Category: Economical policy

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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

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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

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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