Category: Global economy

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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.

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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!

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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.

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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.

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Economical policy Global economy

Fragmentation and Distrust

The systemic China-US rivalry. The appearance of a “Global South”, itself quite disparate. The war in Ukraine…The most flagrant manifestations of this fragmentation are the multiplication since 2010 of international military conflicts by almost 4 , of the number of countries subject to financial sanctions by a little less than 3 or even that of protectionist measures in the world by 6. This geopolitical fragmentation is thus accompanied by economic fragmentation albeit at a slower pace. Both threaten peace and security-the world’s noise sadly reminds of this every day- and the benefits of organised freedom of trade and capital flows. Let us not forget that, in emerging countries the poorest part of the population (below the minimum subsistence level) experienced a very sharp decline from 1995 to 2021.

Power play has returned to the centre of the world stage. China wants to regain a dominant position, after a long period of little geopolitical presence. Russia, after the peaceful end of the Soviet Union, is driven by its historical fear of being encircled and its insufficient consideration of where it ‘fits’ in the concert of world powers. The rejection of ‘double standards’ is mobilizing both the populations of emerging countries and their leaders. Distrust has therefore increased considerably between emerging countries and the West. The West which had served as a model for a long period and which set the tone for global regulations. This accounts for the current deficiency of global regulation modes: the UN, the WTO, etc., but also the usual more or less formalized bilateral mechanisms of coordination. The fragmentation of the world seems to be well underway.

Power play has returned to the centre of the world stage. China wants to regain a dominant position, after a long period of little geopolitical presence. Russia, after the peaceful end of the Soviet Union, is driven by its historical fear of being encircled and its insufficient consideration of where it ‘fits’ in the concert of world powers. The rejection of ‘double standards’ is mobilizing both the populations of emerging countries and their leaders.

Distrust has therefore increased considerably between emerging countries and the West. The West which had served as a model for a long period and which set the tone for global regulations. This accounts for the current deficiency of global regulation modes: the UN, the WTO, etc., but also the usual more or less formalized bilateral mechanisms of coordination. The fragmentation of the world seems to be well underway.

But at the same time we are also witnessing another fragmentation. At the heart of Western democracies, with the rise of populism and extremism. Democracies seem worn out. As Cioran put it, “civilisations develop through the belief in the myths upon which they were founded and decline through the doubts which assault them”.

The rise of Wokeism is both manifestation and cause. The no limits quest for the broadening of everyone’s rights, in all areas, without ever associating them with the symmetrical duties that would permit them, may potentially lead to moral ruin with a loss of all civic sense. And the possibility of financial ruin, with the funding of the social protection system, something which is essential, running out of steam. Here again, the resulting rise of distrust reinforces fragmentation. Distrust of the Government, institutions and even of others.

And here and there is an increasing distrust of democracy itself. Wokeism ends up fueling the rise of populism, which prides itself on wanting to restore fundamental values, while putting forward an illiberal logic, both economically and politically. This game of -Siamese-opposites risks an even more marked and potentially violent fragmentation of society.

This apparent fatigue of democracy can only solicit weak interest from other civilisations. The fragmentation of Western societies partly fuels the fragmentation of the world and the rise of general distrust. At the same time, the increase of autocratic regimes in emerging countries in turn leads to justified distrust on the part of Western countries.

Will we be able to re-establish the level of confidence in ourselves and others and the means of coordination necessary to avoid further developing the everyone-for-themselves logic of individuals and countries? Will we be able to avoid primitive violence, always justified by the anticipated violence of the other? Can we revive democracy and ensure its balance to protect such a precious asset? To avoid the deadly dynamic of distrust and the multifaceted detrimental consequences of fragmentation.

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Economical policy Finance Global economy

French Public Debt and Deficit- how to avoid the precipice

5.5% of GDP in 2023: the French public deficit rate is posted at an unexpected level and one of the highest in the European Union. Why is this a serious problem? What are the possibilities for getting out of the trap that France has been stuck in for a long time?

A deficit may be desirable when fiscal policy plays its countercyclical role during recessions, for example. However, if French and European growth proved weak in 2023, the recession feared due to the historic rise in interest rates did not occur. After years of very high public deficits (6.6% in 2021 and 4.8% in 2022), it was hoped that last year’s deficit would be at a much lower level and that its decline would be premeditated and credible for the following years. France has continuously run public deficits since 1974, though, empirically, there is no long-term positive correlation between public deficits and the growth rate.

If the public debt rate were low, or even average, a few years of public deficits at high levels would not be dangerous. But our public debt (social protection system included) exceeds 110%. Our primary deficit (before payment of debt interest) is close to 4% of gross domestic product (GDP). Our potential growth is low and the real long-term interest rate has become slightly positive. We have come out of the period of low rates for good. With free money having disappeared, the cost of public debt rose from 34 billion euros in 2020 to more than 50 billion in 2023 and will reach more than 70 billion in 2027. There is no more magic money. This very unfavourable combination could thus lead us to experience a snowball effect of public debt, which consists of borrowing even more to pay the interest on the debt itself, in an endless and very destabilising growth of public debt. The French public debt rate stood at 20% of GDP in 1980, 60% in 2000 (same in Germany) and 110.6% in 2023 (compared to around 65% in Germany). Finally, if the public debt rate has increased by approximately 25 points of GDP for the entire euro zone since 2000, it has increased by 50 points for France, or twice as much as the euro zone.

There are possible ways to break the deadlock, of course being protected by the euro which has protected us since 2000, but which could sooner or later no longer be enough.

No room for manoeuvre

The cancellation of the debt held by the central bank is not only highly perilous, but also useless because the interest lost by the monetary authority would be equally lost by the State which receives revenue through the results of the issuing institution.

Raising taxes would be a solution if France did not already have a total tax rate (43.5% of GDP in 2023) among the highest in the world. But today, this would lead to slower growth and sooner or later further deterioration of the deficit and debt. And further lower the employment rate. And fall back into France’s vicious circle. This recipe can only work when there is room to manoeuvre. This is no longer the case in France.

The income tax rate for more than half of households is zero in France and the rates are lower than in the rest of the euro zone for the first levels of the scale. But the marginal rate on household income stands at 55.2% in France compared to 47.5% in Germany; it is also higher in France than in Italy, Spain, the Netherlands and Belgium…It therefore hardly seems feasible to cause even more imbalances by increasing the rate scales of the wealthiest households. The capital tax rate, for its part, still remains higher than the European average. In addition, the level of income inequality in France is one of the lowest in Europe.

Companies, for their part, despite the efforts of recent years, are still experiencing levies well above their European competitors: taxes on production, for example, are still 2.4 points of GDP higher in 2022 compared to the euro zone average and 3.7 points compared to Germany.

In 2022, the total tax rate was 6.1 GDP points higher than the euro zone average rate. It is the highest in the European Union. The budgetary weapon can be very useful, but only if one is able to reload it regularly.

Significantly lowering the level of public spending in relation to GDP is therefore desirable when reaching these peaks. In the case of France, it would be necessary to carry out a re-engineering of the territorial organisation and the management of public services. Which can only take time and cause discontent. However, the need for it is great and the superficial shaving method is very limited in its effectiveness.

However, it is unreasonable, with very low growth, to carry out a rapid and indiscriminate reduction in public spending because it could lead to a recession in the short term which would have negative effects on the deficits themselves. Stabilising their volume level and redirecting them is, however, particularly desirable and greatly improves their efficiency. By involving public service employees (including those within social security in the broad sense of the term) to show them the benefits that they themselves could gain from it. By working from administration to administration and transversally on each topic, calmly but without prevaricating or procrastinating. With the support of digital tools, among others, it is possible without human impact. Saying it and doing it in a credible way is essential. Credibility is, in fact, key to financial stabilisation.

At least three levers

Could this be enough? No. Two additional levers are necessary, to be used in conjunction with the previous one, and to be announced publicly, displaying unfailing determination and clear programming. The credibility of public authorities is essential to convince all stakeholders.

Pursue structural reforms that increase growth, i.e. increase the quantity of people available for work and increase productivity gains. The excess growth generated would make it possible to relieve the deficit rate and public debt by increasing the denominator.

But faced with the French and European delay in terms of technological innovations and industries of the future, these actions alone would again probably not be enough.

The development of programs like the American IRA, backed by a well-thought-out industrial policy, would be unavoidable, but illusory with current debt. It is also probably illusory to think that the European Union would agree to launch a second common loan similar to the one launched during the pandemic.

Only the concomitance of these three lines of action can avoid a predictable catastrophe. It is necessary to combine investments in growth and competitiveness, the financing of which would be pledged on a recurring reduction in operating expenditure in relation to GDP, the greater efficiency of public services (in health, as in education for example, French public sector expenditure by GDP is among the highest in Europe, yet it is both felt and measured to have deteriorated significantly) and the improvement in potential growth generated through structural reforms.

Public debt, when it is no longer sustainable, leads to the worst economic and social consequences. Monetary and financial disorder due to excessive and unsustainable debt for too long can suddenly lead to breakdowns in the confidence of citizens, as well as in the international financial markets (foreign investors finance more than 50% of French public debt). And in the absence of a sudden rupture, uncontrolled debt can lead to an inexorable decline, the economic and social consequences of which are, ultimately, just as bad, if not brutal. Only the commitment to a clear and planned pursuit of the three action plans described here, in short, only the presentation of a legible and credible trajectory, because it is solidly documented and substantiated seems to be able to avoid such a risk.