Category: Economical policy

The eurozone crisis that erupted in 2010 had an idiosyncratic, eurozone-specific dimension. Historically, monetary unification occurs when there are centralising powers in a country or powers which federalise when we are a set of States. In each case, a budgetary policy – or a federal budgetary policy – is needed, as well as a sense of solidarity with a community of interests of the people who reside there and public debt, which is fundamental. With, accordingly, the construction of a central bank of last resort. Under these conditions, federated regions or States may not have the same economic structure or even the same economic situation. Why is that? For the Federated States, there is a coordination of budgetary policies and a federal policy. Transfers are organized between regions through the national budget, or between federated States by the federal budget. All social rules – such as labour – are unified and facilitate labour mobility. Finally, there are rules that are shared by everyone to build trust. And supervision makes it possible to legitimize and strengthen solidarity and the sense of a community of interest.

Under these circumstances, the advantages of having a single currency are very great. First, there is a unique reference and no intra-zone instability due to changes in exchange rates. If, for example, in the former European Monetary System (EMS) the dollar fluctuated against the Deutsche Mark, the French franc mechanically weakened against the Deutsche Mark causing asymmetric shocks that were only due to the movements of the dollar and which, in reality, led to internal disruptions in the zone. Of course, this type of situation is no longer happening with the single currency.

Then, with the single currency, there is only one constraint outside the boundaries of the monetary zone. It is therefore no longer a problem that, on the one hand, there are current account deficits and surpluses on the other, because only the external constraint matters for the entire consolidated zone. Some countries can therefore grow faster than others according to their needs, for example according to their demographics. Thus, if countries have a population that is growing faster than others, the need for additional growth can be very easily justified and financed by countries that aren’t going as fast and have surpluses.

However, if there is no strong labour mobility – in any case facilitated by tax regulations, labour regulations, unemployment regulations -, if there is no real coordination of economic policies and there are no organised transfers, then the methods of adjustment in an incomplete monetary zone, which does not have the possibility for devaluation or revaluation of one country vis-à-vis others, provides only the possibility of internal devaluation. That is to say, basically, they go with the lowest-bidder in terms of labour, wages and regulations. With, in addition, a debt that remains at the same value, which does not devalue itself while income declines, therefore resulting in perverse effects. In addition, when several countries have to adjust downward at the same time, a very low structural growth bias emerges, which obviously leads to economic, social and political problems that we see clearly growing worse in Europe.

So this does not mean that we shouldn’t adjust by making structural reforms to increase growth potential. It is necessary to increase economic efficiency through structural reforms, which are not equivalent to austerity reforms. But if the monetary zone is not complete, the proposed horizon is structurally blocked. The same applies to cyclical convergence policies, with convergence indicators to be followed in advance. If they are done well, these indicators are the foundation of the possibility of solidarity between the various elements of the zone. But they did not work as the only avenue of integration. Contrary to what some might have believed, they cannot replace the incompleteness of the single currency zone. The mere belief in the fact that the convergence criteria, had they been met or if it had been possible to allow only the countries that complied with them at the time to enter, was sufficient to produce a monetary zone with normal growth and normal functioning, failed. One of the reasons is that a single monetary policy, based on the inflation of the member countries, does not provide the same real interest rates to the individual states. This obviously leads to differences in economic conditions. A single currency can also favour industrial polarisation. Until the crisis, there were current account polarisations between the countries of the South, which accumulated deficits and de-industrialisation, and the Northern countries, which multiplied surpluses. We must add to these polarisations the errors of the markets that believed that all long-term rates could converge, even though it was not the external constraint at the borders of the eurozone that should have been considered but the borders of each country. Many contributing factors have thus facilitated the explosion of the crisis and did not allow for internal regulation, simply because the convergence criteria are not sufficient to compensate for the incompleteness of the area.

Unfortunately, the crisis has aggravated the lack of desire for European integration, and this is not only true in the countries of the South. Northern countries are even more wary than the countries of the South. However, federalism is a useful condition for making a meaningful monetary zone. And putting the euro to an end is not a desirable solution because it is a valuable collective good, provided that the means of regulation enabling the advantages mentioned above are combined. We are therefore faced with a dilemma: while federalism is now virtually impossible to put in place, should we put an end to the single currency, which is a precious common good, provided that it has the right method of organisation?

Institutional arrangements may exist to build an architecture that is favourable to the single currency, without tackling the issue of federalism head-on. The crisis has created many elements of the solution: the ECB, which is now able to purchase debt, not just public debt, the European Stability Mechanism, the Treaty on Stability, Coordination and Governance, the European Banking Union. But the sum of these instruments has not yet resulted in a complete system, and the overall architecture itself is still insufficient. It is therefore necessary to find other possibilities to advance while avoiding the pitfall of the fear of federalism and at the same time protecting the euro.

Responses in the post-speech debate

On labour mobility

Of course, language is a natural handicap for Europe compared to the United States. It is nevertheless possible to facilitate the mobility of the labour force outside of major moments of crisis through social harmonisation of labour regulations, as well as by unemployment benefits. The fact that an unemployed person loses his or her right to benefits by leaving a country obviously does not facilitate mobility.

On institutions

When we talk about “institutions”, these are not only legal institutions, but rather economic institutions within the meaning of economic theory. That is to say, all the rules, whether written or not, that make the global modes of regulation, beyond the legal rules alone.

On shared destinies

Should we think Europe as a pure economy and not as a community of destinies with a shared cultural vision? There is obviously a shared European destiny and many shared cultural visions. However, some national facts are strong, irreducible, and naturally lead to the question of sovereignty. Much better communication policies and strengthening of the production of a common culture are certainly essential, but not sufficient. A pure economic community, with only common regulations, cannot function properly. Because the eurozone is not complete due to the lack of this vision, of this community of genuinely shared interests. First of all, we need to rebuild trust, because there is no solidarity between people without basic trust. This trust is essential, and it warrants supervision. There is no construction without supervision, simply because one cannot be endlessly united without being able to verify that people fulfil their duties. Each country must therefore conduct its own structural policies, not to lower its standard of living, but to improve the efficiency of its economy and build the confidence of its people. With confidence, it will be possible to trigger several essential elements. First of all, the necessary coordination of budgetary policies. Secondly, industrial policies at the European level, in order to develop clusters of competitiveness and prevent the emergence of deserts. Otherwise, there will be permanent transfer policies for these deserts. Finally, when the market no longer finances the current account deficits by the current account surpluses of the others, structured methods of organisation are needed to do so. This is obviously a crucial issue, since the eurozone crisis was essentially caused by a major current account deficit problem and the foreign debt of various countries.

First of all, as we are thinking about the institutional difficulties in carrying out structural reforms, it is important to take the word “institutional” in the broad sense, that is, in the sense of culture, history, the State’s role and off-market regulation.

Structural reforms need to be initiated and implemented gradually. Fundamentally, structural reform means increasing growth potential. In France, we currently have a terribly low growth potential of around 0.5 or 0.7%. Increasing growth potential makes it possible to preserve or increase wealth per capita, reduce public deficits without suffering, control public debt, find fiscal solvency and ensure the balance of social systems. If growth is not sufficient, our social system equilibrium is not maintained, and it is therefore financed either by debt or ultimately by a drastic reduction in social protection.

Countries such as the Nordics and Canada carried out very successful structural reforms during the first half of the 1990s, as Germany did in the first half of 2000. The southern countries such as Spain and Portugal are currently doing so but are having great difficulty because they are doing it completely on the fly, during this major crisis period. France is struggling to implement these reforms, as everyone, on the right and on the left, is pushing back against them. The question is determining why it cannot be achieved simply, while, on the substance, there is a convergence of extraordinary ideas in all the reports that have been published (the Camdessus Report; the Pebereau Report; the Gallois Report; the Attali 1 and 2 Report).

The important thing is that the growth potential of an economy is increasing with labour productivity gains. That is, technical progress, capital intensity and an increase in the working population. Also with the increase in structural competitiveness, by seeking efficiency for the State in order to have, for a given capacity, the best efficiency in public spending. In France, there is a fundamental issue: we have the highest public expenditure on GDP and the highest GDP tax in Europe, while a public service delivered is average for Europe, that is to say well below the level of expenditure. It is therefore necessary either to significantly improve efficiency or, for a given capacity, to seek to achieve savings.

For competitiveness, obviously we need to look at the cost of labour. But beware: there is the cost of labour for a given productivity and the cost of labour for a given quality. Germany’s labour costs are very slightly lower than France’s, while its current account balance is in surplus, its growth rate is much higher and its unemployment rate is much lower. Nevertheless, we have a fundamental problem in France, and that is the quality of production in relation to the cost of labour. On this subject, it is important not to reason in terms of the “average” but rather pay attention to fact that the cost of labour is dependent on the qualification of people and to ensure that unqualified workers work, even if social benefits protect them as a supplement to low wages. And then it is essential to increase the average quality of our industry and our services in order to justify the high labour costs. Everyone agrees on the need to work on product lines and the importance of research and development. And for several years, France has been making great strides on this subject. Everyone is also aware of the need to invest. To invest, companies must have a sufficient rate of profit. For the past ten years, however, France has been the only country to have lowered the profitability of its companies, that is, the rate of profit on added value. This does not facilitate investment, modernisation, innovation, etc.

In this context, our working population needs to be increased because it is a determining factor in long-term growth. Immigration must, of course, be well chosen and correspond in particular to the desired product ranges. The establishment of a family policy is also necessary to promote the opportunity and desire to work. Pension reform must also increase the working-age population. France is one of the least long working countries both in terms of hours worked per year and years worked in life. This obviously leads to difficulties in achieving sufficient growth potential. Several issues need to be addressed, such as pre-retirement to encourage work, childcare, or, of course, minimum income in relation to labour income. The incentive to search for work also involves assistance in training, return to employment and flexisecurity. France offers the longest and highest unemployment protection for an extremely high unemployment rate. We know, however, that the correlation between the length of protection, the height of protection and the unemployment rate is real. There is an urgent need to accelerate and accentuate the incentive to return to employment. This will happen through better protection, better training and better support for this return to employment.

So, since ideas are converging in the same direction, why are we having such a difficult time carrying out these reforms in France? Certainly, it is better to do them when there is growth. But growth, when it is present, does not encourage or drive reform. Another way of thinking about this is to say that “we are not having enough of a crisis” to undertake them. All these rationales relate to cyclical and non-institutional issues. Let us try, with humility and without pretending to be exhaustive, to find some institutional reasons in the modes of regulating French society in order to understand the difficulties in carrying out these reforms on which everyone agrees. Here are two.

The first reason concerns our historical, conflicting culture and power relationships. Since Louis XI, and then Colbert, Louis XIV, Napoléon and continuing with the post-war period, France has created itself as a hyper-powerful, centralising state. We built ourselves as a country with a French elite, gradually becoming an Elite state, occupying the entire political space, but also that of businesses. So, what is preventing this powerful state from making reforms? Its intermediation. Because of its omnipresence, the State intermediates the relationship between everyone and society, between each individual and others. Thus, instead of feeling responsible to the community, to feel that we have rights but also duties, there is continuing demand from the State which acts as “mum”. This explains the particularly anxious nature of the French population. As soon as something goes wrong, whether you are a business manager or a private person, we turn to the State, asking for solutions. And we refuse reform.

The second reason, undoubtedly linked, is that in France – as everywhere else – there are corporate interest groups seeking to defend each of their own interests. But this situation leads to a vacuum in the construction of the social system in which only the state and the special-interest groups are present. And finally, instead of having a working social democracy, we have a kind of social-corporatism coupled with a social-technocracy. That is why reforms are difficult to accept because we expect everything from the State, refusing to believe that everyone’s rights and duties should be able to justify and protect social protection, growth and well-being.

Responses in the post-speech debate

On France’s ability to carry out these reforms

In France, we live according to principles that are very strong and very good in and of themselves, but we often forget that in order for these principles to work, we must understand the causes that allow them to function. Bossuet said: “God laughs at men who complain of the consequences while cherishing the causes”. As soon as we want to combat inequality and unemployment, it is necessary to agree to clearly analyse their causes and to take action accordingly to maintain our social protections and defend this principle of equality.

Let’s take the example of university. As soon as there is no sufficient selection, it is clear that the students who emerge are less likely to be hired than those from a large school. Quite simply because there is an asymmetry of information on the side of the employer, who will employ the surest option, to make fewer mistakes, even though excellent profiles are also coming out of the university. It is therefore necessary for universities of excellence, to make these profiles converge through excellence. Today, the failure rate in the first year at the French university is one of the highest in Europe. And many of those who leave university in the first year do nothing. So why not select better upstream? But to select better, you obviously do not need a very general baccalaureate where, at the end, students are directly asked to specialise in medicine, law or economics, even though they do not know what these professions are about. The system must include a longer and more comprehensive common starter core, in which students will be able to choose their subjects.

Basically, we have to succeed in overcoming “compassionalism”. And there is no policy today that dares to go against compassion. Just because one thing moves the population doesn’t mean that the state must do everything straight away. It is fundamental to find the real causes, to have the courage to analyse them and to carry out the appropriate reforms to protect the system. Fortunately, in many French people, the principle of equality is always dear and highlighted. And everyone understands that the state cannot do everything, does not have all the resources, because there are too many demands for public spending and that it cannot tax enough in exchange without stifling the economy. Society must be pushed to agree, to evolve; there must be fewer but more representative trade unions in order to promote consensus, negotiation, consultation, and not the conflict that is freezes everything and prevents development.

On disenchantment with politicians and the fight against inequality

It is bad to oversell the ability of women or politicians to solve everything. Redefining the role of the State and the possibility of the politician would be preferable. We need to move towards a strategist State rather than an omnipresent State. Politicians efforts in terms of reflection and honesty vis-à-vis society is necessary.

Reflection on inequality. In society, there are natural inequalities between those who have talent and those who have less talent. It is not inequality in itself that is unbearable; it is injustice. Moreover, France is one of the few countries that, for the past 20 years, has practically not aggravated economic income inequality. The level of income inequality is stable. The real issue is that of injustice, unequal opportunities, of saying that we are capable of doing something but not doing so because we are blocked. The blockage in a society that is too hierarchical, too “mandarinal”, which overvalues diplomas, is considerable. We must work on this concept of injustice that we find throughout society, in our businesses, in education, etc., which is even more fundamental than that of income inequality.

On the simplification of the French bureaucratic system and the return of efficiency

For a very long time, companies’ operations were very hierarchical, which could limit each individual’s ability to express talent, initiative capacity and entrepreneurship. Although some are still very hierarchical, most companies now operate less vertically, in networks. To obtain an authorisation, we no longer need to go through our manager, who in turn goes through their manager. Network-based operation improves efficiency by involving everyone more, which also generates more confidence. The hierarchical society, which worked thirty or forty years ago, creates less confidence as the absolute power of the very small elite is challenged because times are more difficult, because changes are stronger. It is therefore difficult to expect everything from the top.

These profound changes that we are experiencing require a more flexible, less hierarchical organisation in order to recreate a working environment that prevents injustice and allows us to express ourselves, regain this trust and this desire to do. The desire to do is fundamental. It promotes the company’s competitiveness in the sense that it promotes the development of a team spirit and an ability to move forward and fight. Perhaps the State should also think about this. Decentralisation is good if we pay attention not just to juxtaposing the levels. Otherwise, in all public authorities, the State creates certain places where tax is collected and others where tax is spent. The situation is catastrophic as there are fewer collective responsibilities.

On “the French economy weakened by its institutions”

There are certainly many countries in which the institutions operate less well than in France. This is not the issue. The issue is not to look at institutions in the sense of justice, roads or ministries. We need to ask ourselves how to position ourselves in the face of the current trend. Given the low potential growth, the current account deficits, the public debt, the unemployment rate… are we not heading for a gradual impoverishment of our country? Will our regulatory methods, which are not strictly commercial, adapt well to the world that is arriving? Certainly not well enough. Pedagogy is essential to make it clear that if hell is often paved with bad intentions, it is also paved with good ones. For example, it is not enough to want fewer unemployed people to have fewer unemployed people. In France, we agree on the need to reduce unemployment, but in practice the number of unemployed is still very high. We therefore need to be able to determine the real causes of this. Fortunately, collective awareness is progressing on the importance of carrying out reforms, which will certainly require effort, but essential effort to protect what is essential. And the act of changing to protect what is essential is increasingly shared through these concepts of individual responsibilities and collective responsibilities towards society.

The Next Generation EU recovery plan is a remarkable innovation that enables the European Commission to pay €750 billion (divided between grants and loans) to the twenty-seven member countries, based not on their ‘relative weight’ but on the needs of each country and shared objectives. But it is also a major innovation because this recovery plan also allows Europe, for the first time, to raise a common, joint debt of the same amount.

The result of the historic agreement reached between France and Germany, this plan represents an important step forward in the necessary construction of a stronger, more effective and more united European Union. It was particularly appropriate that this plan was welcomed as major European progress. Without, however, going so far as to describe it as Europe’s ‘Hamiltonian moment’. In 1790, Alexander Hamilton, the first Secretary of the Treasury of the United States, organised the takeover by the federal government of the debts of the various US states, which had been considerably increased by the War of Independence. At the same time, he established import duties, a source of recurrent federal revenue. Hamilton, leader of the Federalist Party, thus enabled the United States to take a decisive step in its federal construction. Europe has not gone that far.

To begin with, this significant development itself is currently hampered by several types of dysfunction and obstacles. The disbursement of grants and loans appears slow and complex to implement. Now that the European Parliament has adopted the plan, it must be approved and ratified by all twenty-seven national parliaments before it can be implemented, and the twenty-seven countries will have to justify to the European Commission the use of their subsidies and the reforms necessary for their economy. This is no doubt an understandable requirement before committing to such an act of solidarity, but it is unfortunately slow and complex and incompatible with the immediate financing needs of the States, at a time when a slower recovery is being announced for the European Union, with growth forecasts for 2021 of +4.4% compared with +6.4% in the United States, which will also have slowed down much less in 2020 (-3.5%, compared with -6.8% for Europe).

Moreover, there is no guarantee that such a Community budget will be maintained in the future and that the accompanying common debt can be renewed. Many so-called “frugal” countries have already suggested that this is just a “one off” operation, linked only to the existence of the pandemic. Therefore, the timely implementation of these instruments will not necessarily lead to the construction of a more federal Europe.

Moreover, the pandemic is considerably accelerating many changes that were under way in all areas. Europe is obviously not immune to these changes, but it is not well placed in the new growth sectors of the economy. It must therefore quickly consider pooling more resources to increase and accelerate investment in these areas. This is what the Next Generation EU plan intends to do, but perhaps not commensurate with the challenges of global economic and technological competition. In order to participate in the renewed dynamism of the world economy and be a player in the new sectors driving growth, it is necessary for Europe, an old civilisation, not to lose its vitality, its taste for innovation and its capacity to take risks. The precautionary principle alone cannot serve as a guide to prepare for the future.

Furthermore, it is becoming urgent to resume the institutional construction of the Union and at least of the eurozone. If it is to defend its integrity and its social market model in the long term, it must be both economically efficient and united. The necessary structural policies must therefore be conducted on a country-by-country basis in order to reassure the ‘frugal’ countries that they will not have to pay for the ‘spendthrift’ countries ad infinitum, in exchange for the implementation of elements of a transfer union. A European investment policy to re-industrialise the regions with a deficit is also an additional and essential condition. Structural policies alone – assuming they are effectively implemented – will not be enough. Europe will also have to face the fact that the countries that make up Europe will emerge from the pandemic with even greater disparities than when they entered it.

Lastly, it must develop a common strategy to exist on the international scene between the two superpowers, the United States and China, if it wishes to carry weight in the future in the international arena, by defending its values as well as its political, diplomatic and economic weight.

If Europe’s leap forward in the face of the pandemic is clearly to be welcomed, European ambition must bounce back with a certain sense of urgency, by making the essential changes, particularly in terms of institutional regulation, if it is to meet the substantial challenges of the present time. The road will not be easy, but time is running out.