Category: Euro zone

Categories
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.

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 Euro zone

Monetary policy cannot do everything

Today, inflation has returned for the long term. Central banks must counter it. But an excessive rise in interest rates can trigger a recession, a hard landing. It can be too strongly calibrated, if we think that the transitory component of current inflation will weaken in the near future. Supply constraints have already begun to ease over time, barring the consequences of an escalation in the war. But an excessively slow rise in interest rates would lead to an increase in indexation. Reacting late, once inflation expectations are no longer anchored at a low level, would cost much more. Making deep recessions inevitable.

Interest rates too low for too long have globally led to very high debt ratios and bubbles in both equities and property. Rates must therefore be raised and quantitative easing policies gradually come to an end. But central banks are facing the risk of bursting bubbles, with impacts on growth, and the risk of insolvency for the most indebted companies and governments. This situation is therefore problematic for central banks, which must be very determined and very cautious. As a result, they have begun the normalisation of their policy and will go as far as its neutralisation. Including through a gradual exit from quantitative easing. But once this stage is reached, they will act according to the circumstances. If growth weakens sharply, if markets fall substantially, they will warn. The state of wage and price indexation, and therefore of the level of “structural” inflation, will then be scrutinised, in order to question the opportunity or danger of positioning interest rates above the neutral rate. If the inflationary regime were to strengthen further, they would very likely tighten their policy, both by raising their interest rates above the potential growth rate, and increasing quantitative tightening.

In this context, they will conduct monetary policies that are closely linked to data as they arise. While avoiding being dominated by fiscal issues and financial markets.

Meanwhile, governments have no choice but to have a credible medium-term solvency trajectory. An overly strict fiscal policy would destroy growth, but doing nothing when the level of indebtedness is high would undermine their credibility, which would be a very high risk in the short term.  They therefore need to put in place a policy of managing public finances without austerity, but which in reality is an exit from support policies. The unexpected, brutal and temporary pandemic is indeed to be differentiated from a possible change in inflation regime.

In addition, the investments needed to increase potential growth or green growth must be financed. However, this financing must be secured by more rational and efficient management of public spending, as well as by structural reforms. The latter are necessary to increase potential growth, i.e. sooner or later for a better ratio of public debt to GDP. They are also a means of combating inflation, the origin of which in Europe is more linked to a supply shock. And when the labour supply is very insufficient, job shortages can be alleviated by the reform of the labour market and the unemployment system, as by pension reform. In France, the employment rate of people over sixty is much lower than that of the rest of the eurozone.

The road is narrow. The essential fight against inflation, without too many economic and financial difficulties, requires a good combination of monetary policy and structural policies. Monetary policy can do a lot, but it cannot do everything on its own.

Categories
Conjoncture Economical policy Euro zone

“Inflation, interest rates and debt”

Updated on 21/10/2022

Categories
Euro zone Global economy

Inflation, interest rates and debts: an explosive cocktail

Should central banks have to finance public deficits linked to reindustrialisation, climate change or rearmament over the very long term, as opposed to the “we’ll do whatever it takes” approach that only lasted as long as the pandemic did? Does the debt not matter, in that case? Trapped by too many contradictory objectives, extremely accommodative monetary policies would then be prolonged, with interest rates remaining well below the growth rate and central banks’ balance sheets continuing to swell. No way! This is a convenient idea, but it’s a recipe for a very painful future. So, central banks are taking a different path.

Before the war, because inflation was more than only transitory, central banks had to exit quantitative easing and raise their interest rates gradually. But because of very high global debt levels and high valuations on financial and real estate markets, they toughened their tone cautiously when a strong surge in inflation occurred due to the war in Ukraine. An inflation that gets out of hand through indexation, even if imperfect, of prices to prices and wages to prices would indeed be a source of many evils. It would de facto lead to a significant inequality in income trends in real terms, both between households and between companies, as the ability to pass on price rises would be far from equal. Wage negotiations would become very contentious; price signals between producers, distributors and consumers would be unstable; loan contracts would lead to a disruption in the way interest rates are set between lenders and borrowers. Stable and low inflation is indeed essential for confidence among market participants, and therefore for an efficient economy. Today, faced with the threat of stagflation, central banks are faced with an even more delicate dilemma.

They must not undermine this weakening growth, but they have no choice other than to react if they have any hope of combating the major risk of uncontrolled inflation. \Therefore, if and when central banks normalise their monetary policy, they will have to do so with a great deal of clarity for the sake of their credibility, but also with great caution. They will have to test the effects on the financial markets, including government debt, at each stage. The ECB has an additional challenge: the eurozone is made up of countries with very divergent economic situations. At the same time, governments will have to show a credible fiscal trajectory, by making investments that promote potential and greener growth, but also by protecting the poorest from inflation… Structural reforms will also be essential, and more than ever, to facilitate growth and to participate in the solvency path – we are talking in particular about that of pensions in France. This narrow path is the only one possible.

If central banks were to perpetuate ad libitum a policy of financing public deficits and maintaining excessively low interest rates, serious financial crises due to the bursting of increasingly uncontrollable bubbles would cascade, structurally damaging growth. Inflation would sky-rocket to the detriment of the weakest and damaging the overall efficiency of the economy. And, sooner or later, confidence in money itself could be called into question. The flight from money would eventually lead to the collapse of the economy and the social order. Historical examples bear witness to this. Monetary policies will therefore tighten and interest rates will rise. There is little time left for highly indebted agents, public or private, to prepare for this.