Category: Euro zone

The most recent major financial crisis, resulting from widespread over-indebtedness in the private sector, was at the root of a significant risk of deflation. Monetary authorities reacted appropriately with unconventional monetary policies, and short-term and long-term interest rates approaching zero, or even negative.

We have not been exposed to the risk of deflation for several years now. Growth returned along with a sharp recovery in credit, even if we are seeing the first signs of a slowdown indicating a classic downturn in the economic cycle. Given the decline in deflation risk, it is no longer necessary to maintain an extremely accommodative monetary policy. And yet, the fact that the level of inflation is below central banks’ objectives is feeding the fear that a significant rise in rates will cause insolvency problems, and leading monetary authorities to continue their unconventional policies.

However, if we study past financial crises, we can very clearly identify the signs indicating a maturing financial cycle, leading sooner or later to the return of a potential systemic crisis. Indeed, keeping rates too low – i.e., nominal interest rates significantly below nominal growth rates – for too long creates a vicious cycle. For this reason, economic players are encouraged to take on even more debt rather than repaying their debt, making a rise in rates even more difficult. And this is pushing savers, as well as the players managing these savings (pension funds, life insurance, investment funds, etc.), to take more and more risks in order to gain returns. All these behaviours contribute to increased financial instability. In this way, the rate of global debt has greatly increased: it stood at 190% in 2001 and 200% in 2008, before rising to 230% in 2018. Savers and institutional investors take larger risks in order to keep from offering negative rates to savers themselves. This constant increased risk-taking characterises a rising phase in the financial cycle. This type of phase has repeated itself throughout history and today, for example, takes the form of investments that are increasingly long-term and illiquid, including greater and greater credit risks.

Such a bubble as this one could burst as a result of the rise in interest rates. This rise will probably not happen quickly if inflation remains low in the long term for structural reasons. This should, moreover, raise questions about the inflation targets of central banks themselves, as explained by Jacques de Larosière in this newsletter. What, then, are the factors that could cause the bubble to burst? A major slowdown in growth, due to the investment cycle or to geopolitical crises, would lead to a decline in public or private revenues, making debt repayment more difficult and compromising the value of investments.

Banks, being better capitalised and better protected against liquidity risk than before, are less risky; the financial crisis is probably more likely to come from “shadow banking”, in a broad sense. The portion of finance not mediated by banks is indeed constantly growing. Yet, the structure of the flattened yield curve and negative rates are also gradually weakening banks. This could eventually limit their capacity to increase the amount of their lending and finance growth, thereby weakening the European banking sector.

Ultimately, the main risk is that central banks, which have successfully fought catastrophic risks with innovative instruments, will want to return to an inaccessible inflation rate and will use these same tools to cope with reversals of economic trends and to protect players carrying significant debt. The central banks seem to have adopted an imbalanced attitude: while very accommodative during crises, it has not sufficiently supported the decline in deflation risk and the return to growth with a rise in rates. This attitude will certainly help to delay the next crisis in the short term, but, on the one hand, it will make monetary policy far less effective when we are once again in need of it on a massive scale; and, on the other, it is a powerful factor in the development of long-term financial instability. This policy contains the risk of an even greater financial crisis, when it arrives.

Co-written with Eric Lombard,
CEO of the Caisse des Dépôts.

1. Following the European elections, “populist” parties have gained in power but failed to make a sweeping advance. They have increased their number of MEPs from 205 to 210, ahead of the probable departure of 34 from the UK.
2. At an average 51%, the participation rate in 2019 was the highest since 1999.
3. Attachment to the European Union remains strong. Surveys show that 50% of the Italian population responded positively, compared with 52% for France, 67% for Spain and 70% for Germany. Even though confidence in (rather than attachment to) the European Union dipped substantially between 2007-2008 and 2014-2015. Between 20% and 35% depending on the country, at the end of this period. But confidence has risen slightly since (between 30% and 50% depending on the country). And the percentage of the population thinking their country would fare better outside the Union has decreased since 2013. Around 20% for Germans and the Spanish, 30% for the French, and over 40% for Italians.
4. The percentage of people favourable to the Euro is stable overall. Around 80% for Germans and the Spanish. Over 70% for the French. And over 60% for Italians, though this percentage has fallen sharply since 2000.
5. While immigration remains a concern, the four countries we studied were, by a large majority (70% to 90%), favourable to a common migration policy.
6. But dissatisfaction concerning the functioning of democracy in the Union has risen over the last 20 years, notably since 2012, the dissatisfaction rate today standing at around 50%.
7. So the major disruption failed to occur. And the idea of Europe and the Euro are holding up strongly in the hearts of the Union’s population. However, we think overly hasty celebrations would be dangerous. Granted, even the “populist” parties no longer boast about wanting to quit the single currency or the EU. But the forces behind the rise of these parties in a number of European countries are still at play and the underlying reasons still very much a reality.

One of those reasons, one that has been thoroughly analysed, is the combined effects of globalisation and the technological revolution, which has led to the declassification and relative impoverishment of the middle classes, or a fear of such. This phenomenon is not reserved to Europe; many other countries are seeing a rise in anti-system and anti-globalisation movements.

However, the decreases in the surveys mentioned above occurred in the EU mainly starting in 2010-2012, i.e. at the time of the eurozone-specific crisis and its defective management. The issue of improving the functioning of the eurozone remains insufficiently examined. And a new crisis would undoubtedly be dangerous, with increasingly costly political and social consequences.

Immigration is also a subject that still needs to be discussed and shared within the Union.

The call to order issuing from the survey on the need for the improved democratic functioning of the Union is not a chimera. As things stand now, institutional reform will not suffice; what is needed in reality is a feeling of stronger proximity between Europe and its inhabitants. Notably through active cooperation implementing European industrial, technological, defence and ecological projects. Even if each of these projects fails to unite all the EU countries. These achievements, the result of collaborative efforts between European businesses, and wherever necessary backed by the EU budget, would help everyone to better perceive the usefulness of Europe in the economic and social life of their territory.

Lastly – and we can all see the growing urgency of this point – the Union of European Nations must also become a strategic Europe. Only such a Europe would be able to play a full role in the new global power balance that is being forged before our eyes, leading today to an unstable confrontation between China and the United States, and from which Europe is dramatically excluded.

As such, defending the European idea today can no longer essentially consist in complaining about a lack of communication or lamenting that its detractors are distorting the truth. Neither can it be based on simply repeating the need for greater integration via the gradual relinquishing of sovereignty. Like it or not, in our current circumstances, this attitude seems to be producing the opposite of the desired goal.

We should thus refrain from seeking the impossible, and instead take an unflinching look at the unresolved problems and intrinsic defects of European construction as it stands today. We should pragmatically seek out any possibility of reviving cooperation topics and processes between the Member States and European players, to achieve together what no-one achieve alone.

After all, would this not be tantamount to updating the principle of subsidiarity dear to Jacques Delors? Now more than ever, what the people want is for Member States to not be stripped of their identity or sovereignty regarding any matter that they can manage themselves. And institutional progress is currently not on the agenda of a number of EU countries. Through new or revived collaborative efforts between European countries, it is vital to enable citizens to open up more possibilities. And, as part of a supplementary rather than substitutive identity, it is crucial to offer them greater control over their destiny. Could this be the start of the rebirth?

The European League must take an active part in this debate and devise new ideas. This ability to be committed and useful hinges on each one of its members. Your support is necessary if, in a manner both pragmatic and critical (and in the full sense of the latter word), we are to contribute at our level to reviving Europe. We need to seek out and promote concrete pathways to go beyond today’s blockages. In short, we need to renew the ideal. The recent elections give us hope that this is possible.

With the first country ever having decided to leave the European Union, a sentiment of distrust appears to be on the rise, along with a waning of interest in integration, an increased need for identity and the resurgence of the nation state.

North-South tensions in the eurozone are rising, with Southern countries denouncing the lack of solidarity on the part of Northern countries and Northern countries feeling that Southern countries are not rigorous enough for them to show solidarity and share their economic risks. Can a strategic Europe still emerge to take a place between the United States and China and to bring our vision to the table as part of the reshuffle of the global power balance currently afoot?

Is there a possibility, a realistic path, of combining a sovereign Europe and a Europe of nation states – to which there is currently no alternative – to forge a successful outcome to a situation of great concern today for convinced Europeans? What new compromises are possible for pursuing European construction? And what new institutional arrangements are required to protect the eurozone in the event of a new crisis?

Through our events, the French Section of the European League for Economic Cooperation, which I have chaired since January, succeeding Philippe Jurgensen, who now serves as Honorary Chairman, is seeking to find answers to these questions and present them independently to political and economic decision-makers. It is more vital than ever to explain the benefits of Europe. But it is equally vital to address the necessary changes and rebuild in-depth dialogue between the various players and countries of Europe so as to keep from falling into a rut or, worse, disintegrating.

The two sessions of “citizen consultations” organised by the League in September and October were key events in 2018, bringing together some 100 participants, including experts and non-experts from diverse fields and featuring three renowned economists, Agnès Bénassy-Quéré, Patrick Artus and Xavier Timbeau. The aim was to debate desirable and realistic improvements in the eurozone with the European elections on the horizon. Through the event, we were able to develop and send proposals as part of the framework provided for by the head of state.

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A number of working lunches and breakfasts, as well as special theme-based committee meetings, were organised in 2018 focused on personalities and topics enabling us to further our understanding of Europe’s strengths and difficulties, and desirable or possible changes.

The French Section of the European League for Economic Cooperation is an open space for debate and dialogue which, to be as useful as possible to the defence and promotion of Europe, requires the active contribution of each of its members. It also needs to grow its membership – of private individuals and companies alike – to boost its reach, i.e. its ability to weigh in debate and promote a responsible and socially-minded Europe, a Union attached to democratic values and those of an open society founded on the rule of law, in which social aspects are combined effectively with economic aspects. A Europe with a strong strategy, enabling it to keep the world from becoming locked into an economic and diplomatic face-off between the United States and China, which would relegate our continent to the role of powerless spectator.

Through our ideas and common energy, let us make our best contribution to finding the right solutions for Europe, both here and elsewhere.

I would like to thank each one of you for being a member of the European League for Economic Cooperation.