Category: Euro zone

Should interest rates be lower than the growth rate for the long term, implying that debt is not important? This is not my thesis and I believe that central banks will initiate or continue a gradual increase in their rates. What will be the possible and relevant reactions for any government with a high level of debt?

Before the very recent war in Ukraine, growth was strong, even if it fell slightly in view of the slow return to a more normal growth rate after the 2021 rebound.  Monetary policy was therefore expected to be at least normalised, smoothly due to the high overall debt and highly valued financial and real estate markets, by gradually exiting the quantitative easing policy, as well as by cautiously raising interest rates.  This need for tightening came from the risk of overheating. But also from the risk of monetary policy being exhausted in the event of new (and there are always) future crises. Finally, from the development of bubbles due to interest rates that have been too low for too long compared to growth rates.

Then, several months ago, there was an upsurge in inflation. It was clear that part of this inflation was not transitory and that we were probably changing inflationary regime.  The Fed, then the ECB, were therefore prompted to accelerate their announcement of a gradual end to their net securities purchases on the markets.   They also said they would raise their rates a little faster than expected. For the same reasons as described above, however, the issue was still not to proceed too quickly in exiting their very accommodative policy. Moreover, the ECB had to deal with the more specific and difficult eurozone issue, due to the large imbalances between the countries of the South and the North.

At the same time, governments had, and still have, a need for investment for the development of new technologies, re-industrialisation (even partial) and the energy transition. There was therefore a conflict between, on the one hand, the objective of financial stability undermined by interest rates that have been too low for too long and now the fight against inflation and, on the other hand, the objective of financing the necessary new investments and the solvency of governments, or even private players, whose debt had increased sharply since 2000 for the private sector and since 2007 for the public sector, with in addition a significant increase in public debt due to the pandemic.

Hence, the raising of several voices in the eurozone. The first stating the need to change the common budgetary rules, by excluding investment budgets from the calculation of constraints on public deficits. This proposal is sometimes coupled with the idea that, under current circumstances, the level of public debt was of little importance, and that the central banks would continue to finance future deficits for a long time. Another voice showed a narrower path, but it seems to me much more credible, certainly explaining the need to change the eurozone’s common rules, which are dated and ineffective, but at the same time stressed the importance of the compromises to be found between the countries of the North and the South on these changes in rules so as to select as candidates for exclusion only investments that actually generate potential growth or facilitate the energy transition. All expenses not always resulting in more potential growth. And the improvement in growth potential not always requiring additional spending. It was also crucial, from this point of view, to agree on reasonable budgetary rules, preventing any “free rider” behaviour.

The spectre of stagflation

Today, the war situation has created the spectre of stagflation. Therefore of a slowdown in growth which will be at least 1% and inflation even stronger than expected before the start of the war. This will create an even more intense dilemma for central banks. However, if the very sharp upsurge in inflation were to lead to no reaction or a very weak reaction on their part, a major risk of an inflation spiral could arise. Today, the question of whether there will be a second round of inflation no longer arises. Many industrialists and large retailers are increasing their prices, otherwise they are no longer able to cope with rising costs. And many companies have begun to raise their wages. They cannot act otherwise, in order to retain their skills, as well as to be able to recruit. The upcoming wage negotiations will reinforce this phenomenon.

However, if inflation takes hold through price-to-price, wage-to-price and price-to-wage indexation, with slower growth, we will enter a potentially lasting stagflationary dynamic. When Volcker, then Fed Chairman, tried to exit a long stagflation, in 1979, he had to provoke a deep recession in order to break the indexation phenomena. Ignoring inflation would also be very dangerous in terms of inequality, because no one is equal, neither among employees nor among companies, in the face of the ability to pass on any price increases in their incomes. Moreover, there is a need to fear inflation that could be transformed into a system of hyperinflation, causing economic agents to lose their bearings. Stable and low inflation allows for viable wage agreements; reliable price catalogues between producers, distributors and consumers; loan agreements to set interest rates between borrowers and lenders based on shared inflation expectations. In short, stable and sufficiently low inflation is essential to confidence. However, it is necessary for an efficient economy. Monetary policy must therefore react in a timely manner. If it were not to do so, it would have to act later by taking much more risk. Central banks must remain credible.  By supporting growth, of course, but clearly by combating inflation. Uncontrolled inflation also undermines growth itself.

This path will be very narrow

This path will be very narrow.  The monetary tightening policy must therefore necessarily be very cautious, and therefore very gradual. As a result, this trajectory will also require governments to play their part. On the one hand, governments will have to make the aforementioned necessary investments, generators of potential growth and, on the other hand, reduce unnecessary expenditure or reallocate it usefully. France has had the highest public expenditure as a percentage of GDP in the eurozone for a long time, but in some areas this expenditure has, in recent decades, provided a quality that bears little relation to the level of expenditure incurred. The OECD’s many comparative measures testify to this on a regular basis. Thus, the effort must not be only financial. The essential investments can therefore only be made if the essential reforms are carried out. Such as the reform of retirement – which while reducing the public deficit – supports potential growth because it increases the population available for work, whereas currently France is one of the countries with the significantly lowest employment rate after the age of 60.

All in all, it is imperative that central banks neutralise, at least, but cautiously, their monetary policy, in order to combat too much inflation, as well as to avoid financial instability due to bubbles that would continue to develop. And, at the same time, it is essential that governments increase potential growth through investment and reform and ensure better control of spending. In order to give credible trajectories to their fiscal policy and ensure their solvency in a world where interest rates will be structurally rising.

On 16 March this year, the Fed increased its intervention rate by 25 cents and indicated that there would be numerous hikes in the future. The following day, the ECB, in turn, announced an end to its net securities purchases at the end of June and paved the way to subsequent rate hikes. Furthermore, if the ECB did not perform such a policy change, the euro would continue to depreciate against the dollar in particular, leading to even higher inflation, due to the rise in prices in euros of imported products. The trend therefore seems to be underway.

The idea of a “war economy”, war against climate change, war for re-industrialisation, as well as a military war, as begins to be mentioned here and there among some economists – if it led to the belief that debt was of no importance and that the central banks would be obliged to finance any new deficit thus allowing very sustainable spending without constraints – could lead to a disaster. This concept of war economy, as previously stated, inevitably leads to the idea of a very long period of time.  Unlike a “whatever it costs”, limited to the duration of the pandemic. However, this idea includes an unthinkable: money. Money is the foundation of the debt settlement system. Having confidence in money means having confidence in the effectiveness of the debt settlement system. Therefore, if ever the monetary constraint[1] were suspended for too long, then confidence in money could be called into question. And if we no longer had confidence in money, we could experience, not traditional inflation, but a flight from money. If the central banks were to never stop quantitative easing and endlessly keep rates too low relative to the growth rate, not only would there be regular serious financial explosions, but sooner or later this would also lead to a flight from money that would be dramatic. This would result in the disorganisation and collapse of the economy and society. Because money constitutes the social link. As Michel Aglietta says: “confidence in money is the alpha and omega of society”.

---

[1] Either the obligation to pay one’s debts or, more precisely, for governments and companies, to refinance them at maturity with lenders other than central banks.

Monetary union is our common good. The virtues of the euro have proved its usefulness, notably in times of crisis, through the determined action of the European Central Bank. But the ECB cannot indefinitely palliate the inadequacies of structural policies such as the incompletion of the eurozone’s regulatory method.

The sustainability of European monetary union hinges on solidarity. But are the interests of European countries sufficiently aligned to achieve that solidarity? If divergences are too strong, it would be an illusion to believe in the long-term future of a budget such as the Next Generation EU plan or a Community debt, both of which stand as remarkable advances.

One-way solidarity

Since the creation of the eurozone, the Northern countries of the monetary union have further industrialised while the Southern countries have gradually deindustrialised. In correlation, the former have gained market share in global trade while the latter have lost ground. With their current account surpluses, Northern countries have accumulated net assets in the rest of the world; in contrast, with their current account deficits until the eurozone crisis, Southern countries have amassed debts relative to the rest of the world. A major divide also exists regarding initial education levels and occupational skills, and in terms of youth unemployment rates and employment rates. Productivity gains are also divergent, while differences between the North and South are growing in terms of public debt as a percentage of GDP. To safeguard the solidarity forged during the pandemic, trust must be established between Northern and Southern countries by reducing these major divergences. This calls for three vital things.

Firstly, Southern countries are duty bound to implement structural policies, i.e. ad hoc investments and reforms. This does not involve austerity measures, as, on the contrary, these policies serve to increase potential growth by boosting productivity, improving the effectiveness of initial education and occupational training, more effectively mobilising the working-age population (notably through pension reform) and optimising public spending. These reforms are the only way to prevent Northern countries from having to demonstrate one-way solidarity towards Southern countries on an indefinite basis. But while these reforms are necessary, they do not suffice in themselves. Structural policies alone will fail to remedy the industrialisation shortfalls of Southern countries.

Realistic budgetary rules

Hence the second vital need, for an industrial and regional planning policy in the European Union, implemented through targeted investment and aid from Northern countries to Southern countries. The Next Generation EU recovery plan is an answer. The projects involved must be effectively implemented so as to foster competitiveness and industrialisation in the relevant countries.

The third requirement is the reconstruction of shared and realistic budgetary rules, which are no longer such today. These rules must be effective and support these developments, while ensuring that there are no free riders in the Union.

If these three requirements are not fulfilled, populism will continue to rise in Northern countries refusing to indefinitely assist Southern countries, or populism will continue to grow in Southern countries increasingly deindustrialised without aid from the North. Devaluations, far from being a miracle solution, are not possible in a monetary region, making it more difficult for countries to catch up on competitiveness in isolation. This leads to the build-up of local industrial polarisation in countries with the greatest comparative advantages. Avoiding this trap will hinge on the aforementioned efforts at both Community and national level.

 A monetary union is, in principle, very effective when growth is facilitated by the fact that the financing capacities of certain countries in that union allow the financing needs of others to be met, thus pushing the external constraint to the boundaries of the monetary zone and not the borders of each of its constituent countries. This is the case, for example, in the United States of America for the various States that make up the United States of America. Sustained stronger growth in California, for example, would not be hampered by the weaker growth in other States, even if this would lead to an increasing current account deficit of the first State vis-à-vis all the other States, because the only relevant current account balance is that of the United States as a whole and not that of each of the States. It is therefore necessary for capital to flow efficiently within a Monetary Union. And in order for this movement to take place without hindrance, we need a transfer union, i.e. elements of budgetary solidarity between the States.

 The eurozone crisis, which began in 2010, was a “sudden stop” crisis, specific to this area, and not the mere development of the previous great financial crisis. Until then, the financial markets had properly matched the financing capacities of the Northern countries to the financing needs of the Southern countries within the eurozone. However, ever-increasing divergences between the current account balances of the eurozone countries, namely the growing deficits and surpluses of the various parties, had emerged since the creation of the euro. And when the markets realised that there was in reality no solidarity mechanism between the eurozone countries, they suddenly stopped allocating the financing capacities of the Northern countries – i.e. their current account surpluses – to the financing needs due to the current account deficits of the Southern countries. The crisis therefore happened suddenly, as always when the financial markets suddenly discover, and often belatedly, reality as it is. Countries that are structurally more importers than exporters, seeing their external financing cut off by the markets and not benefiting from solidarity from other eurozone countries, were obliged to immediately curb their demand, thus their imports, by reducing investment, wages, social benefits and public spending. As a result of strong austerity policies, the Southern countries quickly brought their current account balances to near-zero levels. Northern countries, with continued high current account surpluses, began to finance the rest of the world, including US current account deficits, but paradoxically not the other countries of the eurozone itself. This, strictly speaking, does not correspond in any way to an efficient allocation of capital within a Monetary Union.

 Therefore, it is now important to ask how we can build an efficient monetary zone through a real solidarity project in the Union. The expected “technical” improvements to both the European capital market and the Banking Union cannot alone achieve it.

 Since the idiosyncratic crisis in the eurozone, the only elements that have helped partially intermediate the financing capacities of one party with the financing needs of other parties have come from the European Central Bank, through its relations with the national central banks in the eurozone (Target 2).  It is therefore the central banks that have actually encouraged capital flow, but independently of the markets. Then, the emergence of the COVID-19 pandemic resulted in the Next Generation EU plan and the Community loan, which now make it possible to enter a new dimension because they create clear elements of solidarity and a better flow of capital. For the first time in the history of the region and in reality of the European Union, Community expenditure, through donations, mobilises amounts that are incomparably higher than previously, while not split according to the relative weight of each country but according to their needs.  On condition, however, that they undertake the necessary reforms. And the financing of these donations is done through a Community loan. These are obvious demonstrations of solidarity.

 Of course, the issue that arises is that of the European Union’s future resources, which are essential to repay these loans. The challenge is then whether European countries will reach an agreement on common taxes, such as on plastic, CO2 or digital technology. And whether this Community budget and loan will be sustainable. Europe’s “Hamiltonian moment” will only be a real one if there is long-term common expenditure of large amounts, a Community debt and resources specific to the European Union, and not only in response to the pandemic. Will solidarity be sustainable or will it, as many Northern countries are already saying, be a one-off, an isolated operation, specific to the pandemic?

 A monetary union can only be sustainable if there are clear elements of a transfer union. Thus, the fundamental question is whether the interests of the various European countries are sufficiently convergent to achieve this and to agree on it over the long term. If they are not, it becomes very difficult to ensure the permanence of a Community budget and debt. However, Northern countries have significantly increased their industrial capacity while Southern countries have gradually de‑industrialised since the creation of the eurozone. Consecutively, Northern countries have gained market share in global trade (increase in their exports as a percentage of global exports), while Southern countries have diminished their share.  Countries with current account surpluses, thus the Northern countries, have accumulated net assets in the rest of the world; whereas Southern countries, with current account deficits, until the eurozone crisis, have conversely built up debts to the rest of the world on an ongoing basis. At the same time, assessments of initial education levels, as well as professional skills, are very different between the countries of the South and the North. Like youth unemployment rates and general employment rates, productivity gains also diverge.

All these factors contribute to the level of growth and the quality/price competitiveness of each country. Finally, the consequences are a growing North-South divergence in the levels of public debt to GDP.

If this situation persists, post-pandemic solidarity is likely to be short-lived. Especially since, in addition, current inflation, if not only transitory, would lead the ECB to gradually increase its rates, at the very least to neutralize its policy, if not more so. That would increase the difficulties of Southern countries that would not have sufficiently engaged in a credible policy of normalizing their fiscal policy. On the other hand, if the ECB, does not push its interest rate up, to protect them, that would significantly increase tensions in Northern countries with regard to a single monetary policy considered too accommodative for too long and would undoubtedly also cause dangerous market reactions.

 Faced with these considerable and numerous divergences, what must we build to achieve greater solidarity? How can we build mutual trust between the countries of the North and the South? Three points can be put forward here.

 Firstly, Southern countries must implement structural policies, i.e. ad hoc investments and reforms aimed at significantly reducing these divergences. These necessary reforms are not austerity policies, since, on the contrary, they increase potential growth, by increasing productivity, improving the efficiency of initial and vocational training, by better labour mobilisation, including through pension reform, as well as by optimising public spending. Only these policies will ensure that Northern countries do not have to send subsidies indefinitely to Southern countries. This will make it possible to activate the necessary elements to achieve at least some elements of a transfer union.

 While these reforms are necessary, they will not be sufficient. Structural policies alone will not make up for the increased differences in industrialisation levels between the countries of the North and the South. Hence the second point: an industrial and regional planning policy in the European Union must also be implemented, through investment and aid from Northern countries to Southern countries, in order to contribute to their re-industrialisation in certain well-chosen sectors. On this point, we can hope that the Next Generation EU plan will be able to provide answers, since this plan presents and includes major projects for the future. They should therefore be set up according to the relative specialisations, existing or desirable, so as to promote industrialisation and competitiveness in countries requiring it.

Finally, the third point is based on the necessary reconstruction of shared and realistic budgetary rules: they are no longer so today. These rules must be effective and make it possible to support these developments, while ensuring that there are no free riders in the countries of the Union.

 Individual (country-by-country) efforts by the members of the Union, and jointly transitory efforts from North to South, are needed, because they will, in a shared interest, allow the North not to finance the South ad infinitum, and the South not to experience continuous de-industrialisation with all that this implies both economically and socially. And there is a need for budgetary rules that make it possible to implement these policies effectively, but also without leaving the possibility for some countries to count indefinitely on the aid of others, by perpetually postponing the necessary reforms. Otherwise, either populism will continue to rise in the Northern countries that will not agree to pay subsidies ad infinitum to the Southern countries, or populism will continue to grow in the Southern countries, if we leave them to continually become de-industrialised without coming to their aid. Especially as this de-industrialisation is encouraged by an incomplete monetary union, i.e. in particular without the coordination of economic policies and without a transfer union. The catch-up of competitiveness differentials cannot be facilitated by devaluations, which are by the way never miracle solutions. That leads to a dynamic of increasing competitiveness divergences, with induced phenomena of industrial polarisation located in countries with the best comparative advantages. Without individual and common efforts, therefore, there will be no permanent elements of solidarity to get out of this trap. We would then suffer from this rise in populism, which would ultimately endanger the Monetary Union, which is an undeniable common good, due to the virtues of the euro, which has demonstrated its usefulness to us, especially during crises, thanks to the determined action of the European Central Bank.  But the ECB definitely cannot be the only player at the table.

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.