Category: Economical policy

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Conjoncture Economical policy

The Dynamics of Economic and Political Fragmentation

The dissolution of the Soviet Union in 1991 marked the end of a bipolar world and the emergence of an international order centered around the United States, the sole remaining superpower. This period saw the rise of a regulatory model based on market economy principles, free trade, democracy, and the promotion of human rights. Alongside it grew the idea of a global spread of democracy and a human rights-based diplomacy, even extending to the concept of a “right of intervention.” This period—sometimes described as the “end of history”—provided a certain form of stability.

Globalization, through the increasing integration of countries into the world economy and international trade networks, as well as through the diffusion of technology and capital, led to a dramatic reduction in global poverty. The share of the global population living below the subsistence minimum dropped from 40% in 1980 to about 10% in recent years. This occurred even though certain populations in Western countries—particularly those tied to industries exposed to competition from lower-wage economies—were negatively affected.

At the same time, this dynamic enabled the emergence and assertion of new powers. China, in particular, progressively moved up the value chain, capturing significant global market shares in a wide range of sectors. Through its Belt and Road Initiative, it has also expanded its spheres of influence—securing, among other things, its access to energy resources and rare earths—eventually becoming a hyperpower in its own right.

Along the way, this transformation led to a growing challenge to the previous order. That challenge has also been taken up by the so-called “Global South,” a diverse set of countries united by their criticism of what they see as American—or more broadly Western—“double standards.” This Global South has questioned the legitimacy of the Western-led order and called for a greater role in global governance.

At the heart of today’s geopolitical fragmentation lies the systemic rivalry between China and the United States. China seeks to reclaim a dominant position on the global stage after a long period of geopolitical retreat—a goal made explicit by Xi Jinping in 2021, when he stated that China should become the world’s leading power by 2049. The United States, conversely, is determined to preserve its current status. Russia, for its part—driven by a historical complex of encirclement and lack of recognition—is striving to reassert its influence on the international stage.

Geopolitical and economic fragmentation is now evident. Between 2010 and the onset of the war in Ukraine, the number of international military conflicts increased nearly fourfold. The number of countries under financial sanctions nearly tripled. Protectionist measures affecting both international trade and cross-border direct investment multiplied sixfold. These developments reflect a logic of withdrawal and rising mistrust among states, undermining the benefits of regulated trade and capital flows. This fragmentation poses a serious threat to international peace and security.

Mistrust between the two hyperpowers has become substantial, deeply affecting global regulatory frameworks. Multilateral coordination and communication mechanisms—essential for managing and resolving conflicts in their early stages—are increasingly impaired, giving way to bilateral relations and a resurgence of confrontational dynamics. The central question today is whether contemporary societies can rebuild sufficient trust among stakeholders and develop effective forms of coordination to avoid a “every-man-for-himself” world and the resurgence of primitive violence, always justified by the anticipated aggression of the other.

Olivier Klein
Professor of Economics, HEC

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Conjoncture Economical policy

Non-Bank Financial Institutions: A Systemic Risk to Watch

Since the global financial crisis, non-bank financial institutions (NBFIs)—including pension funds, insurance companies, hedge funds, private debt funds, and others—have significantly increased in importance. They now account for nearly 50% of global financing and approximately 30% of corporate financing. This rise reflects a structural rebalancing of the financial system. Since Basel III, banks have faced tighter prudential requirements, which limit their ability to meet all financing needs. NBFIs have stepped in, particularly in the riskier or longer-term segments. Their growth therefore corresponds to a real economic rationale. However, this evolution is not without risks, and the stability of the global financial system now also depends on their resilience.

In an environment of persistently low interest rates, NBFIs have been inclined to seek higher returns, pushing them to take on more risk: exposure to lower-quality credit, longer maturities, use of leverage through derivatives and repos, and liquidity mismatches between illiquid assets and short-term liabilities. The March 2020 crisis highlighted the vulnerability of some of these entities: those faced with massive redemptions were forced to rapidly liquidate assets, threatening to trigger a downward spiral and substantial losses. During this crisis, central banks significantly expanded their quantitative easing policies to prevent systemic liquidity crises and had to act, in some cases, as “market-makers of last resort” to avoid possible contagion across the entire financial system.

To address these vulnerabilities, several tools have been deployed. Some open-ended funds now include liquidity management mechanisms (gates, swing pricing). Margin requirements (initial margins, margin calls, collateral) have been strengthened for derivatives, and reporting on exposures, funding, and liquidity risks has improved. Yet these advances remain partial. The prudential framework remains heterogeneous, sometimes incomplete, and supervision is fragmented, especially at the international level.

Several improvement avenues have been identified. There is a need for better oversight of leverage, the imposition of minimum haircuts in securities financing transactions, and greater transparency regarding liquidity mismatches. Closer cross-border cooperation is also essential to prevent regulatory arbitrage between jurisdictions. The goal is not to impose a banking-style regulatory regime on NBFIs, but rather to establish a coherent framework, proportionate to the risks and differentiated by business model. The interconnections between NBFIs and between NBFIs and banks must also be closely monitored.

Finally, the idea of conditional access to central bank liquidity facilities deserves discussion. This could serve as a useful safety net in times of severe stress—but only if strict requirements are imposed in terms of regulation—transparency, liquidity ratios, leverage limits, high-quality collateral requirements—as well as supervision. The aim would be to support the most prudent actors without creating a broad incentive for risk-taking.

Thus, the resilience of the contemporary financial system depends as much on the strength of the banking sector as it does on the non-bank sphere. Smart regulation must prevent potential excesses without stifling innovation.


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

Categories
Economical policy

Some Truths to Escape the French Deadlock

Published by L’Opinion on June 16

Economic and social policy cannot be dissociated. Their interactions can produce positive effects — or disastrous ones — sometimes contrary to their initial intentions. France provides a striking illustration. Despite having one of the highest levels of taxation and redistribution in the OECD, the temptation to increase both remains strong.

Yet, such a trajectory would jeopardize employment, competitiveness, entrepreneurship, and the incentive to work. And it is precisely employment, allied with growth, that is the most effective tool against poverty, for social mobility, and for the sustainability of both our standard of living and our social protection system. Social well-being cannot be preserved or improved over the long term without the development of a strong economy.

The ever-increasing debt-to-GDP ratio can only lead, sooner or later, to a major economic, social, and financial crisis. We must beware of the uncontrolled — and thus highly dangerous — dynamic in which we currently find ourselves. From 1997 to 2024, France’s debt ratio increased by 50 percentage points of GDP, while the euro area’s rose by only 15 points.

The ever-increasing debt-to-GDP ratio can only lead, sooner or later, to a major economic, social, and financial crisis. We must beware of the uncontrolled — and thus highly dangerous — dynamic in which we currently find ourselves. From 1997 to 2024, France’s debt ratio increased by 50 percentage points of GDP, while the euro area’s rose by only 15 points.

The same applies to the relationship between supply and demand. While demand growth is essential for a strong economy, it cannot be sustained if national supply does not grow in parallel. France already faces a persistent trade deficit — a symptom of insufficient competitiveness. Increasing demand without restoring supply would worsen this vulnerability, deepening financial dependence on foreign partners.

We will not escape the French trap by increasing taxes further. On the contrary, we must revive our productive dynamism.

It would be a mistake to believe that activist fiscal policy, financed through ever-higher taxes or debt, can generate lasting prosperity. Quite the opposite. Across OECD countries, long-term growth is slightly negatively correlated with the ratio of public spending to GDP. This does not call into question the importance of countercyclical fiscal policy, but it does contradict the all-too-common French belief that every problem must and can be solved by ever more public spending. Beyond a certain threshold — already exceeded in France — the effect becomes counterproductive.

We must therefore reverse the logic. Further tax hikes will not solve the French dilemma. Instead, we must reignite productive momentum: invest in technological and environmental innovation, make work more attractive, remove barriers to social mobility, encourage business growth by lowering taxes and excessive regulation, improve education system efficiency, and raise employment rates — especially among youth and people aged 60 to 65.

It is this strategy — combined with lower public spending and more effective use of it — that will increase our growth potential and broaden the tax base, thus boosting public revenues without raising tax rates. Any other choice would only worsen the vicious circle: more burdens on an already weakened economy, less wealth creation, further tax increases to offset a shrinking base — and so on, endlessly. This would damage both the economy and the social fabric. Weakening the economy inevitably undermines the very social model we aim to protect.

Olivier Klein is Professor of Economics at HEC Paris.

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Conjoncture Economical policy Global economy

THE FRENCH MODEL: FROM EXCESS TO NECESSARY RENEWAL

The European model, and especially the French one, of political, economic, and social regulation is undergoing a profound crisis. Under the pressure of its excesses, this model proves hardly capable of meeting contemporary challenges.

Five major trends highlight its limits: the weakening of public authority and sense of security, the insufficient immigration regulation and integration of immigrants, the rise of exacerbated individualism, the expression of excessive egalitarianism, and finally, the hypertrophy of the state and regulation.

These dynamics weaken institutions and fuel distrust towards politics, favoring the rise of populism.
The market, essential for economic dynamism, requires effective public regulation to avoid its excesses. However, in France specifically, the public sphere has grown excessively, causing both inefficiency and discouragement. The omnipresent state tends to infantilize citizens and interfere in their social relations while reducing the role of intermediary bodies. As Hannah Arendt points out: “When the state monopolizes this capacity to act, citizens are reduced to the role of spectators.” Over-administration indeed causes a loss of individual and collective responsibility, while weakening respect for others and social rules. This in turn provokes widespread anxiety and distrust.

At the same time, what I call hyper-democracy is developing in our societies, due to an endogenous dynamic that, if unchecked, can lead to pathological excesses that may even endanger democracy itself. These excesses manifest as an unlimited extension of individual rights at the expense of everyone’s duties, fostering selfishness, withdrawal into oneself, and an exacerbated, compartmentalized communitarianism. Additionally, this also weakens the meaning and necessity of work.

These excesses also include an extreme egalitarian obsession, fueling jealousy, resentment, and hatred. Egalitarianism also hinders the engines of growth and progress. Tocqueville, who already analyzed the potentially self-destructive developments of democracy, warned: “There is no passion so fatal to man as this love of equality which can degrade individuals and push them to prefer common mediocrity to individual excellence.”

These excesses threaten the ability to live together and can lead to both moral and economic ruin. The issues induced by financing over-administration and the lack of responsibility regarding social protection spending result in a permanent public deficit, leading to soon unsustainable public debt. These in turn reinforce distrust.

To avoid irreversible decline, it is imperative to reinvent our political, social, and economic balance around several axes. Reconcile ethics (including social justice) and economic dynamics (economic system efficiency). Neither is sustainably viable without the other. In other words, today norms, regulations, and tax systems must not unduly hinder innovation, growth, and business development, lest efforts towards ethics be in vain. Address public authority, security, and immigration matters in a democratic and effective manner, without moralizing bias or contempt. This will also prevent populism from monopolizing these debates. Ensure better social mobility through appropriate quality education. Reject egalitarian excesses by recalling the essential notions of equality of rights and duties, equality of opportunity, and equity, so as not to confuse them with absolute equality in everything, which often contradicts the former.

The survival of the European democratic model and social market economy depends on its ability to renew itself. Without an intellectual awakening to limit the excesses that have developed and to regain the essential balances that underpin them, our politico-economic-social system will sink into entropy. Moreover, this is in a world where power struggles have again become the rule. This renewal is crucial to restore trust in institutions and politics, as well as in democracy itself. It is also crucial to regain vitality and dynamism without which nothing is possible. The sustainability of our beautiful European model depends on it.

Olivier Klein
Professor of Economics at HEC

Categories
Conjoncture Economical policy Global economy

THE DOLLAR-BACKED STABLECOINS: A NEW STRATEGIC WEAPON FOR THE UNITED STATES

Stablecoins are experiencing explosive growth as a means of settlement. In 2024, they processed more transactions than Visa and Mastercard combined. Unlike “pure” cryptocurrencies, which are issued without any backing and whose value is inherently speculative and highly volatile-since it depends solely on the self-referential opinion of the market-stablecoins are cryptocurrencies backed by assets such as the dollar. For each unit of stablecoin issued and purchased in exchange of any currency, the amount received is immediately used to buy U.S. dollars and invested in U.S. Treasury securities. It is this one-to-one rule that makes these specific cryptocurrencies “stable” rather than purely speculative.

Amid rising uncertainties in the U.S. bond market, reflected by a reduction in Treasury purchases, the United States sees stablecoins as a strategic opportunity: to attract new demand for its sovereign debt and reinforce the dollar’s dominance in global trade. Indeed, the more dollar-backed stablecoins are used internationally, the more issuers must acquire U.S. debt to guarantee their value. Washington thus could use stablecoins as a tool to refinance its external debt while expanding the dollarization of the global economy. The recent adoption of the Genius Act bill, supported by the U.S. administration, aims to support and regulate the development of dollar-backed stablecoins, giving American issuers a competitive advantage and consolidating the dollar’s supremacy.

This strategy is not without risk for the rest of the world. The possible massive adoption of dollar-backed stablecoins could accelerate capital flight from emerging or fragile economies, as citizens seek protection from inflation or currency devaluation by turning to these stable payment methods. More broadly, stablecoins weaken the monetary sovereignty of countries outside the United States, reduce their ability to finance their economies with local savings, and expose their financial systems to risks of banking disintermediation. The global reallocation of savings toward stablecoins backed by U.S. debt diverts resources from local private sector financing to the benefit of the U.S. Treasury. National banks, deprived of deposits, see their lending capacity shrink accordingly, slowing economic growth in these countries.

Finally, the expansion of stablecoins poses major challenges in terms of regulation, anti-money laundering efforts, and consumer protection. These assets can circulate without constraint, facilitating illicit flows and eroding the integrity of financial markets.

Ultimately, increased dependence on the dollar via stablecoins further entrenches the asymmetry of the international monetary system, making economies-especially emerging ones-even more vulnerable to U.S. monetary policy decisions.
In sum, by developing dollar-backed stablecoins, the United States has gained an unprecedented lever to further dollarize global trade and refinance its external debt. But this strategy imposes significant risks on the monetary sovereignty, financial stability, and economic development of the rest of the world.

But it’s a double-edged sword for the United States. Stablecoins can also accelerate both the appreciation and depreciation of the dollar, thereby increasing macro-financial volatility.

Olivier Klein
Professor of Economics at HEC and Banker

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