Category: Conjoncture

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Conjoncture Economical and financial crisis Economical policy

Central Banks: Warsh and the Debate on the Limits of the Post-Crisis Monetary Regime

Olivier Klein — May 25, 2026

The emergence of Kevin Warsh in the American debate on monetary policy has become an important focal point, both for understanding the internal debates shaping central banks and for anticipating the possible future direction of the Fed. His approach cannot be understood either as a simple return to the monetary orthodoxy of the Volcker years or as a merely cyclical criticism of the Federal Reserve. More fundamentally, it reflects a broader historical questioning of the transformations of the monetary and financial regime that emerged from the great crisis of 2007–2009.

The significance of the debate opened by Warsh lies precisely in the fact that it challenges several implicit foundations of the post-crisis monetary regime: the acceptance of permanently hypertrophied central bank balance sheets, the enduring stabilizing role attributed to central bank liquidity, and the idea that central banks can and should continuously support financial markets in order to preserve macroeconomic stability.

Warsh’s thinking therefore appears as an attempt to reintroduce a form of monetary and financial discipline into a system that has gradually become dependent on central bank intervention and prone to generating lasting moral hazard in the behavior of financial market participants. To understand this position, it must be placed within the historical evolution of monetary policy since the 1980s.

The disinflation initiated by Volcker from 1979 onward opened a long period of structurally declining inflation. This resulted not only from a change in monetary doctrine, but also, more deeply, from major transformations in global capitalism: financial globalization, trade globalization, the rise of emerging economies, and the digital and robotic revolutions. As at the end of the nineteenth century, these transformations simultaneously generated a regime of low inflation and strong financial expansion.

In this context, central banks progressively shifted their operating framework. Monetary regulation through control of the money supply was abandoned in favor of steering the economy through short-term interest rates. During the 1990s and 2000s, the idea gradually took hold that price stability effectively guaranteed overall macro-financial stability. This became known as the era of the “Great Moderation.”

At the same time, however, financial cycles re-emerged. An environment of low inflation and structurally low interest rates — often below the growth rate — encouraged rising indebtedness and asset-price bubbles. The apparent stability of consumer prices in fact concealed increasing financial fragility. The crisis of 2007–2009 revealed precisely the limits of this framework.

Faced with systemic risk, central banks fully assumed their role as lenders of last resort. They lowered policy rates toward zero and introduced unconventional policies such as Quantitative Easing (QE), involving massive purchases of securities in order to compress long-term rates and risk premia. These policies helped avoid a depression comparable to that of the 1930s. But they also profoundly transformed the functioning of the contemporary financial system. Central bank balance sheets reached unprecedented levels. Markets gradually became accustomed to the permanent presence of the central bank. Asset valuations were durably supported by extraordinarily accommodative monetary conditions.

It is precisely this new monetary regime that Kevin Warsh criticizes. His implicit thesis is that central banks have gradually moved beyond their traditional role. In his view, QE was supposed to be an exceptional crisis-management instrument, not a quasi-permanent monetary regime. By maintaining oversized balance sheets and very low interest rates for too long, central banks may themselves have contributed to the financial imbalances they originally sought to contain.

In this respect, Warsh partially echoes analyses developed over several years by the Bank for International Settlements, notably through Claudio Borio, and by economists such as Olivier Klein. In a durable regime of very low interest rates — below the growth rate — debt accumulation progressively becomes excessive, asset valuations disconnect from fundamentals, and markets, as well as the financial positions of many economic agents, become hypersensitive to any increase in interest rates. Warsh’s criticism is therefore aimed less at the emergency rescue operations of 2008 than at the lasting asymmetry of post-crisis monetary policy: central banks intervened massively during shocks, but failed to normalize policy once growth had become satisfactory again.

Behind this criticism lies a more fundamental question: how far can a central bank stabilize the economy without ultimately destabilizing the system itself? Warsh argues that the Fed’s permanent intervention has gradually altered market behavior. When investors anticipate that the central bank will systematically intervene to prevent any sharp correction in asset prices, market discipline weakens. Moral hazard increases. Risk premia become artificially compressed. Debt levels appear sustainable only so long as liquidity remains abundant. This directly connects with the analysis of long financial cycles developed after the global financial crisis. In an environment of structurally low inflation, central banks may be led to keep short- and long-term rates too low for too long, thereby fueling debt accumulation and bubbles. Price stability therefore does not guarantee financial stability; it may at times even encourage its opposite.

Warsh thus advocates a more limited Fed, more narrowly focused on its traditional mandate and less involved in the implicit support of financial markets. It would also, in his view, reduce incentives for fiscal complacency. His desire to significantly shrink the Fed’s balance sheet reflects this orientation. Yet this line of thought also raises several important questions.

The first is that it may underestimate the structural transformation of the contemporary financial system. Since 2008, U.S. markets have been profoundly reorganized around the abundance of liquidity provided by the central bank. Abruptly reducing that liquidity could trigger major tensions in bond markets, bank refinancing, or asset valuations. The new regime may indeed be one in which central bank balance sheets remain structurally larger than before the crisis, even if their normalization has probably not yet reached equilibrium. Banks may continue to hold structurally high deposits in central bank money beyond mandatory reserves. Monetary policy can still remain effective in such a framework.

The second question concerns the international role of the dollar. The Fed has effectively become a global central bank. In periods of crisis, it is dollar liquidity provided by the Fed that stabilizes a large part of the international financial system. A much more restrictive and less interventionist Fed could therefore significantly increase global volatility.

The third question concerns Warsh’s intention to lower short-term rates while allowing long-term rates to rise through the “Quantitative Tightening” he advocates. Is such a configuration feasible? What might its consequences be? His conceptual framework assumes that reducing the central bank’s balance sheet would lower inflation, thereby creating room to cut policy rates. This appears to reflect a monetarist analysis whose empirical foundations have been weak since the late 1980s. Moreover, with the return of post-Covid inflation — and today renewed inflationary pressures linked to energy prices and certain commodities and rare earths — long-term rates are no longer at levels that, in the previous period, could reasonably have been considered abnormally low. Major central banks have already initiated a normalization of their balance-sheet policies while keeping short-term rates well above zero.

It should also be noted that one of Warsh’s arguments for lowering policy rates — namely the disinflationary effects of artificial intelligence through expected productivity gains — can theoretically be countered by the possibility that stronger productivity growth may itself raise the natural rate of interest. One may also question the fact that Warsh appeared considerably more hawkish before the Trump presidency than he does today.

Ultimately, Warsh’s thinking raises a central question: does there still exist today an interest-rate level compatible simultaneously with monetary stability, financial stability, and the sustainability of the public and private debt accumulated over more than fifteen years? This is the paradox of the current system. Ultra-accommodative monetary policies helped avoid successive depressions. But they also contributed to making economies extremely sensitive to monetary normalization. The longer central banks support asset valuations and debt levels, the more difficult it becomes to return to a normal situation without triggering instability. Conversely, failing — even cautiously — to exit this regime may itself pave the way for even more severe crises in the future.

The debate opened by Kevin Warsh therefore goes far beyond his own person. It reveals the deep contradictions of the contemporary monetary regime: how can central banks simultaneously preserve anti-inflation credibility, financial stability, debt sustainability, and the orderly functioning of financial markets? In other words, the issue is no longer simply the appropriate level of interest rates or the optimal size of central bank balance sheets. It has become a question about the very role of central banks within a financialized, globalized, and structurally indebted form of capitalism.

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Conjoncture Economical and financial crisis

When Debt and the Lack of Reforms Weaken Democracy

Published in Les Échos , May 2026 the 11th
By Olivier Klein

Since 2000, French public debt as a share of GDP has grown four to five times faster than the average debt level of the eurozone excluding France. This points to a political system and a country that no longer know how to explain or understand limits, prioritize effectively, or embrace the long term. Debt thus ceases to be a countercyclical tool and instead becomes the symptom of a headlong flight forward.

But does this drift at least succeed — even on credit — in preserving social cohesion and trust in institutions? In fact, the opposite is true. France devotes a record share of its GDP to public spending while allowing debt to spiral out of control, even as the perceived quality of public services declines and their cost-effectiveness remains average, or even mediocre, as international comparisons confirm.

A growing share of citizens doubts that taxes and social contributions are being put to good use. This situation fuels the image of an omnipresent yet ineffective state, weakening tax consent and undermining trust both in public authorities and among citizens themselves.

A vicious circle

A first vicious circle has taken hold: in order to finance a generous social model without possessing its necessary foundations (high employment, a sufficient productive base, and individual responsibility regarding social spending), France combines a very high tax burden with steadily rising debt. These taxes weigh on competitiveness and on the attractiveness of work, thereby limiting employment and the taxable base. Lacking dynamic sources of revenue, the state is then tempted to raise taxes and deficits even further, thereby closing the circle.

But a second, more insidious circle — which I also analyze in my book (*) — affects democracy itself. When deficits persist and debt keeps rising, everyone anticipates that one day the bill will have to be paid, without knowing by whom or how. Households and businesses fear higher taxation; welfare recipients fear cuts in benefits; public-sector employees and younger generations fear becoming tomorrow’s sacrifice.

Every reform therefore appears unfair, as each group fears losing more than the others. Reforms that are watered down or endlessly postponed only deepen this distrust. Debt thus acts as a solvent of trust, both vertical and horizontal. The essential transformations become politically inaccessible, making continued debt growth virtually inevitable.

This dynamic reflects a broader drift within democracy — when it no longer self-regulates — toward the endless multiplication of rights, the parallel weakening of duties, and the never-satisfied pursuit of total equality, blurring the distinction between equality of rights, equality of opportunity, and equality of income. The resulting uncontrolled debt becomes the instrument of a system that continually promises more than it can finance.

A strategy for sustainability

Escaping this double vicious circle requires precisely what France has postponed for decades: an explicit strategy to ensure the sustainability of its economic and social model, based on structural reforms openly embraced as a condition for its survival rather than accepted as a form of surrender.

Increasing the employment rate, extending effective working lives, encouraging risk-taking, fostering individual responsibility, and improving the efficiency of public spending are the essential levers for stabilizing debt without undermining social cohesion.

A democracy capable of accepting its constraints can turn debt control not into a technocratic imperative, but into an act of collective responsibility toward the future and a foundation for rebuilding trust.

(*) Dette, réformes et démocratie. Comment sortir du cercle vicieux français (Décryptage Editions, May 2026)

Olivier Klein
Professor of Economics at HEC Paris

Categories
Conjoncture Economical and financial crisis Economical policy

Cryptocurrencies, Bitcoin and the Questioning of Official Currencies

Cryptocurrencies, and Bitcoin in particular, are part of a major contemporary debate on the nature of money and the role of institutions. Cryptocurrencies indeed represent an attempt to found an alternative to traditional currencies. To properly understand what these new assets propose, and what differentiates them from official currencies, we must rethink the essence of money, the role of institutions, and trust. It is therefore useful to undertake a deeper reflection that addresses not only economic questions but also anthropological and political philosophy issues, by analyzing the fundamental differences between the libertarian school and the institutionalist school. 

A cryptocurrency is a digital currency whose transactions are recorded and verified by decentralized technology, often blockchain. Bitcoin, which appeared in 2009 (that is to say, notably, right after the great financial crisis), is the first cryptocurrency to have achieved significant success. Its founding principles are decentralization, the absence of a central authority controlling the creation or regulation of the currency, limited supply, transparency, and transaction immutability. 

The founders of Bitcoin promoted this currency for several reasons. First, it would protect against inflation of the money supply and monetary manipulation: unlike official currencies, which are created by banks and regulated by central banks, Bitcoin relies on a fixed and predetermined protocol, without the intermediary of a financial institution. Second, it offers more individual freedom and autonomy, giving the user anonymity and independence from a national currency and its constraints. It also introduces the notion of algorithmic trust: instead of relying on an institution, one trusts the technology and the distributed consensus of the network. Finally, it can promote financial inclusion in areas where access to banking services is limited. 

Bitcoins and other similar cryptocurrencies essentially stem from the utopia of a world in which money would no longer be national but universal, valid for all countries and people, transferable securely and without costs. This currency would do without intermediaries; its value could not be manipulated by governments or central banks. It would be tied to private decentralized governance. It would guarantee transaction anonymity, and its guardian would be not a central bank but an algorithm, assumed to be infallible — a form of anarcho-capitalist utopia. In the 1970s, Friedrich Hayek and the Austrian school recommended denationalizing money, removing the monopoly of money creation from governments and leaving this task to private industry. In a way, the development of cryptocurrencies could be an attempt to fulfill this desire. 

The differences with official bank money are therefore fundamental. Modern money is always, upon issuance, a debt of the issuer (a bank in this case) to itself. But this private debt must be recognized by society to be universally accepted as a liberating means of payment — that is, a means of payment that frees the holder from the debt created by the exchange. Modern money is issued by banks, no longer in proportion to gold or silver holdings, but based on economic development. Money is created from credit, which simultaneously results in the creation of a deposit for the borrower. This deposit appears as a liability for the bank. It is legally a debt of the bank to the deposit holder. Bank deposits thus serve as money because they are accepted by society as a liberating means of payment (unless there is a collective loss of confidence in the bank’s solvency). Credits therefore make deposits. Today, banks create money ex nihilo — no longer linked to precious metal holdings but according to credit demand and economic needs. Moreover, this system is regulated by an external institutional authority — the central bank — since the automatic regulation of money creation by the convertibility of money into gold or silver has disappeared. 

It was the severe recurring financial crises in the second half of the 19th century that led to the creation of official institutions, central banks, after repeated bank failures. Central banks, by homogenizing the monetary space (e.g., one dollar issued by one American bank always equals one dollar issued by another) and by acting, if necessary, as lender of last resort, created the possibility of stability. The usefulness of institutions and rules thus became clear. 

Bank money — which is therefore a bank debt — regulated by central banks and governments relies on confidence in these institutions. Trusting money therefore means trusting the effectiveness of the debt settlement system. And the money supply, backed by credits to the economy, evolves primarily with the economy’s needs. 

Bitcoin and other cryptocurrencies, by contrast, have a limited, pre-fixed supply, independent of economic needs. Not backed by any official institution but by a protocol, and having no economic counterpart, they are highly volatile and their value is completely self-referential. Bitcoin, for example, is worth only what buyers and sellers agree it is worth, with no external objective reference such as the economy, and with no external regulation. Their legal framework is also uncertain. Their universal adoption therefore remains very limited. 

From an anthropological and political philosophy perspective, it becomes clear that the libertarian school’s ideas about the role of institutions illuminate the choices of “Bitcoiners.” They promote cryptocurrencies as a response to institutions deemed dangerous or oppressive by nature. They thus create a new non-official alternative “institution”: a set of rules coded in a protocol, norms, and a trust system based on technology rather than the state. Libertarians believe institutions are artificial constructs that hinder human self-organization. Institutionalists, however — along with thinkers like René Girard — view institutions as the product of spontaneous societal evolution, representing historical learning aimed at improving social efficiency and peaceful coexistence. 

Institutionalists see institutions as deep and resilient social structures. They encompass formal rules such as laws, contracts, or central banks, and informal norms like customs or shared beliefs. They are the “rules of the game” that structure social interaction, enable effective cooperation, strengthen mutual trust, and reduce transaction costs and conflicts. Without them, markets, economic life, and social peace would be unstable or chaotic. Girard, specifically, sees institutions as regulators of violence, developed through human history to channel societal tensions. Money itself plays a role in organizing exchanges and maintaining social order. 

Thus, Bitcoin — a private money not backed by a public institution and issued without reference to society’s evolving needs — cannot be validated universally as a liberating means of payment. Its self-referential value and high price volatility make everyday use as a payment method very difficult. 

However, institutions themselves are not immutable; they can become ineffective or distorted. If, for example, monetary constraints were suspended for too long — such as through sustained public debt monetization — confidence in the debt settlement system and in money itself could be undermined, potentially leading to economic and societal collapse. Money is, as Michel Aglietta said, “the alpha and omega of society” — the fundamental social bond. 

Cryptocurrencies, including Bitcoin, could thus establish themselves as alternative or even substitute money if debt levels relative to GDP continue rising globally and if fears of “corruption” of official money through sustained monetization take hold. Otherwise, their characteristics make them highly speculative assets whose value depends solely on market participants’ anticipations of each other’s future behavior — speculation “in a void.” They are not money, and we should be cautious about letting them become so. 

Categories
Conjoncture Economical and financial crisis Economical policy

A 20-Point GDP Gap with the United States: Europe Is No Longer Falling Behind — It Is Settling into Decline

For almost twenty years, Europe has been falling behind — not as the result of a temporary cyclical shock, but as the outcome of a cumulative and structural process. The comparison with the United States is now unambiguous: while the U.S. economy regained a sustained growth trajectory after the 2008 financial crisis, Europe appears stuck in a regime of persistently low growth, with lasting economic, social, and geopolitical consequences.

Since the global financial crisis, real U.S. GDP has grown at a markedly faster pace than that of the European Union. As a result, the American economy has expanded roughly twice as fast as Europe’s over the period, creating a gap of more than 20 percentage points in GDP.

Growth is not merely an economic variable. It determines fiscal capacity, investment in research, defense, and infrastructure — and therefore, in the long run, global power itself: the ability to protect living standards and uphold one’s values.

A Growing Productivity Divide

The divergence is also visible in GDP per capita. In the early 2000s, Europe stood close to U.S. levels. By 2024, GDP per capita in purchasing power parity terms reached roughly $75,000 in the United States, compared with around $55,000 in the European Union. This gap no longer stems primarily from differences in hours worked, which have remained broadly stable over the past two decades, but from a widening disparity in productive efficiency.

At the heart of Europe’s challenge lies insufficient productivity growth — more specifically, weak total factor productivity gains. These depend on incentives to innovate and take risks, on competitive market structures, and on the capacity to allow new firms to emerge while less efficient ones exit. In other words, on enabling “creative destruction” in the Schumpeterian sense, as formalized in modern growth theory.

Europe has suffered from a chronic deficit in these areas. Since the late 1990s, productivity growth has been significantly lower than in the United States, often close to zero in the euro area.

Innovation tends to be incremental rather than radical; markets remain fragmented; scale effects are limited; and incentives for risk-taking are insufficient.

The weakness of venture capital — particularly at the scale-up stage — combined with burdensome regulation and penalizing tax structures, leads many European start-ups either to sell prematurely or relocate abroad, fueling a silent outflow of technology and talent.

Structural Handicaps

These weaknesses are compounded by structural constraints: energy dependence, persistently higher energy prices than in the United States, critical dependence on rare earths, and chronic underinvestment in defense and key technologies.

The illusion of European “normative power” — the idea that Europe can shape global standards without sufficient industrial and technological leadership — collides with reality: standards ultimately follow market power.

The remedies are well known. They require acting more collectively and more swiftly. Institutional governance is at stake. They involve deepening the single market, particularly in capital, energy, and digital sectors; massively reducing intra-European regulatory barriers; and pursuing a more ambitious and risk-embracing innovation policy.

They also require faster reallocation of resources toward the most productive firms, greater labor mobility, and a decade-long investment effort spanning climate transition, defense, energy, and critical technologies — alongside a substantial upgrade in education and skills.

Ultimately, the issue is not merely economic; it is political. Without stronger and more durable growth — and therefore without the structural reforms that make it possible — neither Europe’s social model nor its ability to shape the global order can be preserved.

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Conjoncture Economical and financial crisis Economical policy

Why Europe Is Falling Behind — and How to Accelerate

Olivier Klein
Professor of economics at HEC
February 12, 2026

Over the span of two decades, the European Union’s relative slowdown has turned into a genuine divergence from the United States—and increasingly from China as well. This is no longer a cyclical gap: Europe’s growth trajectory has become structurally weaker, with profound implications for living standards, social cohesion, and the continent’s geopolitical weight.

Since the 2008 financial crisis, average annual growth in the U.S. economy has significantly outpaced that of the European Union. A one-percentage-point growth gap sustained over twenty years results in a GDP difference exceeding 20%, translating into reduced capacity to finance defense, infrastructure, the energy transition, or education. GDP per capita in purchasing power parity terms—once relatively close to U.S. levels in the early 2000s—has gradually drifted away, signaling a relative decline in European living standards.

This divergence comes at a time when the global economic order has shifted from a U.S./Europe bipolarity to a tripolar configuration: United States, China, and the European Union. Economic weight determines not only internal prosperity but also the capacity to fund military power, sustain diplomatic ambition, and shape technical and regulatory standards. Growth, in other words, has become a strategic variable.

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An Efficiency Problem, Not a Labor Quantity Problem

One key lesson from recent research is that Europe does not suffer from a lack of capital or from a massive education or skills deficit relative to the United States. Nor has the historical gap in annual hours worked—traditionally lower in Europe—widened since 2000.

Europe’s relative deterioration over the past two decades stems primarily from an efficiency problem in organizing production and innovation. Total factor productivity (TFP)—which measures the ability to innovate, adopt new technologies, and efficiently reallocate resources—has grown much more slowly in Europe than in the United States since the mid-1990s.

The gap is highly sectoral. Europe remains competitive in traditional manufacturing and certain regulated services, but it lags significantly in high-technology sectors: digital platforms, cloud computing, artificial intelligence, and biotechnology. These sectors now concentrate productivity gains and give rise to “superstar firms” that drive overall economic dynamism. The combined market capitalization of major U.S. technology companies far exceeds that of their European counterparts, revealing a deep imbalance in the capacity to create and capture innovation-driven value.

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A Schumpeterian Reading: Europe’s Creative Destruction Deficit

To understand this divergence, a Schumpeterian framework—particularly as formalized by Philippe Aghion—is especially relevant. Long-term growth depends on creative destruction: the entry of innovative firms, the exit of obsolete ones, and the rapid reallocation of capital and labor toward the most productive sectors.

Near the technological frontier, this process requires strong incentives for breakthrough innovation, sufficient competition to push incumbents to reinvent themselves, and institutions that accept failure and structural transformation. This is precisely where Europe underperforms.

Stylized facts are clear: since the mid-1990s, TFP growth has been roughly twice as high in the United States as in the euro area, with the gap concentrated in the most innovative sectors (ICT, digital technologies, biotech), rather than across the entire economy.

Politically and socially, Europe shows a marked preference for ex ante protection of existing jobs and firms—through regulation, labor law, and taxation—whereas the United States tends to rely more on ex post compensation for losers, via labor mobility and income-support mechanisms. The result is lower firm entry and exit rates in Europe, more limited sectoral and geographic labor mobility, and therefore slower reallocation toward the most productive activities.

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Innovation Institutions: Europe’s Structural Lag

Another key dimension concerns the organization of innovation systems. In economies close to the technological frontier, growth depends less on imitation and more on the capacity to generate and diffuse breakthrough innovations. This requires specific institutions: effective intellectual property protection, competitive markets, deep capital markets, and public agencies capable of financing long-term, high-risk projects.

The United States has, for decades, developed agencies such as Defense Advanced Research Projects Agency (DARPA), ARPA-E, IARPA, and BARDA. These bodies operate with significant autonomy, substantial funding, and high tolerance for risk. Led by program managers from scientific and industrial backgrounds appointed for limited terms, they fund applied research projects with transformative potential, often at the intersection of public needs (defense, health, energy) and private innovation.

This model has played a decisive role in the emergence of technologies that are now ubiquitous: the internet, GPS, advanced semiconductors, and key components of artificial intelligence and biotechnology.

By contrast, Europe has built a fragmented landscape of research institutions and innovation programs, often oriented toward medium-scale projects, with limited tolerance for failure and lengthy decision processes. The difficulty lies in concentrating resources on strategic priorities, taking bold technological bets, and ensuring a smooth continuum from public research to start-ups, innovative SMEs, and large firms.

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Energy, Industry, and the Low-Growth Trap

Performance gaps are also explained by real factors such as energy and industrial structure. The European Union remains structurally dependent on energy imports, particularly gas and oil, while the United States has become a net exporter. Recent energy shocks have exposed this vulnerability, durably increasing energy costs for European firms, especially in energy-intensive sectors.

Some national policy choices have compounded the problem: rapid nuclear phase-outs without immediately available decarbonized alternatives, underinvestment in dispatchable generation capacity, and slow development of interconnections. Since energy is a core production input, persistently higher costs weigh directly on competitiveness, industrial employment, trade balances, and investment capacity in other areas such as R&D and infrastructure.

Thus emerges a “low-growth trap”: weak growth, underinvestment, technological lag, and renewed weak growth.

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Europe Is Not Doomed to Decline

The diagnosis should not lead to fatalism. The European Union retains considerable structural strengths: high levels of education, world-class universities and research centers, and a dense base of engineers and scientists. Its socio-economic model—social protection, reduced inequality, strong public services—remains widely supported by citizens.

Europe also benefits from stable institutions: rule of law, judicial independence, central bank independence, and robust property rights protection. In a geopolitically fragmented world, such stability is a valuable asset that can attract talent, capital, and firms—provided Europe regains a more dynamic growth trajectory.

Recent history shows that the Union can respond decisively in times of crisis: the creation of the European Stability Mechanism and banking union progress after the euro crisis, joint debt issuance after the pandemic, and renewed emphasis on reindustrialization. Yet such advances are often incremental and slow.

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Three Reform Axes to Escape the Trap

  1. Deepen the Single Market.
    Goods markets remain fragmented by national regulations; services markets are far from integrated; capital markets remain segmented. A genuine capital markets union, deeper integration of energy and digital markets, and reduced entry barriers in protected sectors would generate scale effects comparable to those enjoyed by U.S. or Chinese firms.
  2. Reinforce Frontier Innovation Capacity.
    R&D policy must increase overall effort and, above all, create institutions capable of financing long-term breakthrough projects with agile governance and explicit tolerance for risk. Universities, research centers, start-ups, and large firms must be more tightly connected. Venture capital and growth capital must be strengthened. Europe must enable the emergence of new “superstars” in artificial intelligence, semiconductors, health, and low-carbon technologies. More broadly, it must move away from hyper-protection and hyper-regulation—often intertwined—and toward greater acceptance of risk, failure, and the recognition and reward of success.
  3. Redesign the Social Contract.
    If creative destruction is to intensify, it must be socially acceptable. Protection should shift—as in Denmark—from protecting specific jobs to protecting individuals. Flexicurity in labor markets, large-scale lifelong learning, portability of social rights, and stronger income-insurance mechanisms are essential to reconcile economic dynamism with social cohesion.

Europe must move beyond the implicit compromise that trades short-term stability for a gradual erosion of the productive base that finances its social model. The continent’s divergence is not inevitable; it is the consequence of institutional and political choices that can be revised.

The question is not whether Europe should abandon its model, but whether it can equip itself with the institutions of a competitive frontier economy and a sufficiently strong and dynamic productive base to sustain that model in a world of far harsher power dynamics—more technological and more competitive at once.

Only then can Europe continue to shape global standards and remain a consequential actor on the world stage.

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Conjoncture Economical and financial crisis Economical policy

THE FRENCH POLITICAL, ECONOMIC AND SOCIAL MODEL MUST UNDERGO A DEEP RENEWAL

29.11.2025

Below is an in-depth essay on the necessary renewal of the politico-economic-social model that defines the system in which we live in Europe, regardless of right–left alternations in power. This renewal is all the more essential in France, where this tradition of thought has gradually been diluted into an overdeveloped statism and the byways of wokisme.

“A state that interferes everywhere not only weakens institutions; it also destroys the relations of trust between citizens, for it stands between them and makes them strangers to one another.”
(The Crisis of Culture) — Hannah Arendt

A Model Out of Breath

The model as it exists today in France has run its course. It has contributed a great deal over the decades. But its intellectual foundations have evolved very little—in fact, they have drifted—while at least four major developments have taken place. These developments have been ignored, left unexamined, sometimes denied, or worse still, embraced without understanding their consequences. Let us list them without ranking.

The issue of public authority, security, and migration, along with the rise of Islamist ideology—reshaping the question of what makes a nation. The rise of fierce individualism, marked by the overvaluation of individual rights and the devaluation of duties. The obsession with equality, leading to a dangerous egalitarianism at the expense of equal opportunity and fairness. And finally, the expansion of an oversized public sector whose entropic growth breeds inefficiency, discouragement, loss of trust and rising anxiety.

We will return to each of these points. The essential challenge of the ecological transition is not mentioned here, for our model—with too many dogmas and an insufficiently scientific approach—has nonetheless integrated it relatively well into its framework. We must therefore renew our thinking, or risk becoming obsolete, by exploring areas that have so far been insufficiently examined. Let us try, modestly, to lay a few building blocks.

Market and State

The market is indispensable, for it generates economic dynamism, allocates resources, and matches supply and demand—imperfectly, of course, but irreplaceably. Yet the market cannot be a sufficient regulatory mechanism on its own, for to remain effective and sufficiently stable it needs law, rules, institutions, regulatory bodies, and intermediary groups capable of acting when the market becomes destabilizing. The public sphere is therefore essential to regulating the market, the economy, and society at large.

Thus the State—in the broad sense—is necessary for maintaining society’s balance, including by fostering intermediary bodies such as trade unions, which help regulate the whole. The various forces at play in society can then be channelled more or less harmoniously in a shifting, inherently unstable balance. And this regulatory model has enabled—unevenly and not linearly—a rise in well-being, relatively well shared across European countries.

The most developed manifestations of this regulatory model, combining ethics and efficiency, have been found in Northern Europe and Germany. Later, with nuances, a form of social democracy spread across Europe and became, volens nolens, one of its defining features. Overall, our model, with its variants, has for decades achieved a successful combination of markets with institutions and rules—including redistributive ones.

We use the term social market economy in a broad sense, beyond the alternation of right- and left-wing governments, to designate the common foundation that best captures the regulatory mode of European countries.

However, Europe now appears to be experiencing a relative decline—and in recent years even a significant economic lag behind the American model. The proliferation of norms and regulations, the weaker incentives for initiative and risk-taking, and the unchecked drive for equality—not fairness—seem to be part of the explanation. This model, even in its reformist versions aware of this dangerous trajectory, has become insufficient.

Authority, Security, Immigration

It is essential to integrate into public-policy thinking the issues of public authority, security, and better regulation and integration of immigration. Failing to address these matters in a republican manner leaves them to populist movements, which can then attract voters who are rightly dissatisfied at not being heard on sensitive issues of daily life.

These subjects are crucial, and they must not be treated moralistically or with disdain. Likewise, conceiving a country, a nation, as a multicultural kaleidoscope with no unity, no real borders, no shared culture, no genuine identity, and with nothing in common but disembodied universal values is an ethereal vision that dissolves history, geography and the very notion of nationhood. It ignores the cultural bonds that forge a country, enabling its inhabitants to recognize themselves within it and live together. Denying this truth leads sooner or later—volens nolens—to disaster.

Renan had already said it all: “What unites us is not a language, a religion or a race, but a shared past and a shared willingness to live together. A nation is a soul, a spiritual principle, built on the memory of past glories and the present consent to continue that common life. A nation is a daily plebiscite.” Let this be an inspiration.

These fundamental issues, however, will not be further developed in this paper.

Over-administration: a Brake on Action

We must also examine carefully the loss of effectiveness in the public sphere. Just as markets are not free of errors and endogenous dysfunctions, public decisions may be ineffective, or simply wrong. Neither markets nor the State are omniscient. We must acknowledge—beyond ideology—that public policy may fail, be unsuitable, or even undesirable. It may even generate perverse effects contrary to its goals.

This must become core to the renewal of social-market-economy thinking. It is worth remembering that there is no “evil capital” and “virtuous State.” No camp of good and camp of evil. This simplistic and dangerous Manichaeism is misleading. Capital and its institutional counterpart each follow their own logic of endless expansion—there, in terms of return, accumulation; here, in terms of control and power. Both feel, like living organisms, the vital need to grow. Yet both are necessary and complementary—so long as neither is allowed to dominate and destabilize the delicate balance required for progress.

The State’s Logic of Growth: Over-administration
We must think freely about the decades-long expansion in France of an omnipresent State that increasingly intermediates relations among individuals—that is, between individuals and society. This State exercises ever-tighter control over citizens and, in an entropic dynamic, develops an ever-heavier over-administration with diminishing returns.

This analysis is especially necessary in Europe—and more particularly in France—much more than in the United States. Over-administration breeds discouragement, nostalgia, and a sense of powerlessness. It also drives individuals to seek maximal advantage for themselves, or even, for some, to desire sedition or insubordination. Through its intrinsic logic of endless growth, over-administration infantilizes people and continually pushes them to demand ever more from the State. This inevitably leads to disappointment, which in turn fuels fear—even in the face of small problems—because the sense of personal responsibility has been eroded.

Too much State intervention atomizes individuals² and alienates them from their own capacity to act. An overintrusive State can undermine self-confidence and mutual trust. It hampers individual and collective action and weakens self-organized solidarity within society.

“Action is what enables human beings to appear before one another, to reveal themselves in their singularity, and to build a common world. When the State monopolizes this capacity, citizens are reduced to mere spectators.”
— Hannah Arendt, The Human Condition

In short, following Arendt’s insight, this dynamic erodes the necessary balance between individual and collective freedom and responsibility on the one hand, and necessary social regulation on the other. “The danger is not only in the violence of authoritarian regimes but also in the gradual slide into a soft, paternalistic administration that suffocates freedom under the pretext of protection.”

The Essential Combination of Ethics and Efficiency

Since the public sphere can err and tends to expand until its effectiveness collapses, the State must regain clarity of vision and vigour. It must avoid developing superfluous structures and refrain from generating unnecessary laws, rules and institutions. The public sphere must ensure the best possible balance between ethics and efficiency; neither belongs exclusively to the market or to the State. Their interplay is complex and interwoven. Ethics and efficiency belong together in companies and in society as a whole; neither can endure without the other.

Hyper-democracy

We must also question democracy’s natural trajectory—its endogenous dynamic—what I call hyper-democracy. Democracy can generate its own excesses. Tocqueville already warned of this. Without deep reflection on these tendencies, democracy can weaken itself and ultimately even disappear, paving the way for populism—whether far right or far left.

We cannot avoid reflecting on democracy’s own specific excesses: the endless expansion of individual rights, enforceable against everyone else, combined with the erosion of duties. This leads to extreme individualism, egoism, and fragmentary communautarisme. These are symptoms of total self-absorption. And ideologically, they are reinforced by the simplistic idea that everyone is necessarily either an oppressor or oppressed, with thought policed by new dogmas.

This produces hatred of the Other—those assigned as oppressors, burdened with indelible guilt. The oppressed, in turn, are deemed to be freed forever from duty or responsibility. Redemption for the “oppressor” is only possible through total re-education and self-denunciation. A fantasy reminiscent of totalitarianism.

All this hides behind totemic words, repeated endlessly—hollow words but mandatory, belonging to the “good” camp. Other words become shameful, forbidden. A police of morals, a police of thought. Wokisme is the caricature and most advanced expression of this distortion of democracy. It is not an extension of democracy, nor of progressivism. It is a new ideology of democratic excess, ultimately destructive of democracy itself.

Opposing wokisme—understood as the intolerant, totalitarian radicalization of progressive activism—is neither conservatism nor reaction. The defenders of the democratic, liberal, social-market model cannot leave the critique of wokisme to populists alone, at the risk of disappearing themselves. The American example is clear; so is that of today’s French Socialist Party, absorbed by NFP/LFI as the RN grows in parallel.

Other endogenous excesses also emerge from hyper-democracy: the quest for absolute equality, magical thinking that suffocates the very dynamism of society. As Tocqueville wrote: “There is no passion so fatal to man and society as the love of equality, which can debase individuals and lead them to prefer a common mediocrity over individual excellence.”

Without self-reflection and regulation, our model drifts fatally. We must reassess absolute equality, equality of rights, equality of opportunity, and fairness, along with their moral, economic and social implications.

Hyper-democracy leads to regression, the erosion of economic dynamism and well-being, financial collapse, and moral decay. It unleashes the lowest passions—jealousy, resentment, hatred—which are already at work.

Without renewed thinking about democracy’s endogenous excesses, about over-administration and its effects, about the legitimate republican need to restore public authority, and about better immigration regulation and integration, mistrust toward democracy will not diminish. The rise of populism does not originate solely in these factors, but it would be dangerous to deny that they are part of the cause.

A False “Progressivism” Concealing a True Regression

Benevolence—or blindness—toward the causes and consequences of these four trends does not constitute progressivism, despite its self-presentation. Quite the opposite. These phenomena confine, isolate, and provoke fatal regressions in relation to humanist and universalist values—always values of progress, responsibility, emancipation and harmony. Imperfectly realized, yes, but they have enabled societies to recognize and respect minorities without doing so at the expense of the majority. They have supported racial, gender and social equality, and facilitated equality of opportunity.

The combination of too much State with hyper-democracy creates a pernicious, destructive dynamic resolved only through limitless expansion of rights and the collapse of duties and responsibilities, as well as through declining effectiveness of socio-economic regulation. This generates societal mistrust toward institutions, politics, and others—in short, toward society itself. And ultimately, it drives unsustainable public debt.

A society with a social market economy must ensure essential protection for the most vulnerable while balancing this with individual and collective responsibility. The welfare state is essential, but it cannot and must not attempt to protect from everything, without limit, at the cost of widespread disempowerment.

Tocqueville again: “The sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, minute, uniform rules… it does not break wills, but it softens and bends them… until each nation is reduced to nothing more than a flock of timid, industrious animals, of which the government is the shepherd.”

The Survival of the Social Market Economy Model

The proper balance—the viable equilibrium—has been broken. This endangers the welfare state itself, and thus the precious social protection it provides.

The present analysis questions whether democracy, social democracy, and the public sphere can avoid entropic decline and stabilize at an equilibrium combining justice (ethics), efficiency (wealth creation), and economic and social well-being.

This is a matter of survival for our European socio-economic model. With specifically French shortcomings making the system increasingly inefficient, our regulatory model will sooner or later become incapable of reproducing itself—incapable of surviving. If renewal does not come in time, the consequences will be widespread impoverishment and a moral and financial collapse.

The reflection must therefore continue. How can we design mechanisms that limit these excesses? How can we restore the vital equilibria that allow our societies to survive and regain vitality?

That is the challenge. It is a fundamental question for our future, our “model,” our Europe, and our country.

Olivier Klein
Professor of economics at HEC Paris