Categories
Conjoncture Economical and financial crisis Economical policy

The French social and economic model is unsustainable

It would be more than reckless to claim that France does not have a serious public debt problem, nor that its social and administrative model does not require profound reforms to become sustainable. Admittedly, an immediate catastrophe on the markets is unlikely to arise solely from France’s financial situation, notably thanks to the protection offered by the euro. However, a lasting political chaos with no foreseeable solution could eventually trigger such a crisis.
In any case, the issue is to act deeply and swiftly to restore the sustainability of our economic and social model, which is now out of breath. Notably, the sharp rise in public debt interest payments, especially from 2026 onwards, will further weigh down the budgetary equation.

France’s Economic Disconnect

Our GDP per capita is increasingly lagging behind that of its neighbors. In 2024, Germany reached 116.2% of France’s GDP per capita, up from 105% in 2000; the Netherlands hit 136.4% versus 114; Denmark 129.3% versus 117.8; and Sweden 114.1% versus 100, for example. This serious disconnect, occurring over just two decades, reflects a decline in competitiveness and the exhaustion of the French productive model.
Meanwhile, since 2000, France’s public debt has risen from 59% to 113% of GDP—a 54-point increase. In comparison, the eurozone (excluding France) saw an increase of only 17 points, from 70% to 87% of GDP. This debt surge did not boost French growth, which has been slightly weaker over the period than in the rest of the eurozone.

116.2%

The tax burden in France reached 45.3% in 2024, compared to 40.3% for Germany, 40.6% for the eurozone (excluding France), and 34% on average in the OECD. Not to mention the growing overadministration and overregulation, which weigh heavily on our competitiveness and entrepreneurial spirit. Our employment rate (68%) is comparatively too low, while Northern European countries and Germany are between 75 and over 80%. The employment rate is strongly correlated with the level of social contributions paid by companies and with retirement rules. Meanwhile, the share of French merchandise exports in total eurozone exports has fallen from 16% to 11%, marking a significant decline in our industrial competitiveness.

It should also be noted that the redistribution rate in France is among the highest in the world. According to calculations by INSEE, the income gap between the top 10% and the bottom 10% drops from 18 to 3 after extended redistribution. The top 1% receive 7.2% of household income in France, compared to 8.7% in Sweden, 10.3% in Italy, and 14.4% in the United States.

Finally, public spending in France amounted to 57.1% of GDP in 2024, far ahead of Germany (49.5%), the eurozone (excluding France, 49.6%) and the OECD (42.6%). In the long term, there is no positive correlation across OECD countries between public spending and growth rates—quite the opposite beyond a certain threshold.

Work and Production Must Increase

Should we ignore these figures and, against all evidence, propose further increases in tax and public spending, instead of reducing them? Can we seriously fail to realize that the right answer for France is to increase the wealth produced, and not even more redistribution? That the issue also lies in the insufficient quantity of work, both annually and over a lifetime? Without understanding that this shortage only supports our standard of living and social protection at the cost of ever-increasing debt?
We must speak honestly and act justly to avoid the accelerated decline of our economic and social model. These observations are not ideological—they are neither right nor left. As Pierre Mendès France used to say: “Public accounts in disorder are the sign of nations in decline.”

Olivier Klein is Professor of Economics at HEC.

Categories
Economical and financial crisis Economical policy

Bayrou’s Budget: Necessary, Whatever Happens

Published in Les Échos, August 28, 2025

It was urgent to put a stop to a dangerous drift that has been undermining our economic and social balance for far too long. The time for inaction is over, whatever the political outcomes in Parliament.
The budget must be part of a coherent, long-term strategy—no small feat in France today. It is essential to design a detailed and consistent plan for transforming the State and local authorities, making them leaner, less redundant, and more efficient. The engineering and support for change will also be crucial for the success of this transformation.

Responsibility

It is equally urgent to rethink our welfare state to make it sustainable. This requires greater accountability from everyone in regard to this fundamental common good: encouraging a more rational use of Social Security, avoiding overconsumption of healthcare or benefits, and introducing an individual contribution, however modest, to limit abuses without undermining solidarity. The amount of work in France—both the employment rate and the number of hours worked—must be structurally increased. If we had Germany’s employment rate, we would no longer face a primary public deficit or financing problems for our social protection system.

The current budget proposal touches on these issues. Public spending would continue to increase in 2026, but by 1.8% instead of the initially forecast 3.5% to 4%. This would be progress, but not the kind of cost-cutting seen in companies that need to reduce expenses. Criticisms of this budget proposal as “ultra-liberal” not only miss the urgency of the necessary recovery but are unfounded. Moreover, some of the supposed cuts are in fact hidden tax increases, such as the removal of the 10% tax allowance for retirees or the elimination of certain tax breaks.

Reform

The principle that “everyone must contribute to the effort” seems fair, but it must be applied with discernment. It is crucial to address excesses where they actually occur, not indiscriminately—otherwise the reform risks being unjust and undermining public support.

As for the idea that such efforts can only be accepted if accompanied by greater tax fairness, it must be placed in the French context. Our country is already one of the most redistributive in the OECD. In France, income inequality is reduced from a factor of 18 to 3 after redistribution. The top marginal tax rates are among the highest in Europe, while the lowest taxable incomes are among the least taxed. And 55% of French households do not pay income tax at all, while 10% pay 75% of the total.

More broadly, further increasing compulsory levies—already the highest in the OECD—would only further discourage investment, employment, and entrepreneurial risk-taking. The necessary balance requires fair pragmatism, reconciling social imperatives with economic solidity, without worsening the lack of work incentives or the insufficiency of competitiveness.

This budget proposal could therefore be a necessary—though insufficient—beginning, unless the confidence vote renders it meaningless. France will not escape, in any case, the imperative of a long-term vision that finally recognizes the country cannot live indefinitely on ever-rising debt and insufficient wealth creation. Let us have the courage to implement structural reforms before they are imposed on us. We must stop feeding the French vicious circle: ever-increasing taxes, uncontrolled spending—both already at world-record levels—resulting in a debt trajectory that is unsustainable and extremely perilous.

Olivier Klein is Professor of Economics at HEC.

Categories
Economical and financial crisis Economical policy

Rebalancing Market and Public Sphere: An Indispensable and Urgent Task

Les Échos, August 4, 2025

The market is an essential driver of economic dynamism. It enables efficient resource allocation, stimulates innovation, and adjusts supply to demand. However, it is neither perfect nor self-sufficient. Regulation is required to prevent excesses, ensure fairness, and secure long-term stability. Such regulation demands a legal framework, robust institutions, and legitimate authorities to set the rules of the game—but this framework must not harden into a straitjacket.
Over the past several decades, the public sphere has continued to expand, often in poorly controlled ways. In France in particular, one observes a trend toward over-administration and excessive taxation. The State now intervenes in an ever-growing number of areas, inserting itself far too often into relationships between individuals and organizations, while simultaneously weakening intermediary bodies. The result is a proliferation of rules and an ever more complex bureaucracy—alongside a decline in competitiveness and in the attractiveness of work.
Administrative red tape, diminishing effectiveness of public policies, and blurred responsibilities are the visible symptoms of this drift. Public action thus ceases to inspire confidence; instead, it creates disappointment, resentment, and disengagement. Citizens too often feel infantilized, stripped of their ability to act, reduced to a kind of civic passivity. This climate breeds withdrawal and mistrust toward institutions and politics, perceived as distant, ineffective, or even incompetent. The expansive logic of the public sphere further sustains the illusion that the State can provide answers to every problem. That illusion locks us into a vicious cycle: the more the State promises, the more it disappoints; the more its scope expands, the less effective it becomes. This erosion of individual responsibility deepens collective fear, sometimes even in the face of minor problems. As Hannah Arendt so aptly observed, “A State that intrudes everywhere does not only undermine institutions; it also destroys relations of trust between citizens, by placing itself in between them and turning them into strangers to one another.”

Too much State intervention therefore alienates individuals from their own capacity to act. This affects not only democratic vitality but also the capacity of society to innovate and adapt. It encourages inertia, obstructs necessary reforms, and undermines collective trust. The economic and social fabric suffers as a result. An excess of rules, taxes, and levies guarantees neither fairness nor efficiency; instead, it immobilizes society rather than helping it navigate change. This leads to a persistently low employment rate and blocks social mobility. For this reason, rethinking the balance between market and public power has become urgent. The market does need rules—but rules that are clear, stable, not overly numerous, and adapted to contemporary challenges. The State, for its part, must concentrate on its core missions and prioritize effectiveness. As Tocqueville already warned: “The sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, minute, and uniform rules through which even the most original minds and the most vigorous souls cannot find their way to rise above the crowd. It does not subjugate wills, but softens, bends, and directs them; it does not tyrannize, but hinders, compromises, enervates, extinguishes, and stupefies, until finally reducing the nation into nothing more than a herd of timid and industrious animals of which the government is the shepherd.”

The challenge, then, is not to choose market or State but to rearticulate them intelligently. France must move beyond the all-too-frequent Manichaean logic according to which whatever is public is necessarily good while whatever is private is automatically suspect—or vice versa. What is needed is the restoration of complementarity between individual initiative and responsibility on the one hand and collective organization on the other. There exists a path of balance that combines economic efficiency with ethical responsibility. Efficiency is not the sole property of markets, just as ethics is not the exclusive domain of the public sphere. Public authorities must constantly seek equilibrium—harmonizing the best of both sides.
This requires a deep reform of public action. Instead of piling on new administrative layers, the State must simplify, decentralize responsibility, and refocus on its strategic functions. Policy should be designed with constant attention to actual outcomes, steering clear of counterproductive effects and ideological dogmatism—whether fashionable or outdated. Only thereby can we prevent both entropy in the public sphere and loss of meaning in society. In doing so, trust in institutions, politics, and ultimately democracy itself can be restored.

Olivier Klein
Professor of Economics, HEC

Categories
Conjoncture Economical and financial crisis

The Thought of Social Democracy Must Undergo a Profound Renewal in France

27.01.2025

A state that interferes in everything not only weakens institutions; it also destroys the bonds of trust between citizens, by positioning itself between them and making them strangers to one another.”
(The Crisis of Culture) – Hannah Arendt


Social-democratic thinking as it currently stands in France has run its course. It accomplished much over many decades, but its intellectual model has scarcely evolved in the face of at least four major trends that have emerged over time. These shifts were either ignored, insufficiently addressed, outright denied, or blindly followed without a grasp of their consequences. Citing them without regard to priority: public authority, security, and the migration phenomenon — particularly with the rise of Islamist ideology — making the question of national identity more acute. The rise of a fierce individualism that overemphasizes rights while devaluing obligations. An obsession with equality that tips into dangerous egalitarianism, undermining the pursuit of equal opportunity and justice. Finally, the hypertrophy of the public sphere, whose entropy breeds inefficiency, discouragement, loss of trust, and rising anxiety.

We will return to each of these issues. Although not cited here, the climate transition remains crucial; social democracy has, with too many dogmas and insufficient scientific rigor, managed to partially internalize it. To avoid obsolescence, social-democratic thought must therefore explore new terrain — long neglected, even within itself. Let us lay a few modest foundations.

Market and State

Markets are indispensable: they drive economic dynamism, resource allocation, and (albeit imperfect) supply-demand equilibrium. However, they cannot, in and of themselves, be sufficient regulators. For markets to function effectively and sustainably, they require law, institutional norms, regulatory bodies, and intermediary institutions — all of which become essential when the market becomes volatile.


The public sphere is thus vital for guiding and regulating economic and social activity. The State — in a broad sense — plays a critical role in maintaining this balance, including supporting those intermediary bodies such as trade unions. This system enables society’s various forces to be channeled toward an often-precarious but essential harmony. This model of governance, though imperfect and far from linear, has led to increases in overall well-being, fairly distributed across much of Europe.


Its most advanced manifestations have appeared in Northern Europe and Germany. With variations, a form of social democracy has spread throughout Europe, becoming—willingly or not—a defining characteristic. Social democracy, in its broadest sense, beyond left-right government oscillations, remains the baseline regulatory framework across Europe — the backbone of its political economies.


Yet Europe today faces relative decline, and in recent years, significant economic lag — particularly compared to the American model. Possible culprits? Excessive regulations and norms, reduced incentives for initiative and risk-taking, and a pursuit of absolute equality over fairness. Even the more reformist strains of social democracy remain inadequate in navigating this trajectory.

Authority, Security, Immigration


Public policy under social democracy must now account for authority, security, and better regulatory control of immigration. Failing to integrate these themes into a republican perspective leaves the discourse to populists, who then draw in citizens rightly frustrated by their day-to-day realities being ignored.


These topics are not superficial and cannot be dismissed moralistically or condescendingly. Likewise, thinking of a nation purely as a multicultural kaleidoscope without unity, clear borders, shared culture, or true identity — founded only on abstract universal values — is naive. It denies history, geography, and the Nation itself and overlooks the cultural bonds that allow individuals to recognize and live meaningfully together. Ignoring this truth eventually leads to disaster, as Ernest Renan warned:
“What unites us is not language, religion, or race, but a shared past and a common will to live together. A nation is a soul, a spiritual principle, shaped by past glories and a current desire to continue a shared life. A nation is a daily plebiscite.”
While fundamental, these issues will not be expanded upon further in this article.

Efficiency Loss in the Public Sphere


Just as markets can fail or cause harm, public institutions too can be ineffective — or even counterproductive. Neither markets nor governments are omniscient. Public policy must be approached free of ideology: policies can be ineffective, inappropriate, or even harmful, generating the opposite outcomes they seek. Recognizing this must be central to any renewal of social-democratic thinking.


We must move past simplistic binaries of the “evil capital” versus the “benevolent State.” That dichotomy is not only naïve but misleading. Both capital and the State possess their own internal logics: one driven by return on investment, accumulation, and growth; the other by control and influence. Both must be kept in balance — neither overpowering the other — in order to foster a progressive, stable society.

The Logic of State Expansion: Overadministration


France has developed, over the decades, an omnipresent State that intermediates all social relations — inserting itself between citizens and society, exercising tighter control over individuals, and producing ever more complex, intrusive regulations. This entropic proliferation has diminishing returns.

This is a particularly French issue (more so than in the U.S. or even elsewhere in Europe). Such overgovernance causes a feeling of helplessness, discouragement, and nostalgia — even selfishness or rebellion. Bureaucracy infantilizes the citizenry, encouraging greater dependence on the State, which inevitably leads to disappointment and fear — even of minor challenges — as individual

responsibility is diminished.
Arendt again:
“Action is what allows men to appear before others, to reveal themselves in their uniqueness, and to build a common world. When the state monopolizes this capacity, citizens become mere spectators.”
— The Human Condition

Too much state presence leads to individual atomization and alienation, undermines self-confidence, erodes mutual trust, stifles communal action, and weakens self-organized solidarity. The balance between individual liberty/responsibility and societal order breaks down. As Arendt also warned:

“The danger is not just the violence of authoritarian regimes, but the gradual drift toward a soft and paternalistic administration that suffocates freedom under the pretense of protection.”

Combining Ethics and Effectiveness

To renew public trust and efficiency, the State must reclaim vision and vitality — not through blind expansion, but smart limitation. Laws, institutions, and policies should be strictly necessary for society and economic life. The public sector must aim for the best synthesis between ethics and efficacy — neither of which is the sole domain of either State or market.

These two values are interlinked, feeding one another. There is no sustainable ethics without effectiveness, nor enduring effectiveness without ethics. Social democrats must own this dialectic — not deny it.

Hyperdemocracy and Hypersocial-Democracy


Democracy and social democracy are susceptible to their own excesses. What might be called “hyperdemocracy” or “hypersocial-democracy” — their unchecked dynamic growth — risks weakening their foundations or even causing their undoing.
Tocqueville warned of this. Without deep introspection, democracy and social democracy may collapse under their own weight, ushering in forms of populism — from the left or right.


Endless expansion of individual rights, with no equivalent sense of duty, leads to exaggerated individualism and radical segmentation — identity politics, grievance culture. The framing of all human exchanges as oppressor vs. oppressed dissolves shared narratives. Everyone is assigned guilt or victimhood. This simplifies and falsifies history, which is refashioned to support this binary framing.

All this is masked behind totemic buzzwords — endlessly repeated yet hollow — enforced by a moral and ideological police. Wokism is the most complete expression of this democratic distortion. It is not progressivism nor democracy extended — but their parody, and potentially their undoing.

Criticizing it does not make one conservative or reactionary. Social democracy must not leave this fight to populists alone — or risk vanishing into irrelevance, as evidenced in both the United States and France.

Social Democracy’s Own Excesses

That said, social democracy has its internal structural flaws too — especially its pursuit of absolute equality. Magical thinking, lacking nuance. Total equality leads to jealousy, resentment, suppression of merit — and therefore, stagnation.
Tocqueville:
“There is no passion more fatal to man and society than this love of equality, which can degrade individuals and push them to prefer shared mediocrity over individual excellence.”

We must clarify the differences between absolute equality, equality of rights, equality of opportunity, and equity — along with their ethical, social, and economic effects.

Hyperdemocracy and hypersocial-democracy thus produce societal regression, economic decay, moral confusion, and ultimately collapse. They foster jealousy, resentment, and hatred. And they’re already at play.

A Pseudo-Progressivism That Hides Real Regression
Naïve goodwill or willful blindness about these dynamics masquerades as progressivism — when it is in fact dangerous regression. It isolates individuals, perverts values like universalism and humanism, and damages the foundations of real progress: emancipation, responsibility, and social harmony.
Too much state, too much democracy, too much social democracy — all unleash unchecked demands for rights, diminish any sense of duty, and breed inefficiency. Result? Generalized mistrust — of institutions, politics, others, and society itself.
This leads eventually to insurmountable public debt.
The Survival of the Social Market Economy
For a social market economy to survive, protection for the vulnerable — through the public sphere — must be paired with personal, family, and community responsibility. The welfare state — yes, but not infinite protection from everything. That breeds passivity.
Tocqueville again warns:
“The sovereign stretches its arms over all society; it covers the surface with a network of petty rules, minute and uniform, through which even the most original minds and energetic souls cannot make their way. It does not break wills, but softens, bends, and guides them; it hinders, represses, enervates, extinguishes, and stultifies people until each nation becomes a flock of timid and industrious animals with the government as their shepherd.”
Conclusion: The Stakes
The equilibrium between ethics and efficiency is broken. Without adjustment, the welfare state and the social safety net are both endangered. France’s administrative excesses threaten the very reproducibility — that is, survivability — of this governance model.
If we don’t act, we face cultural, financial, and moral collapse.
The great question, then, is this:
How can we build mechanisms that limit these excesses? How do we rediscover the vital balances upon which our societies thrive?
This is, at its core, a matter of survival — for our model, for Europe, and for France.
Social democracy has long defined the European political model, balancing markets and state authority in the pursuit of fairness and prosperity. Yet in France, this intellectual tradition has stalled — dissolving into excessive statism, inefficiency, and the distortions of hyper-democracy and identity politics. This essay argues for a profound renewal of social‑democratic thought: one that reasserts authority and responsibility alongside rights, reconciles ethics with effectiveness, and rebuilds trust among citizens. Without such a reset, the European model risks decline — culturally, economically, and politically.

Categories
Economical and financial crisis Economical policy

And now, what policy for the ECB?

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

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

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

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

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

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

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

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

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

Categories
Conjoncture Economical and financial crisis Economical policy

Trump: Consistent Concerns, Inconsistent Actions?

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

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

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

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

Monetary Dilemma

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

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

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

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

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

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

Fragile Confidence in the Dollar

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

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

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

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

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

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

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

Protecting Financial Stability

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

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

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

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

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

Olivier Klein is a professor of economics at HEC