Category: Global economy

“It is in developing the employment rate, encouraging work, revaluing the value of work, social mobility, encouraging entrepreneurship, education (a decisive factor), innovation and growth that we must find solutions… And not through additional taxes on income from work or savings, any more than on businesses”

Correcting the poor trajectory of our public finances is a necessity that has become an urgent priority. To avoid a public debt crisis, ensure France’s independence and regain credibility, and therefore a real capacity for influence within the European Union. To this end, it is theoretically possible to increase taxes and social security contributions, reduce public spending and strengthen growth
through structural reforms and investments for the future. However, each of these measures, in the specific situation of France, will not produce the same effect and will not have the same effectiveness. Let us focus here on increasing taxes, which might seem, at first glance, to both reduce the public deficit and improve social justice. The reality is quite different. Increasing taxes in France could worsen the vicious circle between very high redistribution – in itself and compared to similar countries – and relatively high income inequality before redistribution. By again degrading the lack of competitiveness and the inadequacy of our offer and thus
reducing growth and ultimately damaging the standard of living of all and the tax base itself.

Lack of competitiveness. The rate of compulsory taxes has been on an upward trend in France for a long time, reaching more than 43% of GDP in 2023, one of the highest in the European Union with around 6 points more than the average for the eurozone. With a part of public spending that is inefficient (e.g the situation of hospitals, education, the redundancy of administrative operating costs, etc.) and also significantly higher than the European average – by around 8 to 10 points of GDP – and all this for a lesser result. This state of affairs contributes to the lack of competitiveness of our offer, which is currently the heart of the issue.

Furthermore, after redistribution, income inequality in France, measured by the ratio between the income of the wealthiest 10% and that of the least wealthy 10% or by the relative poverty rate, has not changed or has changed little for over 20 years. And is among the lowest in Europe. The Gini index of post-redistribution inequality stands at 0.298, while Germany reaches 0.303 and Spain, Italy and the United Kingdom have levels between 0.320 and 0.354. Let us also add that the share of national income after redistribution held by the wealthiest 1% in France is also one of the lowest at 7.17%, compared to 8.72% in Sweden, 10.32% in Italy or 14.35% in the United States. France in fact has one of the highest levels of redistribution in the OECD. Overall, in France, redistribution reduces the ratio between the income before redistribution of the wealthiest 10% and that of the least wealthy 10% from around 20 to 9. And this ratio increases to 3 by adding the effect of public services, by comparing for each the cost paid versus the monetary equivalent of what is received by using them. The wealthiest pay more, due to the high progressiveness of taxes. Thus, 85% of people among the poorest 30% receive more in terms of public services than they pay, compared to 57% for all people in France (INSEE study of 2023 on extended redistribution).

The marginal tax rate on household income is 55.2%, compared to 47.5% in Germany. It is higher than in Italy, Spain, the Netherlands or Belgium, for example. And the tax rate on capital income is still higher than the European average despite
recent reductions that have been very useful for the French economy, which has been well documented.

Ignoring this when building economic programs will obviously lead to inadequate and dangerous proposals for the economy and ultimately for the less well-off.

Inequality of opportunity. True social justice, given the reality in France, is to tackle inequality of opportunity, which is quite high compared to the European average. And it is in developing the employment rate, encouraging work, revaluing the value of work, social mobility, encouraging entrepreneurship, education (a decisive factor), innovation and growth that we must find solutions… And not through additional taxes on income from work or savings, any more than on businesses. Increasing redistribution further and further, at the particularly high level we are at, is making the problem worse, by leading to less competitiveness, therefore less production and less growth. The overall risk is very high of causing more inequality of income before redistribution and more inequality of opportunity.

And of not improving the sustainability of our public finances, or even of deteriorating it further. French history in recent decades bears witness to this nonvirtuous loop. The economy, like income, is in fact a dynamic, not a zero-sum game. Serious long term research has shown this unambiguously.

What remains is action in the gradual reduction of public spending (well chosen and well managed) in relation to GDP, as well as structural reforms and future investments to increase the competitiveness of our offer and our growth potential, and at the same time promote social justice and restore the sustainability of our public finances. And thus sustainably protect the precious asset that is the level of income and social protection in France.

Let’s not confuse effects and causes

Let us not overestimate the decisive nature of the change desired by the European Capital Markets Union project. Will the reinvestment of the financing capacity (surplus) of the European Union in Europe, rather than in the United States, be guaranteed? Indeed, before the idiosyncratic crisis in the euro zone beginning in 2010, the financing capacities of the Northern countries were able to back the financing needs of the countries in the Southern zone, despite the organisation of the financial markets as it still stands today. The measures proposed in favour of the capital markets union, by Christian Noyer for example, seem very useful to me. But they are not a “game changer”. Today, we can invest freely on each European stock exchange or finance European companies through deposits in banks or investment in debt or private equity funds… Certainly, a more integrated, more harmonised, more European-supervised market, would give more depth and liquidity to European financial markets. They would therefore become more attractive. The unity of the European market would also better protect savers by providing them with greater security. So, it would undeniably be a significant plus, but not enough to ensure the recycling of surplus savings from certain European countries in Europe itself. Why? How can we be sure of this with more certainty?

Two elements would be able to trigger a change in the geographical orientation of the European savings surplus: -On the one hand, the implementation of reforms in the Southern countries (France included) aimed at not having permanently high public deficits, and at gradually approaching the level of public debt to GDP of the Northern countries. This would enable the acquisition of a sustainable credibility of public finances. This would allow significant progress in real and structural solidarity between the countries in the zone. And thus promote “risk sharing” between European countries. Leading to the confidence of Northern savers-investors in the sustainability of the debt of Southern countries.

Investors from Northern countries in fact stopped investing their current account surpluses in 2010 to finance the needs of Southern countries, when they understood that solidarity was not a given. And they are still very reluctant to provide such solidarity, fearing that the ant will have to help the cicadas all year round and every year. Thus, today the current account balances of the South are at zero +, since the end of the euro zone crisis, because a current account deficit could be difficult for them to finance. And the surpluses of the North are mainly placed in the United States…

– On the other hand, a European impetus for a more dynamic European economy and Schumpeterian growth favorable to innovation. Impetus through incentives to raise the level of R&D, through well-measured and targeted subsidies and partial guarantees on carefully chosen investments, through public-private investments, through incentives for innovation and industrialisation in the future industry sectors, etc.

Likewise, non-naive regulation (ESMA, competition, green, etc.) and taking into account the competitiveness of our industries, as well as appropriate taxation, finally the development of a culture of risk and not a religion of precaution -a sign of our aging- should also allow savers and their representatives (institutional investors) to want to invest more in many future projects in Europe, because they would offer good profitability prospects.

These two elements are not contradictory, rather complementary, to the European Capital Union project. But they seem more decisive. Favouring or even focusing only on the capital union would symbolically exaggerate the role of finance and would entail the risk of major disappointments down the road. Good projects have no trouble getting financed.

The systemic China-US rivalry. The appearance of a “Global South”, itself quite disparate. The war in Ukraine…The most flagrant manifestations of this fragmentation are the multiplication since 2010 of international military conflicts by almost 4 , of the number of countries subject to financial sanctions by a little less than 3 or even that of protectionist measures in the world by 6. This geopolitical fragmentation is thus accompanied by economic fragmentation albeit at a slower pace. Both threaten peace and security-the world’s noise sadly reminds of this every day- and the benefits of organised freedom of trade and capital flows. Let us not forget that, in emerging countries the poorest part of the population (below the minimum subsistence level) experienced a very sharp decline from 1995 to 2021.

Power play has returned to the centre of the world stage. China wants to regain a dominant position, after a long period of little geopolitical presence. Russia, after the peaceful end of the Soviet Union, is driven by its historical fear of being encircled and its insufficient consideration of where it ‘fits’ in the concert of world powers. The rejection of ‘double standards’ is mobilizing both the populations of emerging countries and their leaders. Distrust has therefore increased considerably between emerging countries and the West. The West which had served as a model for a long period and which set the tone for global regulations. This accounts for the current deficiency of global regulation modes: the UN, the WTO, etc., but also the usual more or less formalized bilateral mechanisms of coordination. The fragmentation of the world seems to be well underway.

Power play has returned to the centre of the world stage. China wants to regain a dominant position, after a long period of little geopolitical presence. Russia, after the peaceful end of the Soviet Union, is driven by its historical fear of being encircled and its insufficient consideration of where it ‘fits’ in the concert of world powers. The rejection of ‘double standards’ is mobilizing both the populations of emerging countries and their leaders.

Distrust has therefore increased considerably between emerging countries and the West. The West which had served as a model for a long period and which set the tone for global regulations. This accounts for the current deficiency of global regulation modes: the UN, the WTO, etc., but also the usual more or less formalized bilateral mechanisms of coordination. The fragmentation of the world seems to be well underway.

But at the same time we are also witnessing another fragmentation. At the heart of Western democracies, with the rise of populism and extremism. Democracies seem worn out. As Cioran put it, “civilisations develop through the belief in the myths upon which they were founded and decline through the doubts which assault them”.

The rise of Wokeism is both manifestation and cause. The no limits quest for the broadening of everyone’s rights, in all areas, without ever associating them with the symmetrical duties that would permit them, may potentially lead to moral ruin with a loss of all civic sense. And the possibility of financial ruin, with the funding of the social protection system, something which is essential, running out of steam. Here again, the resulting rise of distrust reinforces fragmentation. Distrust of the Government, institutions and even of others.

And here and there is an increasing distrust of democracy itself. Wokeism ends up fueling the rise of populism, which prides itself on wanting to restore fundamental values, while putting forward an illiberal logic, both economically and politically. This game of -Siamese-opposites risks an even more marked and potentially violent fragmentation of society.

This apparent fatigue of democracy can only solicit weak interest from other civilisations. The fragmentation of Western societies partly fuels the fragmentation of the world and the rise of general distrust. At the same time, the increase of autocratic regimes in emerging countries in turn leads to justified distrust on the part of Western countries.

Will we be able to re-establish the level of confidence in ourselves and others and the means of coordination necessary to avoid further developing the everyone-for-themselves logic of individuals and countries? Will we be able to avoid primitive violence, always justified by the anticipated violence of the other? Can we revive democracy and ensure its balance to protect such a precious asset? To avoid the deadly dynamic of distrust and the multifaceted detrimental consequences of fragmentation.