Category: Economical policy

Categories
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.

Categories
Economical policy Euro zone

Repealing pension reform would be dangerous

The pension reform has been criticised for being poorly prepared and poorly negotiated. So be it. However, repealing it would be very financially dangerous given the fragility of our public finances and the absolute need to redress them. Any sign of a worsening situation could trigger a serious French debt financing crisis. Therefore, the repeal of this reform would be understood by savers and the markets as irresponsible. Public pension spending on GDP will already represent 14.4% in 2022 compared to 11.9% in the eurozone.

But the repeal would also be very unfavourable for the French economically (for households or businesses) and ultimately for jobs and purchasing power. The only possible ways to ensure the balance of pay-as-you-go pension schemes are to lower the level of pensions, which is obviously good neither for retirees nor for the economy. To increase social contributions, through being paid by employees, thus causing a loss of purchasing power and downward pressure on demand. Or paid by businesses, knowing that these social contributions on GDP are already 50% higher in France than in Germany and 30% higher than in the euro zone on average, which ultimately amounts to less competitiveness, fewer jobs and downward pressure on wages. Finally, the third and final solution is to adjust the length of working life according to demographic changes.

Age measures (retirement age or, better, number of annuities) adjusted of course according to the arduousness of each person’s work, are the only ones capable of reconciling the interests of current or future retirees and the search for the best growth potential for the economy, employment and purchasing power. All the more so since even today many companies cannot grow as much as they could due to a lack of skilled or unskilled labor. A reminder: in France, we had 4 contributors for 1 retiree in 1960. In 2010, there were only 1.8 contributors for 1 retiree and it will be 1.2 in 2050. At the same time, in 1958, life expectancy at retirement age was 15.6 years for women and 12.5 years for men. In 2020, it is 26.9 years and 22.4 years respectively. While the retirement age is lower today than in 1958. Life expectancy in good health after retirement has also increased considerably. In France, only around 30% of people aged 60 to 64 work, while in other eurozone countries, almost 50% do so. 57% in Germany and 68% in Sweden! All neighbouring countries have indeed raised the retirement age (65 to 67 years) for the same reasons and out of realism. As a result, we must also finally wake up to the reality principle, so that our pay-as-you-go pension scheme is not endangered by the inability to finance it. This reform even if insufficient, is a step in the right direction. It is always possible to adjust it a little, but being careful not to open Pandora’s box…

Finally, two thoughts. First of all, work is not only economically necessary, it is also most often a means of integration, socialisation and self-fulfilment. Let us therefore facilitate the work of those over 60 and encourage companies to keep them, or even hire them. The second: work is not to be shared because it would be in finite quantity. It is a static and erroneous view of the economy that leads to thinking this way. Work creates work in a dynamic where supply and demand feed each other. All empirical results confirm this.

Categories
Economical policy Euro zone Global economy Uncategorized

The reasoning errors of those who want to increase compulsory contributions.

We know that the rate of compulsory contributions in France is one of the highest of the 38 OECD countries and much higher than the average of those countries. We are less aware that after redistribution, income inequalities in France, whether measured by the Gini index, by the ratio between the income of the wealthiest 10% and that of the least wealthy 10% or by the relative poverty rate, have not changed or have barely changed over the past 20 years, contrary to what some say. And that they are among the lowest in Europe and in the world.

In France, redistribution is very high, reducing the ratio between the income before redistribution of the wealthiest 10% and that of the least well-off 10% from 20 to 9. And from 20 to 3 by adding the effect of public services paid more by the wealthiest due to the high progressivity of taxes. 85% of people among the poorest 30% thus receive more in terms of public services than they pay, compared to 57% for all people in France (INSEE study of 2023 on extended redistribution). Ignoring this when building economic programs is obviously a source of inadequate proposals and therefore dangerous for the economy and ultimately for the least well-off. Obviously, the same reasoning is not tenable for the United States for example, where income inequality is much higher and has increased significantly over the past 20 years.

Another fundamental point is seriously ignored by certain programs. The economy and the social spheres are not static. They are dynamics whose effects are difficult to isolate from each other and whose interactions can cause favorable or catastrophic developments, even contrary to the desired goals.

If, compulsory contributions in France which are already on the European and OECD podium, are increased further, they will have a negative effect on employment – by reducing the competitiveness of companies, the dynamics of entrepreneurship, the incentive to work, etc. – as well as on growth. However, employment and growth are the main factors in the fight against poverty and in the development of the standard of living. Since 2000, France’s GDP per capita has declined in relative terms in Europe.

Similarly, supply and demand should not be considered separately. France already has a very large trade deficit and a current deficit that demonstrate its insufficient competitiveness. Its financial dependence on the rest of the world is thus constantly increasing. Artificially increasing demand would only further aggravate the external deficit. The development of the economy requires that demand be firm, but it also requires the simultaneous development of a competitive supply, which will also increase demand, particularly through the development of employment. Demand cannot be sustained for long through ever-increasing public spending, which ends up

leading to unsustainable debt. Nor can it be sustained by financing this spending through an incessant increase in contributions that end up reducing supply and jobs. The right way to fight against poverty and for purchasing power is therefore certainly not to further increase taxes and contributions, which are already very high, nor public spending (which in the long term is not positively correlated with growth), but to promote technological and green innovation, social mobility to improve equality of opportunity and incentives to work, since many companies cannot grow due to a lack of human resources, etc. Let’s stop cherishing the causes that lead to the effects that we deplore!

Categories
Economical policy Finance

The French vicious circle of tax increases

Raising taxes is not the solution, only a structural reform policy, efficient management of our public finances, and investments for the future will allow us to preserve our standard of living and social protection, writes Olivier Klein.

The compulsory contribution rate has been on an upward trend in France for a long time reaching more than 43% of GDP in 2023, the highest in the European Union (around 6 points higher than the euro zone average).The marginal tax rate on household income stands at 55.2%, compared to 47.5% in Germany. It is higher than in Italy, Spain, the Netherlands and Belgium.

The capital tax rate still remains higher than the European average despite recent reductions which are very helpful to the French economy, which has been well documented. As for businesses, despite the efforts of recent years, they are subject to production taxes that are more than 2 points of GDP higher than the euro zone average and almost 4 points higher than Germany.

Due to the lack of control over public spending (notably operating costs), the public deficit has often remained high, including in 2023, when it was one of the highest in the euro zone. For example the civil service workforce was indeed approaching 6 million people at the end of 2023, constantly increasing (33% more than in 1990), with a very high total share in total employment (more than 21 %). However, there is no long-term positive correlation between the increase in public spending and economic growth.

One of the highest levels of redistribution in the OECD

Nor can the increase in household taxes be aimed at combating income inequality. After redistribution, in France the latter is one of the lowest in Europe. The Gini index of post-redistribution inequality stands at 0.298, while Germany is at 0.303; Spain, Italy and the United Kingdom have levels between 0.320 and 0.354. In addition, the level of inequality in France has remained considerably stable since 1990. France actually has one of the highest levels of redistribution in the OECD. Let us also add that the share of national income after redistribution held by the richest 1% in France is also one of the lowest after redistribution at 7.17%, compared to 8.72% in Sweden, 10.32% in Italy or 14.35% in the United States. Likewise, the poverty rate is lower than the European average.

Thus, increasing compulsory contributions, as well as the level of redistribution, would be counterproductive, leading to effects contrary to those desired regarding both employment and growth. The endless race between spending and public contributions that are significantly higher here than elsewhere has continued to cause an increase in debt, which has now reached worrying levels. Remember that between 2000 and 2022, French public debt grew twice as quickly as that of the euro zone. The result is an increasing weakening of the French economy, without gains in terms of relative growth.

Reform policy

Even more taxes, beyond an already high threshold, would lead to a weakening of our competitiveness and our attractiveness, and therefore our employment rate, which is already low compared to that of the countries of northern Europe. Which would in turn lead to more inequalities before redistribution, employment being decisive in this matter. Thus leading to raising the redistribution rate again, and therefore causing more taxes again. The vicious circle is complete.

Only a policy of structural reforms, efficient management of our public finances (notably operating expenses) and investments for the future made possible by a reallocation of our public expenses, will allow us to preserve our standard of living and social protection. Not understanding this would very quickly lead to discouraging work and talent, damaging already insufficient competitiveness, therefore aggravating inequalities of opportunity and creating huge scale poverty.
Categories
Economical policy Global economy

The European Capital Markets Union, useful but not enough!

Let us not overestimate the decisive nature of the change desired by the European Capital Markets Union project. Will the reinvestment of the financing capacity (surplus) of the European Union in Europe, rather than in the United States, be guaranteed? Indeed, before the idiosyncratic crisis in the euro zone beginning in 2010, the financing capacities of the Northern countries were able to back the financing needs of the countries in the Southern zone, despite the organisation of the financial markets as it still stands today. The measures proposed in favour of the capital markets union, by Christian Noyer for example, seem very useful to me. But they are not a “game changer”. Today, we can invest freely on each European stock exchange or finance European companies through deposits in banks or investment in debt or private equity funds… Certainly, a more integrated, more harmonised, more European-supervised market, would give more depth and liquidity to European financial markets. They would therefore become more attractive. The unity of the European market would also better protect savers by providing them with greater security. So, it would undeniably be a significant plus, but not enough to ensure the recycling of surplus savings from certain European countries in Europe itself. Why? How can we be sure of this with more certainty?

Two elements would be able to trigger a change in the geographical orientation of the European savings surplus: -On the one hand, the implementation of reforms in the Southern countries (France included) aimed at not having permanently high public deficits, and at gradually approaching the level of public debt to GDP of the Northern countries. This would enable the acquisition of a sustainable credibility of public finances. This would allow significant progress in real and structural solidarity between the countries in the zone. And thus promote “risk sharing” between European countries. Leading to the confidence of Northern savers-investors in the sustainability of the debt of Southern countries.

Investors from Northern countries in fact stopped investing their current account surpluses in 2010 to finance the needs of Southern countries, when they understood that solidarity was not a given. And they are still very reluctant to provide such solidarity, fearing that the ant will have to help the cicadas all year round and every year. Thus, today the current account balances of the South are at zero +, since the end of the euro zone crisis, because a current account deficit could be difficult for them to finance. And the surpluses of the North are mainly placed in the United States…

– On the other hand, a European impetus for a more dynamic European economy and Schumpeterian growth favorable to innovation. Impetus through incentives to raise the level of R&D, through well-measured and targeted subsidies and partial guarantees on carefully chosen investments, through public-private investments, through incentives for innovation and industrialisation in the future industry sectors, etc.

Likewise, non-naive regulation (ESMA, competition, green, etc.) and taking into account the competitiveness of our industries, as well as appropriate taxation, finally the development of a culture of risk and not a religion of precaution -a sign of our aging- should also allow savers and their representatives (institutional investors) to want to invest more in many future projects in Europe, because they would offer good profitability prospects.

These two elements are not contradictory, rather complementary, to the European Capital Union project. But they seem more decisive. Favouring or even focusing only on the capital union would symbolically exaggerate the role of finance and would entail the risk of major disappointments down the road. Good projects have no trouble getting financed.

Categories
Economical policy Finance Global economy

The European model will be unsustainable without reforms

The mid to long term results of Europe’s economic performance require critical reflection. And anticipating future difficulties require us to think about the reforms to be rapidly implemented to protect the European standard of living and social protection, an invaluable shared asset but unsustainable without in-depth change.

Some data. Over the last 20 years (2002-2023), the cumulative economic growth rate of the United States has reached 60%. The euro zone is at 30%. American household consumption increased by 60%, that of Europeans by 20%. The rate of American private and public research and development over GDP has exceeded the European one by about one point by year for the last 20 years, etc. Thus, over the same period productivity gains have increased by more than 45% in the United States compared to 10% in the euro zone. From 2019 to 2023, they increased by 1.7% per year in the United States and by 0.3% in the euro zone (-0.8% in France). However, the working age population is growing by around 0.2% per year in the United States while it is falling by around 0.5% per year in the euro zone. It will fall by 0.8% around 2030, with the percentage of the population over 65 continuing to increase (22% today, 26% in 2030).

To deal with this negative demographic effect and protect European standards of living, growth will be essential, and therefore more productivity gains. Innovation, research and development and robotisation should be widely encouraged. Especially since Europe is not prominent in the strategic industries of the future: wind turbines, voltaic panels, electric batteries, electric cars, industries of the fourth technological revolution…

We must therefore change the paradigm by facilitating Schumpeterian growth much more, through creative destruction. By rethinking the weight of regulations which, in Europe, are always higher than those in the rest of the world. By increasing the mobility of labour and capital. By combating the decline in the quality and effectiveness of teaching. By controlling and better allocating public spending… Indeed, European potential growth of around 0.5 to 1%, resulting from productivity gains close to zero, declining demographics and a slowing rise in the employment rate will in no way ensure the persistence of European economic prosperity.

Qualified immigration would also make it possible to resolve this difficult equation; in the United States, immigrants having, in total and on average, a level of education higher than that of the resident population. Finally, an increase in the quantity of work (number of hours worked in life as well as the number of people working as a percentage of the population), with less cultural disaffection for work, will be essential.

The Europeans preference, like their institutions, for precaution instead of risk, as well as the permanent extension of rights without their accompanying duties, is unsustainable, otherwise they risk an inexorable decline. A certain strategic naivety must give way to ethical pragmatism. Ethics without efficiency cannot survive for long. Europe cannot continue much longer without the danger of Péguy’s criticism of Kantianism: having pure hands, but having no hands at all. To preserve the very essence of what made post-war Europe, we urgently need to change our software. It remains for us to think carefully about institutional reforms, those through which Europe regulates itself, to facilitate this jumpstart and allow it to maintain its place in the world.