around 2.5%, while wages are increasing at a pace close to 3%. Headline inflation, for its part, has returned to approximately 2%. This outcome is not attributable to a single factor but rather to the convergence of several dynamics: a determined monetary policy that firmly anchored inflation expectations, a gradual recovery of supply after the disruptions caused by COVID, and a significant easing in energy prices.

However, this improvement should not obscure long-term factors such as demographics, the energy transition, or the growing fragmentation of the global economy, all of which may fuel persistently higher inflation.

Growth prospects for the eurozone remain modest: between 1% and 1.4% according to estimates, with some countries performing slightly better than expected. Thus, the current ECB interest rates—after multiple cuts—do not appear restrictive. They are currently within a neutral range, or even slightly accommodative.

Uncertainties continue to weigh heavily on the European economy. Among them, commodity prices—including rare earths—remain highly sensitive to unpredictable geopolitical developments. The impact of the German fiscal stimulus on prices is also hard to foresee. It will depend on the intensity of its implementation and its effect on supply. The future level of customs tariffs is particularly uncertain; they may slow growth by disrupting global value chains, but also fuel price increases through higher import costs. Economic models struggle to produce converging results. In such an environment, the ECB is right to follow a “data-driven” approach, strictly based on incoming data without any predetermined policy path.

Moreover, a return to very low interest rates, absent a strong cyclical justification, would be a mistake. Persistently near-zero rates without exceptional reasons create imbalances such as speculative bubbles in financial or real estate assets, incentives for inefficient capital allocation, and unsustainable increases in both public and private debt. The additional negative effects of an environment with excessively low rates for too long are well known: liquidity traps, artificial survival of inefficient so-called zombie firms, slowing productivity gains, and increased precautionary savings.

Today, the key issue is Europe’s insufficient growth potential—yet the remedies lie outside the central bank’s scope. This weakness stems from a lack of structural reforms, excessive regulation, a competition policy that needs to revise its definition of the relevant market in the era of global giants, and non-tariff barriers that still hinder business expansion within the single market itself. If inflation is under control, monetary policy can support activity and stimulate it when actual growth falls below potential growth—but it cannot substitute for the structural reforms that are required.

Monetary policy should also not be used as a tool to allow states to further delay the consolidation of their public finances. It is also illusory to believe that robust and sustainable growth can be achieved in a context of excessive and unstable public debt. In this respect, governments bear full and entire responsibility.

The ECB should maintain the necessary room for maneuver in case more forceful action becomes necessary. However, the recent rise of the euro—which is disinflationary and may in itself slow growth—could prompt it to act more quickly.

Olivier Klein
Professor of Economics at HEC and CEO of Lazard Frères Banque

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Conjoncture Economical and financial crisis Economical policy

Trump: Consistent Concerns, Inconsistent Actions?

Published by Les Échos on April 7, modified and completed on April 10

Trump has a few central economic ideas that seem to guide his words and actions. And while he appears to many to be disorderly, incoherent, and contradictory, his worries are not devoid of both a sense of reality and coherence. But he seems to have only one weapon to achieve his goals, wielded in a brutal and crude manner: tariffs. Doubtless, along with a weakening of the dollar. But the wielding of these weapons is contradictory and dangerous.

The difficulties of the American economy are not due to its growth rate or productivity gains, which have been significantly higher than those of the Eurozone, particularly for the past fifteen years. On the other hand, between 2000 and 2024, the share of industry in GDP fell from 23% to 17%, with the resulting adverse effects on American workers and middle class.

Furthermore, the twin deficits, public and current, have led, over the last twenty-five years, the United States to see its public debt soar from 54% to 122% of GDP and its net external debt multiplied by a factor of 4 (approximately from 20% to 80% of GDP).

Monetary Dilemma

This explosion of both debts will sooner or later pose a problem regarding the dollar’s status as an international currency. However, the United States has a structural need to finance its debts, and therefore a need to attract capital from the rest of the world.
And owning the international currency (approximately 90% of foreign exchange transactions, 45% of international transaction payments, 60% of official central bank reserves) greatly facilitates this financing, since countries with a current account surplus, most often in dollars, almost systematically reinvest this liquidity in the American financial market. Especially since the United States has outperforming equity returns, and by far the deepest capital market.

This status as an international currency also requires the country with this considerable advantage to accumulate a current account deficit over the years so that the rest of the world can hold the amount of international currency it needs, quasi automatically financing this deficit.

But, as in all things, balance is essential, and in this matter, it is difficult to maintain. The United States does not regulate the size of its deficits and debts according to the needs of the rest of the world, but according to its own needs. This, moreover, gives the international monetary system an intrinsically unstable character, as the global currency is merely the debt of one of the system’s players imposed on the others, and not that of an ad hoc institution, not being one of the players themselves.

Robert Triffin, as early as the 1960s, stated that if the United States did not run a sufficient current account deficit, the system would perish from asphyxia. And if this deficit (and therefore the external debt) became too large, the system would die from a lack of confidence.

Faced with the dangerous dynamics of external debt in particular, today Trump must therefore protect confidence in the dollar to perpetuate its financing by the rest of the world without (too much) pain, that is to say at non-prohibitive rates, and, at the same time, try to reduce excess imports compared to exports so that the trajectory of this debt can be sustainable. With a coherent objective of reindustrialisation, thus making it possible to reduce this gap, by limiting imports of industrial products, while making his voters happy.

So Trump is right to be concerned about the unsustainable trajectory of U.S. external debt. The dollar’s role as an international currency goes hand in hand with current account deficits for the country issuing such a currency. However, if these deficits become too large and external debt grows excessively relative to GDP, U.S. creditors might lose confidence in the dollar, potentially causing its value to drop significantly and/or increasing refinancing rates due to higher risk premiums demanded by the global market. This concern is justified.

Fragile Confidence in the Dollar

Yet, Trump seems to have only one weapon in his arsenal to achieve this: tariffs. And the apparent aim of weakening the dollar. At first glance, indeed, both an increase in tariffs and a weakening of the dollar can simultaneously lead to a decline in US imports, an increase in domestic production and in exports, and a need for non-Americans to develop their industries within the United States to maintain their commercial presence.

However, this strategy, while seemingly coherent, clashes with the contradictory need for a stable dollar if we wish to maintain the confidence of the rest of the world, which buys US debt.

Furthermore, the weaponisation of the dollar by previous administrations to enforce financial sanctions imposed by the United States, has already seriously damaged the confidence and desire of the rest of the world to hold unlimited amounts of dollars. Those of the “Global South” countries in particular, which are simultaneously challenging the American double standard.

In addition, the abrupt and seemingly erratic announcements regarding huge tariffs increases are also not fostering confidence in the American economic and financial system, to say the least. This is without even considering their very dangerously regressive potential for the global economy.

Let us also incidentally note that Biden’s IRA had effects similar to tariffs – though much less abruptly and violently- by heavily subsidizing industries producing exclusively in the U.S., which violates WTO rules.

Additionally, the Trump’s idea that the imbalance between U.S. imports and exports is primarily due to unfavorable and unfair conditions imposed by surplus countries is incorrect. While China has built its growth on exports while restricting access to its market, the significant U.S. current account deficit mainly stems from an insufficient domestic competitiveness and from a strong lack of savings compared to investment, that is to say from demand being much greater than domestic supply, leading to huge current deficits and consequently to a evergrowing reliance on external financing.

Instead, structural measures to enhance U.S. industrial competitiveness and public deficit reduction are essential.
In summary, while concerns about maintaining a sustainable trajectory for U.S. external debt are justified, balancing individual current accounts with each country based on perceived abuses by surplus nations is totally misguiding. Furthermore, aggressive use of tariffs or dollar manipulation reflects a crude and dangerous approach to economic policy that is risky, even as a negotiation tool. And lacks theoretical as well as empirical legitimacy.

Protecting Financial Stability

Trump is therefore right about his “obsessions,” but undoubtedly wrong in the nature of his response.

He also brandishes threats against countries that are considering creating alternative payment systems to the dollar, and perhaps soon against those that channel less of their excess savings into American financial markets.

And perhaps he also dreams of transforming their debt obligations to the United States into very long-term, low-interest debt (see Stephen Miran, Chairman of Trump’s Council of Economic Advisers). This would, of course, definitely precipitate the rest of the world’s loss of confidence in the dollar.

It is also possible, with the same objective, that he is considering facilitating the development of stablecoins, cryptocurrencies backed by the dollar, in the hope that they will spread worldwide, thus de facto dollarizing the planet. To the detriment of the monetary sovereignty of other regions of the world. We can therefore bet that, in countries around the world, authorities would prevent this by regulating payments within their borders, thus protecting their sovereignty and global monetary and financial stability.

The economic and financial challenges facing the United States are significant. But the solutions to address them are certainly more diverse and more structural than simply imposing tarifs. And, much worse still, very high tariffs, with inevitable retaliatory measures, would lead to a huge global recession combined with a major financial crash.

Olivier Klein is a professor of economics at HEC

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Economical and financial crisis Euro zone

Europe: The Threat of Erasure

L’Opinion, March 11, 2025

When a pure and simple balance of power prevails around you, to be heard and, better still, respected, you must be strong and united when you want to defend the values ​​of the rule of law, multilateralism, international law, and the idea of economic and social regulation. Europe upholds these values, but currently has little capacity to enforce them. And yet, it has the potential.

Lagging behind

But Europe has significantly fallen behind the United States economically. From 2000 to 2024, the Eurozone experienced half the growth rate of the United States, averaging around 1% annually compared to 2% across the Atlantic. With productivity gains of 0.7% per year compared to 2%. These gaps have widened further since 2019. China dominates global production of solar panels (84% of market share) and wind turbines (55%).

Europe also has a very limited presence in other future industries (electric batteries, semiconductors, data industries, etc.). Due to a lack of investment in new technologies and a deficiency in productivity gains, Europe has not given itself the means to achieve economic power.

Despite the laudable nature of its intentions, Europe has adopted a highly normative and often insufficiently realistic approach, to the detriment of its economy and competitiveness. It manufactures at high cost and has become obsessed with creating all kinds of meticulous standards. Moreover, regulations are often disparate among the different members of the European Union, which is also a significant obstacle to economic growth.

Hyperpowers

However, the lack of balance between ethics and efficiency cannot sustainably uphold the stated ethical principles, due to the lack of a dynamic and sufficiently competitive economy. And so, Europe, as it has operated in recent years, has focused on appearing righteous. But far from this essential balance, it is ultimately often viewed as a hindrance. With its complex and insufficiently effective governance, it is seen as having great difficulty to assert itself in the face of the rise of Chinese and American hyperpowers.

But even if Europe, among developed countries, does not have exclusivity in this regard, many countries on the continent are weakened by the growing distrust in their populations’ ability to live together, as well as in institutions and democracy itself. We in Europe must not shy away from carefully analysing the reasons for this loss of confidence. At stake are the detrimental effects of ignoring popular (and not populist per se) demand for public authority, security and better regulation and integration of immigration.

In some European countries, it is also important to carefully assess the disempowering and distrust-inducing effects of excessive administration. This also includes the negative effects, both socially and economically, of public overspending and compulsory contributions, overregulation, the serious excesses of the rise of individual rights in the face of weakening obligations, and hardline egalitarian tendencies.

Whilst populist movements are growing significantly, including in France, Germany, Austria, and the Netherlands, for example, it is not enough to simply criticise them. Only a fair and urgent awareness and appropriate responses from governing parties can prevent the advent of a brutal, populist backlash.

Causalities

Let’s not reverse the causalities; populism is the symptom and consequence of a disaffection with democracy and institutions, much more than its cause. European credibility will then only be stronger, both within Europe itself and vis-à-vis the United States or the “Global South,” and its criticism less easy.

The decline is not inexorable if Europe and its constituent countries are still capable of a strong multidimensional resurgence, of an essential impetus.

These two combined phenomena—economic decline and rising distrust of institutions—could lead to the “slow death” (cf. Mario Draghi) of our old continent, assailed by doubt. An existential question, if ever there was one. Civilisations, even the most magnificent ones like ours, can end up slowly fading away. But this decline is not inevitable if Europe and its constituent countries are still capable of a strong multidimensional resurgence, an essential impetus.

By pooling many of our strengths and seeking greater unity, in the diplomatic and military spheres. But also in the economic and industrial spheres, through greater integration, the ability to create European champions, and a drastic reduction in our internal regulatory barriers.

Governance

And this will only be possible by significantly improving the governance of the European Union. Ultimately, by rediscovering the right balance between the necessary regulation of market forces versus the buoyancy of the economy, and social environmental protection versus efficiency, rules versus freedom, tradition versus modernity, respect for the individual versus that of society… Without these balances, our model could disappear in a moral bankruptcy with a financial bankruptcy in tow.

A European scale is the only way possible, given the dominance of the American and Chinese superpowers. Europe can and must react vigorously and not allow our model, our way of life, and our economic, social, and value system to disintegrate. The challenge is to ensure a future for our European civilisation.

By not allowing Europe to slip out of history through an inexorable weakening. By not allowing the rise of authoritarian and brutal regimes, more indifferent to the rule of law, in this very country. By making Europe’s voice heard in the concert hall of great powers. To conclude, let us quote Cioran: “A civilisation begins with myth and ends with doubt.”

We can still muster the resources and strength to resist doubt. Three minimum conditions are essential for this: first, lucidity in analysing our weaknesses as well as our strengths. Second, the essential sense of urgency. And finally, the courage to regain the governance and balance essential to our vitality.

Olivier Klein is a professor of Economics at HEC and Managing Director of Lazard Frères Banque.

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Bank Conjoncture Economical and financial crisis

Europe : high time to wake up

Les Échos , the 18th of February 2025

We are at a real turning point in the history of Europe. In this changing world, which has turned its back on multilateralism and today faces the pure and simple return to the balance of power between nations, one of two things will happen: either Europe pulls itself together economically, politically, diplomatically and militarily, or Europe that is half-asleep continues its decline and gradually disappears from history. 

But getting its act together will not be easy. If Europe has clean hands today, it is heading towards having no hands at all. Let us put an end to our inability to be bold and innovative on our aging continent, due to the constant desire to regulate and standardise before inventing, creating and developing. Furthermore, to force the rest of the world to follow our standards is naive; we have neither the economic nor the diplomatic power to impose them on others.

Let us stop thinking of ourselves in Europe as the camp of the self-righteous, by developing for ourselves at every turn finicky regulations where the letter ends up prevailing over the spirit. They end up hindering our companies, with endless bureaucracy. These are worthwhile goals, but the never-ending red tape needlessly damages our competitiveness.

Let us do away with our naivety in wanting to be continuously top of the class on climate, when this leads directly to the detriment of our industries and de facto favours populism which has a strong climate skepticism. Let us instead seek to best combine the health of the planet and growth, by investing massively in the industries of the future – where we have no presence – including in the climate transition industries – where we are so weak.

Let us also leave behind our naivety when it comes to energy, where yesterday we were subjugated to Russia, and tomorrow to the United States. It is essential for our global competitiveness. Currently we are on average paying at least five times more than the Americans for the price of natural gas.

Let us think that the single financial market would be highly desirable, but that it would not produce the expected effect on its own. The surplus of European savings will spontaneously finance more investments in Europe – only if we establish an explicit framework of financial solidarity within the euro zone. For this, the public finances of France, among other countries, must finally be credible. Risk sharing versus market discipline, right? We also need a European capacity to facilitate the development of our newly created companies to make them global giants. And thus provide attractive returns.

The multiple non-financial barriers to doing so are crippling.

Europe no longer knows how to correctly combine the principle of ethics and that of efficiency. Ethics alone, constructed as an absolute end, to the detriment of efficiency, is only a short lived illusion that we create for ourselves. The reverse is also true. But today, multifaceted, quasi-dogmatic formal ethics has ideologically taken too much precedence over its indispensable partner and unduly hinders it. It is the right balance between regulation and free play of the market that we must aim for. One that enables the dynamics of the economy while seeking the necessary protection against its potential excesses.

Europe has been, and can once again become, the place on earth that best combines these two principles. This has made our social market economy model so strong. It is up to pro-European democratic forces to vigorously regain the vitality and balance they need. Before others impose a brutal paradigm shift on us.

 It is only through this renewed vitality that Europe will be able to continue to chart its course and control its destiny. This is an urgent matter.

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Economical and financial crisis Economical policy

Can the French public debt rate be stabilised?

When the interest rate is equal to the growth rate, as it is today, stabilising the debt rate requires a zero primary public deficit (before interest charges on the debt). And a primary surplus is needed to reduce this debt rate. Otherwise, the public debt
continues to increase and, the higher the debt rate, the greater the risk of a snowball effect.

France is far from enjoying a stabilised debt situation. With a very high public debt to GDP ratio of over 110%, and a very marked upward trend in this rate (the rate was around 20% in 1980), France is experiencing a primary deficit of between 3 and 4% of GDP, with an interest rate on the debt approximately equal to the nominal growth rate. This, without correction, will sooner or later lead to a refinancing crisis.

If the interest rate on the debt were to be higher than the nominal growth rate, due to a generalised rise in interest rates or in the spreads paid by France or because of a fall in the growth rate of the French economy, the snowball effect of the public
debt would become even more significant.

It would therefore be necessary to reduce public spending by around 100 billion euros. Doing it too quickly would lead to too sharp a slowdown in growth and would be difficult to accept. Doing it too slowly would lead to a new dangerous increase in public debt, which would put the country’s solvency at risk, would very probably also slow down growth due to the fear of savers and investors thus generated, and finally would risk a financial crisis which would force adjustments to be made urgently and brutally, as in the case of Spain and Portugal, for example, during the Eurozone crisis.

Let us add that given the comparatively very high level of French public spending and compulsory contributions on GDP, it is much more economically efficient to reduce the former and not increase the latter. Reducing public spending indeed contains much less risk of slowdown, and could even promote growth, compared to increasing taxes. Also, while it seems elegant to say that the choice between reducing spending and increasing taxes is a political choice, it is certainly not relevant in terms of economic efficiency in France’s current situation.

Moreover, income inequalities after redistribution are among the lowest in Europe in France and the level of redistribution on GDP is already one of the highest. Reducing income inequalities in France is therefore not a reasonable objective, because it would go against the pursued goal by further reducing competitiveness which is already too low and an incentive to work that could be improved, and therefore an employment rate that is already insufficient. Which would go contrary to the direction of the announced objectives.

Stabilising and then reducing the French public debt rate is a sine qua non condition for the sustainability of our social protection and our standard of living. Risking hitting the debt wall by refusing structural reforms or going back on those that have been carried out would risk forcing us to implement austerity policies that socially are very costly.

Let us recall that if the United States, which has a very high public debt rate and a large primary deficit, does not have the same burning obligation to date, it is because it has benefited until now from a much higher economic dynamic than ours, from a stock market yield and interest rates higher than ours, which attracts capital from all over the world. Thus, they have, until now, had no trouble refinancing their external debt as well as their public debt. However, this will not absolve them ad vitam aeternam from having to correct their public finance trajectory as well.

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Conjoncture Economical and financial crisis Global economy Uncategorized

Inflation, Endgame?

After having surprised us with its vigour, inflation, due to a demand shock – which rebounded very strongly once the lockdowns ended – and to a supply shock – dramatically reduced during the pandemic -, seems to be gradually returning to acceptable levels. The causes of this decline can be attributed to a gradual increase in global production capacities and the fall in excess demand through the deflation of excess savings generated by the lockdowns. But disinflation was also caused by a very reactive and internationally coordinated monetary policy as well as the strong credibility of central banks who showed great determination in wanting to bring inflation back on target. This has ensured that the inflation expectations of the various economic actors – businesses and households – do not become dislodged. Let us add that until now, contrary to a number of forecasts based on historical data, we have witnessed a soft landing of the economy, that is to say without recession and without any systemic financial shock. So is the game won? Quite possibly. However, several points should make us cautious about this diagnosis.

Salaries have recently increased at a rate that remains high (between 4 and 5% per year). However, in the euro zone, almost zero productivity gains make it impossible to compensate for this increase. Corporate margins are therefore at stake. Continuing in the euro zone, it is the fall in import prices which has provided a large portion of the disinflation. But can they continue to fall further? And prices for services continue to rise rapidly. Furthermore, until now, the sharp increase in interest rates in a context of historically very high public and private debts has not produced the financial impact that was feared. And yet hadn’t we talked about a possible “perfect storm” on this topic? Some reasons for this non-event: increased savings and inflation protection policies have fuelled growth which helps overcome rising costs of debt. Banking regulations, significantly tightened since the last major financial crisis (2007-2009), have generally succeeded in safeguarding the banks.

Companies, taking advantage of the very low rates preceding the return of inflation, had extended their loans and had taken them out at a fixed rate instead. However, let’s keep in mind a few elements that also encourage caution. The professional real estate sector, during the real estate bubble preceding the pandemic, may have experienced excess debt here and there, resulting in insolvencies beginning to appear. Many companies in all sectors, sometimes with high leverage, will have to refinance their loans over the next few years. States themselves, which are highly indebted, will gradually have to bear sharply increasing interest charges which will disrupt their solvency trajectories. The sensitivity of financial markets to this type of situation could thus increase significantly. In addition, central banks will certainly be keen not to reproduce periods of interest rates that are too low for too long, periods which weaken financial stability. And they will want to maintain room for manoeuvre to deal with future systemic crises. Inflation, moreover, for structural reasons, will no longer be as low as during the last 30 years.

We should therefore have changed our interest rate regime a long time ago, returning to more normal rates, that is to say closer to nominal growth rates. Also, if the situation so far has proven to be a successful landing of inflation without major damage to the economy, to avoid a large-scale upheaval that is still possible, it is therefore up to private and public economic actors, supported by macro-prudential rules well established by the concerned authorities, to adapt vigorously to ensure the sustainability of their solvency and their growth.