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Economical and financial crisis Euro zone Global economy

REAix 2017 : Is the euro still a true vector of wealth?

Aix en Provence Economic Conference (Rencontres économiques d’Aix en Provence) July 2017

The success of a currency area depends on the monetary policy which is implemented in it, but, more fundamentally, on the way it is organised. There are organisational modes and operating modes which facilitate or otherwise the creation of wealth and which we need to speak about here.

Firstly, when the eurozone was created it was to offer the citizens of the zone the possibility to share a single currency, which was a strong and very positive symbol for Europe. It was also to facilitate intra-zone exchanges because currency risk thus no longer existed. Yet we know that when we facilitate exchanges, we positively impact the growth rate. There was one final objective, that of displacing the external constraint of the borders of each country to the borders of the zone. It was a very important argument at the time. When you manage a series of highly interdependent countries and the external constraint is expressed at the borders of each country, you quickly encounter obstacles to growth. One country which has more need for growth than another, for example, because it has a stronger demographic, may experience a growth differential in its favour compared with its neighbours and partners and thus see its imports grow more than its exports.

Accordingly, it will rapidly encounter a current account balance deficit which is difficult to bear, which will limit its growth. This is what already happened to France, compared with Germany, before the eurozone. The idea that the external constraint in an optimal zone, in a complete monetary zone, is exercised at the borders of each country, obviously gives additional degrees of freedom to increase the overall growth level. The critical balance of the current account is that of the sum of the current account balances of the countries, some of which are positive and others negative. The principle of this is very interesting, therefore.

What happened in actual fact?

From 2002 to 2009-2010 we saw the per capita GDP of a large number of southern European countries catch up with the German per capita GDP. But nor can we fail to see that, since 2010, the difference has started to increase again. A few figures: in Portugal, the per capita GDP before the eurozone represented 50% of the German per capita GDP; it moved to 52-53% towards the mid-2000s, but it fell back to 48% in 2016. If I take a look at Greece, which is obviously an isolated case, it was 55% of German GDP in 2002, rose to 70% of German GDP but fell back well down on the level reached before the eurozone, to 42% in 2016. Spain was at 68%, it rose to 75%, then fell to 62%. Even Italy, which was at 88% – much closer to Germany  ̶ rose to 90% in 2005, then fell to 72% in 2016. France was at 96% – very close, therefore, to Germany – it rose to 100%, but fell to 88% in 2016.

We can clearly see the effects of the creation of wealth linked to the creation of the eurozone, but also the recessionary effects of the eurozone’s specific crisis from 2010 onwards.

Where does this double movement come from? In fact, the conditions of the sustainability of the stronger growth of the southern European countries after the creation of the euro were not there. Why? Precisely because the organisation of the eurozone did not provide for the institutional arrangements permitting this sustainability. And this growth, in part, was achieved on credit simultaneously during this first period, so there was a very contrasted change in industrial production. We saw the zone’s northern countries grow their industrial production and a decline in the industrial production of the southern nations, including France. Obviously in a quite correlated way, even if the correlation is not total, we saw the current account balance move totally differently between Germany and the Netherlands, for example, which had a 2% GDP surplus before the eurozone and which rose to an 8% surplus over recent years, from 2008 onwards. Yet the eurozone excluding Germany and the Netherlands, went from a current account balance of 0% in 2002 to -6 % in 2008-2009. We thus have the northern countries which top the group, if I take the example of Germany and the Netherlands, at an average surplus of 8% of their current account balance, in 2008, whereas the others are posting a deficit of 6%! The difference is considerable and caused, for most of the southern European countries, a serious balance of payments crisis from 2010 onwards. The growth differential over the same period was not sustainable, therefore. Clearly, whereas a catch-up was occurring in terms of per capita GDP, other differences were being created. All this is largely due to intrinsic defects in the construction of the zone, but also to divergent structural policies of certain countries with respect to others.

One of the reasons for the eurozone’s major economic crisis between 2010 and 2012 is that we did not create a complete monetary zone and that we did not put in place coordination of economic policies, encouraging the wealthy countries to drive growth upwards and provide fresh impetus, thus alleviating the pain for those which had to slow down. This is a great shame but I think that there is no reason why we could never achieve this. Secondly, we have no mechanism for mutualising public debt or budgetary transfers from the countries doing the best to those doing less well, as is the case between states in the United States. In a single monetary zone, in principle, these mechanisms must exist which enable excessively strong asymmetric shocks to be avoided.

In addition, upstream, due to structural policies not having been put in place by the southern European counties, the creation of the eurozone, of the single currency, has facilitated a dynamic of industrial polarisation to the benefit of the northern countries. Industrial production has partially moved to the countries which were the strongest industrially and which have thus accentuated their advantages, favoured by the creation of the eurozone. This was not done without efforts on their part, since they accentuated their advantages thanks to their structural reforms, but also thanks to the eurozone mechanics. Investments spontaneously move to where physical and institutional infrastructure (production conditions, networks of subcontractors, training, job market, etc.) are the most favourable whereas there is longer a currency risk between these countries. No more need to invest as much in production in certain southern European countries since the fear of being able to sell less in the event that they devalued their currency is gone. Moreover, since currency adjustments are no longer made, if we have no policy to help with convergence, the following phenomenon occurs: we give a bonus to the countries which are the strongest and which no longer incur the readjustment of competitiveness by the devaluation of the currencies of the other countries. This is the equivalent of a regular under-evaluation, of Germany in reality, over time.

The economic crisis of the southern countries, caused notably by this partial deindustrialisation, which has greatly contributed to the crisis in their balance of payments, has also been largely due to the single monetary policy which has resulted in creating an interest rate which corresponded to the requirements of the average of the countries in the zone and which, for this reason, for the countries which were growing the fastest and catching up, has given too low interest rates which has meant facilitating the development of, in particular, real estate bubbles or credit bubbles, very visible in certain countries, which later burst.

All this has been reinforced by the fact that the financial markets failed during the period, as from 2002 to 2009 there was no self-regulation of the long interest rates which, despite the circumstances described above, constantly converged towards the German interest rates, the lowest in the eurozone. Accordingly, the countries which constantly increased their overall debt level or their current account balance deficit, did not get a wake-up call. If the markets had worked correctly, their interest rates should have increased to ring the necessary alarm bells to ensure that countries regulate themselves better and limit their external debt and their current account balance deficit.

In fact, the lack of balanced and symmetrical adjustment mechanisms shared by all the eurozone countries, the lack of sufficient institutional arrangements (such as the coordination of the economic policies, the absence of budgetary transfers, etc.), but also the lack of structural reforms in each of the southern countries constituted the basis of the crisis which erupted in 2010. As previously explained, this was a classic balance of payments crisis, a sudden stop of the southern countries. With a stop to the mobility of private capital which stopped being poured into the southern countries whereas they were doing so naturally before that from the northern countries, which, symmetrically, experienced current account surpluses. This caused asymmetric adjustments. These countries, which did not have not the above-mentioned institutional arrangements which would have been opportune available to them, had but one possibility: to adjust downwards in isolation. By reducing their employment and social costs, by reducing their production costs, thus by implementing austerity policies, in order to reduce their imports on the one side – when demand is reduced, imports are automatically reduced – and on the other still reducing costs, by regaining competitiveness to drive their exports back up. This obviously has a high social cost and a very important political cost.

In conclusion it must be said, very fortunately, that the ECB saved the eurozone in 2012. It saved it because the ECB ended the vicious circles that had become rooted in it and which were having catastrophic effects. The vicious circle between the nations’ debt and interest rates. Interest rates which were going sky high, were increasing even further the weight of the nations’ debt, which were leading in turn to a further increase in interest rates. The ECB also interrupted the second vicious circle which existed between the nations’ public debts and the banks of the countries concerned. Since the banks held the nations’ securities, the banks increased the perceived risks as to their solvency, since the nations were in bad shape. But as the nations were obliged to refinance or recapitalise the banks, they seemed at greater risk themselves. The ECB, by various appropriate measures and stances, saved the eurozone.

But the ECB cannot permanently – and it says it itself very clearly – be the only one to bear all the efforts. It does so remarkably, but it does so to buy time from governments which have to do two things, which is also rightly and incessantly repeated by the central bank. For the southern European countries and France, structural reforms must be carried out because it is this which bring the extra potential growth and will facilitate their solvency trajectory. Germany will make no efforts if the other countries do not make structural reforms because, from its point-of-view, there is no reason to show solidarity with countries which would not make the necessary efforts to avoid being in a position to repeatedly call for aid. This is a crucial factor. At the same time – and the central bank says so too – new institutional arrangements are needed to re-establish the capacity of the euro to create wealth in the eurozone, and thus a few factors of solidarity, coordination and sharing of the steering of the zone’s economy and, undoubtedly, major European projects useful for growth.

If we achieve this we shall reunite with the promise of the euro and of Europe. France has a large contribution to make. It seems to have understood this.

Categories
Global economy

Back to Borders? The Challenge of Financial Globalisation

A speech delivered by Olivier Klein, Chief Executive Officer of the BRED Group and Professor of Economics at HEC, with Laurence Scialom, Professor of Economics at the University of Paris Nanterre, Head of the economic think tank Terra Nova, Member of the Scientific Board of the ACPR, during the third conference of the Nocturnes de l’économie, organised at the University of Paris X Nanterre by the Association Les Journées de l’Économie, on 30 March 2017.

Jean-Marc VITTORI, lead writer for the daily newspaper Les Échos

This is the third time that this exchange of views on globalisation or rather on financial deglobalisation has taken place. The world experienced a financial crisis with increases in financial trading which were extremely buoyant before 2008, and since then curves which have changed direction. What does it mean? Is it going to continue? Is it desirable? I am going to start with Olivier Klein. Olivier is a statistician and economist by training. He graduated from HEC where he teaches economics and finance. He has also been a banker for some time, and for five years, Chief Executive Officer of BRED which is the major commercial bank of the BPCE Group. BRED may well have the image of a local and regional bank, but it also has branches of the bank in South-East Asia, in the Pacific, in East Africa, and even in Switzerland, as well as a trading floor. It is thus not only a French bank. Olivier, financial globalisation, what’s the state of play?

Olivier KLEIN, Chief Executive Officer of BRED, Professor of Economics and Finance at HEC

Financial globalisation, which started around the end of the 70s, the beginning of the 80s, led to a very significant increase in international capital flows. Consequently, outstanding gross foreign assets and foreign liabilities have, for example in the United States, risen from 25% of GDP, at the beginning of the 80s – in terms of foreign assets as well as foreign liabilities, hence for assets as well as liabilities, of the United States vis-à-vis the outside world – to 150% of GDP for assets and 175% for liabilities.

With regard to France, due to the effect of the eurozone which has naturally exacerbated these phenomena, liabilities and assets vis-à-vis the rest of the world have risen from 20% at the beginning of the 80s to 300% of GDP today. The phenomenon of financial globalisation is thus very clear. From the 80s to date, the international capital market has grown beyond recognition. From 2008 until recently, a slump in GDP growth and a very strong downturn in international trade growth have been observed. It is interesting to note that this downturn did not affect international capital flows, apart from interbank liquidity flows. Interbank liquidity flows by no means reverted to the level that they had attained before the crisis.

However, with regard to the money markets, apart from the interbank markets, these flows continued to grow, even after 2008 and financial interdependence continued to increase. I will just give you an example of this, which is due, particularly after 2008, to the fact that rates in European countries and in the United State tumbled to levels that were close to zero, and occasionally even below zero, due to the financial crisis.

A carry trade phenomenon, which is well known in finance, was subsequently witnessed. As investment yields were deemed to be too low in the United States, for example, capital was borrowed in the United States and short-term investments made in emerging markets, in dollars – as the emerging markets include countries that accept the American dollar alongside their own currency – or were changed into the local currency, and in both cases were invested at higher rates than the rates that were being offered in the advanced countries of origin, the United States in this case. In so doing, they naturally encouraged growth in the emerging markets and quite rightly.

However, they also obviously created potential instability because as soon as capital leaves in search of higher short-term yields, it is also likely to flee at the slightest threat by withdrawing very quickly. This creates potential instability in emerging markets, which could be serious. This is also why in 2013, when there was a move towards limiting quantitative easing in the United States – which had facilitated the investment of enormous amounts of capital in emerging markets – the tapering announcement alone, namely the limitation of quantitative easing, sufficed to cause a sudden withdrawal of part of the capital from the emerging markets to the United States. It suddenly dried up for some emerging markets which were relying on this capital for development purposes.

This is why the Fed, the central bank of the United States, now manages its ability to raise rates or to limit quantitative easing by including this phenomenon in its calculations as it is jointly responsible for what happens in the emerging markets. However, the United States also needs the emerging markets. The Fed thus manages this in a very cautious manner, with good reason. In conclusion, the correlation between the stock markets in the United States and the stock markets in the emerging economies has risen from around 58% before 2008 to around 75% at the present time. This correlation is a consequence of this very strong financial integration. But it also displays mimicry since at some point, everything may fall or everything may rise together, which could obviously be potentially destabilising. Hence, financial globalisation has very positive effects (ability to move capital between countries with the ability to finance and countries that need finance, for example), but at the same time to potentially increase financial instability. The degree of financial instability of the system depends on the methods of regulation in place.

Jean-Marc VITTORI

This is precisely the question that I wanted to put to Laurence Scialom, Professor of Economics at the University of Paris Nanterre, a financial economics expert, a qualified member of the NGO Finance Watch, inter alia. Olivier has described this tremendous acceleration of financial globalisation in figures. He explains to us that, with the exception of one segment, namely interbank loans, this globalisation is continuing. Does it have positive effects which have often been presented as a result of these increased capital flows?

Laurence SCIALOM, Professor of Economics at the University of Paris Nanterre, Head of the economic think tank Terra Nova, Member of the Scientific Board of the ACPR

Financial globalisation was being sold to us before the crisis as providing a huge amount of benefits. It was supposed to enable better allocation of capital, better risk spreading, finance and hyper financialisation which, closely linked to financial globalisation, was meant to sustain growth. However, these promises have not been kept on the whole.

In very broad terms, the allocation of resources, international capital movements, particularly very short term ones, finance existing assets rather than real activities. They namely finance housing bubbles and stock market bubbles. This was very evident during the Asian crisis, for example. These capital inflows – notably in the emerging markets, but also in Europe before the creation of the euro – frequently had the effect of increasing the nominal exchange rate and decreasing the competitiveness of these countries. Just when it appeared to be unsustainable, there was an exchange rate crisis and capital outflows.

There are evidently problems with regard to the allocation of resources. Furthermore, the derivative markets and the risk transfer markets were sold to us as enabling better risk spreading. In fact, risk has never disappeared. Quite simply, what has in fact happened is that risk has been concentrated in relatively opaque areas. As we have seen, the crisis of 2007-2008 was the first financial engineering crisis. There had never been a crisis on this scale – the fact that a crisis created in a small segment of American finance spread throughout the world – if these products had not been packaged in securitised products which everyone had purchased as the better tranches had good ratings and did not require a capital advance, this particular crisis would not have happened.

This was a real crisis, namely a financial engineering crisis and was closely related to financial globalisation. Lastly, very recent analyses show that hyper financialisation is detrimental to growth rather than sustaining it. In fact, financial development goes hand in hand with growth up to a certain level of financial development, but all the developed countries are considerably above this level.

Conversely, financial development is detrimental to growth in all these countries. It tends to be predatory. Links have also been shown to exist between hyper financialisation and increased inequalities, namely in the analyses of Reshef, Philippon and others. None of this produced the expected results. However, paradoxically today, with the decline in interbank loans – as deglobalisation is first and foremost taking place in the banking sector and in Europe – deglobalisation is a tragedy. In fact, the resulting fragmentation of the European financial area contains the seeds of a deeper crisis, which could even lead to a euro crisis. This is actually a paradox. I believe that it is not so much a question of borders as a question of financial regulation which should be posed.

Jean-Marc VITTORI

What you are proposing to us is rather depressing because you are saying that globalisation has been disastrous and that deglobalisation is tragic… I’d like to come back to Europe because it is natural to come back there as what has happened in terms of the decline in interbank flows is largely the result of what has happened in Europe. But before coming back there, Olivier, as far as the rather critical judgement pronounced by Laurence on the effects of financial globalisation are concerned, do you share this opinion or do you think that it has nevertheless not been completely devoid of benefits?

Olivier KLEIN

I teach more or less the same thing, namely that there is quite a strong correlation between periods of financial globalisation historically and financial instability. I consequently believe that there is indeed a causal link between globalisation, when it is unregulated or poorly regulated, and the recurrence of financial crises, which have occurred time and time again since the end of the 80s, although they had ceased to exist in the developed countries during the period in which the markets were less globalised.

However, financial globalisation has also enabled, one way or another, the development of China for example. China has in fact been able to export more, by financing all or part of the current account deficit of the United States which imported its goods. It was accordingly able to base its development on exporting the goods it was producing for the developed countries. In a way and in a number of cases, with effect from the 2000s, it was because capital was circulating on the international market which countries could have used for development, not by obtaining finance from developed countries, contrary to popular belief, but by financing imports from developed countries which were coming from emerging markets. In other more classic cases, there were emerging markets that were able to accelerate their growth due to the capital that was obtained from advanced countries.

I believe that the issue is not about deciding whether globalisation is good or bad per se. That is how it should be understood, at any rate. The real issue, it seems to me, is to ask what can be done to try and limit financial instability in a financially globalised world. In that respect there are evidently a lot of questions to be asked.

When the theory is examined, it is obvious that there were some serious misconceptions inherent in the promises of financial globalisation. All things considered, it is evident that the most serious financial crises have returned. In my humble opinion, it stems from the fact that finance is inherently unstable because it is very difficult to assess a property asset by giving it a fundamental value. What is the equilibrium price of a property asset, namely an equity asset or a real estate asset? Financial markets are anticipatory.

Whenever an asset is bought or sold it is because there is an anticipation of the future trend in the price of this asset in one direction or another. These markets are sensitive to shifts in sentiment, hence to mimicry, to conventions, because the future is de facto difficult to predict as the asymmetry of information on financial assets is significant and because, as a result, the cognitive biases of the players are decisive.

However, this does not mean that financial markets are not needed as well as banks. Not only are banks necessary, financial markets are as well. Banks cannot do everything, firstly, because they have amounts of capital assets that are necessarily limited for the purpose of making loans, while observing their own solvency ratios and secondly, because financing requirements are far greater than the financing capabilities of banks.

Banks are indispensable and are the economic factors that most frequently provide stabilising effects because they are regulated and manage long-term relationships with their customers, with the aim of ensuring that they repay the loans granted and do not play on the variation in the instantaneous valuation of their commitments based on very short-term market developments. They are accordingly much less sensitive to sudden shifts in sentiment that are inherent in financial markets, which do not set a benchmark for the fundamental value shown.

However, financial markets concomitantly provide additional support to the action taken by banks in terms of financing the economy, as I have just said, as well as their ability to spread exchange rate, interest rate, credit risks, etc., as a result of the derivative markets. It should be emphasised that the division of the share of funding borne by the financial markets and the share borne by the banks is also a structural issue which partially determines the overall level of financial stability.

Lastly, it is all very well to regulate the banks themselves, but it is by no means sufficient. Moreover, at this moment we are seeing that investment funds, investment trusts, insurers, all of shadow banking generally, are starting to take risks for which they are not regulated and for which they do not always have proven expertise. In my opinion, that could present a problem in the coming years, particularly during the next real economic crisis or even during a sharp downturn. Regulation must apply to all players, otherwise it is inadequate by definition and encourages circumvention of the regulations.

Yes, of course, there is inherent financial instability. And yes, there is a need for finance. This means finding the theoretical and practical means that would enable it to be regulated as well as possible to prevent systemic crises.

Jean-Marc VITTORI

So finance is necessary. This finance is inherently unstable so it must be regulated, all the more as globalisation is continuing. What are the main sectors which require action?

Laurence SCIALOM

I think that we are now at a crossroads. We have made progress in certain areas. Banks are undeniably better capitalised but, at the same time, they had previously been so badly capitalised that even if they had tripled their capital, it would not have sufficed. I also think that there is a false sense of security, in other words to prevent the banks from capitalising further, they are compelled to issue types of debt that enable a bail-in. In other words, to avoid asking the taxpayer, a decision was made to ask those individuals and entities that have claims against the banks. These are the famous bail-in instruments.

The problem is that I am firmly convinced that this is not feasible in the event of a systemic crisis because it is likely to create mass contagion, as we have seen. In Italy, which was nevertheless a rather specific case as savers were holding securities, but the taxpayer was obviously on the front line there. But in the event of a systemic crisis, I think that it would be a vehicle for propagation purposes. Because who holds them? They are different financial players…

Enormous progress has been made in enacting bank liquidity regulations. However imperfect they are, they recognise that liquidity risk is the Achilles’ heel of banks, and particularly of European banks due to their funding structure, which is very dependent on obtaining liquidity on wholesale funding markets.
In my opinion, insufficient progress has been made in regulating shadow banking. This time, the action that has been taken falls far short of the action that should have been taken. A particularly serious issue is the excessively close ties between systemic banks and shadow banking. Interbank loans have declined, but not loans by banks to shadow banking. This is patently obvious in the latest empirical analyses of these issues.

I also think that the issue of banks that were “too big to fail” has not been properly addressed. Following on from what I have said about the bail-in, I am convinced that the implicit Government guarantees will continue to have enormous consequences for all banks. This is why I personally was in favour – and am still in favour – of a separation… but not along the lines of the Glass-Steagall Act, but rather a separation along the lines of Vickers and Liikanen, in other words subsidiary creation, with different capital ratios, different boards of directors, etc.

Jean-Marc VITTORI

Before giving the floor to the students for their questions, I would nevertheless like to talk about the specific situation in Europe. Something has clearly happened in Europe with regard to financial globalisation which has undergone a major departure from financial globalisation. Olivier, how do you explain this? How is it going to develop?

Olivier KLEIN

Europe is in fact the one place in the world which is witnessing financial deglobalisation, and this is not good news at all. My interpretation is simple. The eurozone is unfinished. I myself was in favour of the eurozone, I simply said that in order for it function efficiently and sustainably it required elements which are more than the sum total of convergence criteria. As in the US dollar zone in the United States, there no coordination of economic policies and possibilities of making either fiscal transfers or partial debt mutualisation, which ultimately also involves fiscal transfers. This has not been done.

And the markets did not notice. From the creation of the euro until 2010, they have failed to pose the right questions. Then they suddenly realised that contrary to what they had imagined – they had believed that they could look at the current account balances across the eurozone, and not for each country, that there were countries with large current account deficits which could have found it difficult to obtain funding without the solidarity mechanism within the eurozone. The markets took fright and suddenly, quite naturally, triggered a brutal, contagious and dangerous cycle of national public debt and interest rates, embroiling these countries in a vicious circle which could have triggered the collapse of the eurozone. No one was willing any more to provide funding to those countries in the eurozone with a large current account deficit. Fortunately, Mario Draghi intervened and explained that the CEB was going to protect the eurozone by purchasing public debt, then by implementing quantitative easing and last but not least by stating the famous “whatever it takes” in 2012.

Without that, the eurozone would have collapsed. Today, the fact is that the eurozone still does not have a private equity market which finances, through the surpluses of countries with a surplus, countries with a current account deficit. It goes through the euro system, through the European Central Bank. This becomes evident, by taking a closer look at the situation, in the Target 2 balances. Countries with a current account surplus are lending more and more to the central bank and countries with a deficit are borrowing more and more from the same central bank. This represents the cumulated current account positions and financial positions of these countries.

This is the way countries with a current account deficit are obtaining funding for the time being, de facto without the assistance of the markets. This is naturally not sustainable as there may be countries – and Germany is one – that sooner or later are likely to refuse to structurally fund countries with continually growing deficits via the euro system, while they themselves have growing surpluses. Even if these surpluses and these deficits are also the result of the structural setup of the eurozone as it exists today, they are nevertheless unsustainable.

We now have a situation in the eurozone where the private equity market no longer functions. Everything relies on the central banking system, namely the euro system. To enable the system to work well and for the markets to accordingly resume their role, we lack the degree of trust that is required between the countries in the eurozone and the cultural bond that could result in solidarity, even partial, between them. This would manifest in several aspects of federalism and would lead to full monetary union and hence a more stable monetary zone.

In this regard, the fact that France is implementing its essential structural reforms is the condition that is essential to enable Germany to envisage the implementation of elements of solidarity in the system.

Jean-Marc VITTORI

Laurence, I think that you have outlined the main points.

Laurence SCIALOM

Financial fragmentation in Europe today is a result of the fact that the euro is an incomplete currency. The aims of the central currency have been federalised but the fact that over 80 % of the currency that is created is banking currency has been forgotten. Moreover, Europe has banking systems that are excessively concentrated with very large banks. Of course, when the situation started becoming rather critical, the banking union was created.

What is the banking union? It means that the largest systemic banks are going to be supervised at federal level and that the problems are also going to be resolved at federal level. However, there is a third pillar which remains unresolved, namely federal deposit insurance. As long as this third pillar has not been constructed, as long as we are not out of the woods, one euro in a Greek bank will not be worth one in a German bank, for the simple reason that the Greek depositor is less well protected than the German depositor. This was very evident when the situation with regard to Italian banks became strained. You have a great deal of Italian bank assets that had been invested with banks in countries that appeared to be more robust.

As long as there is no back-stop, namely a dose of federalism, as has just been mentioned, and as long as Member States are called upon to bail in their own banks, we are not out of the woods.

Categories
Global economy Management

“Is human capital the future?”

To re-establish sustainable growth, investing in people now appears to be imperative. Three major economic developments lead me to this conviction.

The innovation economy places knowledge at the heart of competitiveness

The first, as stated by Philippe Aghion in his excellent work on growth theory, is that we are no longer in a catch-up economy, as was the case after World War II. An economy in which we needed to re-establish demand levels, standards of living and, more generally, to catch up on those countries not affected by the war in the same way as us and therefore lagging behind much less.

In the 1980s our economy entered an innovation phase. Growth is clearly still a function of the dynamics of demand but, today, it is at least as much dependent on those of supply. The dynamics of supply are a direct result of innovation and R&D capacity. These are the decisive growth factors in the modern world. Technical progress, creative capacity and the creation and development of new technologies, and even the creation of new markets, are of critical importance.

This being the case, new growth will only be attained through significant investment in human capital.

The search for added value requires higher qualifications

The second point I would like to discuss links into and concludes the first: globalisation. The emerging countries are progressing and rapidly catching up on the developed world. They have no other choice but to innovate if they wish to remain on the path of high growth.

Put simply, faced with globalisation, developed economies can adopt two different differentiation models.

Firstly, an economy with a medium level of added value, producing mid-range products, which demands low levels of labour costs and social benefits in order to remain competitive with the emerging economies.

Secondly, a route which can justify the retention of high salaries and benefits, by seeking out high added value through high-end market positioning. We’re not talking about luxury here, but of production located on the high side of the technology curve generating higher added value, which can only be attained through reforms that encourage research and development alongside significant investment in human capital.

And we have two such characteristic examples in the eurozone. On the one side there is Germany, which has enjoyed a globally satisfactory growth rate with low unemployment, a very high current account surplus and zero budget deficit. On the other side we have Spain, which has been forced to reduce labour costs to “pull through” as its output lies in the middle of the range. For all that, its major efforts have borne fruit in economic terms, but have had the all-too-familiar socio-political effects.

For its part, France lies somewhere in the middle. In reality, its added value is somewhat average and has not reformed sufficiently to move up-range, or made much effort in the area of labour costs. It therefore has an unemployment rate twice that of Germany, lower average growth and high public and current account deficits.

The search for high added value production unavoidably calls for positioning at the frontier of technology, which requires investment in training, education and, more generally, in human capital.

In this light, it is important to stress that France has not been on the right path in this regard for some fifteen years. If we take the PISA comparisons from the OECD, which measure educational attainment at the age of fifteen in writing, maths, sciences and problem solving, France, which was already only in 13th place in 2000 with 511 within the OECD, was 25th in 2012 with 495 points. It has both fewer points and a lower ranking. This says nothing for the fact that over 20% of 11-year-olds are unable to master the basic skills.

The second OECD study, the PIAAC, places competence levels of French workers vis-à-vis company requirements in just 22nd place within the OECD.

Organisational structure and management generating higher company resilience and greater employee autonomy

The third main reason, both economic and entrepreneurial, is the introduction of digital. The digital revolution facing us not only changes customer behaviour, but clearly also that of employees.

The management and organisation of today’s company has fundamentally changed. A high performing company must now meet a growing demand for autonomy expressed on a daily basis just as much by the customer as by the employee. These developments call for a world that is much more horizontal than vertical. Employees need to understand, participate and feel more involved with less strict hierarchies. We must therefore expand collaborative working environments and give more meaning to the work of the individual.

And this is why management itself must change. Managers can no longer base their legitimacy on the control of access to information but on their ability to lead their teams, by positioning themselves in front of them and not behind, happy simply to supervise. They must provide direction by explaining and involving, such that employees feel fully motivated and committed.

Here, the clear objective is to have an attractive company with loyal employees fully signed up to the corporate mission. But it is at least as important to promote a competitive model, as this offers greater autonomy to employees and all other parties. This increased autonomy is essential if companies are to maintain flexibility in the face of all the challenges of the modern world, capable of adapting quickly and easily to ensure continued survival. Structures organised more into networks, leaving greater autonomy to their constituent parts, closer to both the customer and employees, are less rigid, less fragile. Conversely, vertical and more centralised hierarchies are less able to confront rapid and continuous change. So by introducing greater autonomy into the system – clearly while maintaining overall cohesion – companies are capable of absorbing exterior shocks, becoming more responsive, more agile and globally more resilient.

In this context, investing in human capital is vital in order to anchor the individual’s capacity to exert their autonomy. It requires continuous investment in training. It cannot be imposed from above.

Counting on intelligence to “come out on top”

Fundamentally, confronting incessant competitive change means relying on intelligence. To be an innovator, a creator and not a follower, at both the company and national level, to be competitive, to find solutions to “come out on top” in the crises we know all too well, to seek out added value, to be effective, to motivate employees, to be able to tackle incessant change – all of these challenges require investment in human capital.

In all modesty, we are continually seeking to “come out on top” at BRED. The banks are going through a very difficult period confronting the threat to their revenues, notably due to interest rate developments and over-regulation. We are seeking to offer our customers higher added value. This path requires investment in our men and women. And this is precisely what we are doing by making significant investment in digitalisation, by improving our tools and services for our customers and employees, but also by investing heavily in our staff to ensure that they are fully able to understand, share and co-construct the strategy and corresponding organisational structure at every level. In partnership with HEC, we have also created an internal management school at BRED which is working remarkably well, where we notably push managers to reflect on the very nature of the role of manager in the world of today and tomorrow.

Categories
Global economy

Nocturne de l’Économie 2016 : The University for the economy of the XXIst century

During the second round-table a debate was led by Benoît Floc’h, a journalist at Le Monde, between Philippe Aghion, Professor at the Collège de France, Laurent Batsch, President at the Université Paris-Dauphine and Olivier Klein, Professor of Economics and Finance at HEC and Chief Executive Officer of BRED.

Benoît Floc’h :

Mr Aghion, how can a university be a driving force for innovation and what is its role?

Philippe Aghion :

Rather than catching up with technology, innovation is a driving force for growth. To produce leading edge innovation, what I call frontier innovation, we must generate knowledge. Silicon Valley is close to Stanford, route 128 being close to Harvard MIT, which is not by chance. Innovation is also synonymous with creative destruction. Ceaselessly, new ideas, new activities and new jobs replace the old. So, we must organise job mobility that offers qualifications and generates a dynamic employment market. Universities can play a central role in generating knowledge and promoting job mobility that culminates in qualifications.

First of all, in research, there are various rankings, various ways of assessing the performance of universities, for example the ranking of Shanghai, of Times, of diplomas – but all are valid. The countries and universities which succeed and excel in research, call on three vital levers.

First, resources – money. The United States spends $35,000 per student/annum, Scandinavia €25,000 per student/annum, but France just €9,000. And although the grandes écoles are rich, French universities are poor.

Secondly, governance of universities, and more specifically their independence constitutes a major factor for success. Universities must be able to set their own budgets and human resources policy. Those which work well have both an academic Senate, composed of professors who advise the Chair and an external “board” which meets regularly, bringing together lecturers from other universities and local personalities. These boards appoint the Chair, follow up the budget, etc.

Thirdly, it is vital to take advantage of research incentives, for example ANR (Agence Nationale de la Recherche) which finances project-based research). Emulation of this initiative must be encouraged to obtain bursaries, which stimulate excellence and enhance the quality of research.

Then two factors for mobility can be identified. In the first place, universities have a role in training teachers because, to generate mobility, students must receive a good education at both primary, secondary and undergraduate level. Secondly, we must make sure that on leaving university, students find long-term jobs which meet their expectations. Unemployment rates and the proportion of fixed term employment contracts are also indicators of job satisfaction. Universities which have the means can properly equip their students to join the professional world.

Finally, there are three significant concepts we currently ignore. First, we must offer a second chance. Failing a competitive exam should not set the scene for the rest of someone’s life. There is a need for increased diversity and flexibility in study programmes. Universities should also offer professional and general training aligned with that of the grandes écoles. There must be bridges from one to the other, in both directions and at several levels.

A second concept to introduce is progressive specialisation. In the United States and other countries, rather than immediately opting for a specialism, the choice is made progressively. Students opt for a main subject, but this may change en route. This system does not create more selection by failure, but a more gradual specialisation and improved results.

Finally, informing students on programmes and outlets is of prime importance. They must be properly informed on the worth and the standard of university teaching staff. And university lecturers and professors must be assessed – so they can improve.

These are major revolutions that should be implemented at universities to achieve excellence in terms of professional integration.

Excellence is not uniform, we need excellence in research but also in professional integration. These two aspects create growth through innovation. And growth through innovation generates social mobility. Universities which operate according to this model would generate inclusive growth.

Benoît Floc’h :

Thank you very much Mr Aghion. I am now going to hand over to Mr Batsch.
So the university can play this role in the economy, it must meet a certain number of challenges. One of the points you frequently emphasise is that the system should be freed from its chains. What do you mean by that and how far should liberation of the system go?

Laurent Batsch :

To illustrate how the system could be freed up, I am going to use two examples which demonstrate we could change to the LMD (Licence – Master – Doctorate) system, more than 20 years after Bologne.

First example, the masters. Recourse to administrative courts, opinion of the Council of State etc. The decision was made without any surprise and selection is not authorised either on entry to a Masters or between the first and second year. These are the legal texts. Political reaction: to secure what exists, with a decree which authorises retaining selection between the first and second year. In other words, we are now immobilising an academic cursus which is already rigid, as two separate years. This is inconsistent for students who must step onto the conveyor belt without any indication of whether they will be able to get off. The only reason for this situation is to avoid selective entry to a Masters in the first year: a very simple restriction which is regulatory.

Benoît Floc’h :

But entry is frequently selective? Many establishments are selective, it seems to me.

Laurent Batsch :

Selection exists de facto, but it’s illegal, both on entry and during the course. Since we don’t want to adopt a text which establishes selection for entry to a Masters, we are retaining a situation in which the Masters is divided into two parts, with the selection process deferred until mid-way through the programme. This restriction is politically imposed and so extremely easy to lift.

Benoît Floc’h :

Surely there is a contradiction between the desires to ensure 60% of a generation follow a higher education course while imposing selection?

Laurent Batsch :

We can accommodate a large number of students in a two year Master programme, if they have been prepared. The contradiction resides in the will to raise the general level of qualifications while “stopping the momentum” of students in the middle of their Masters diploma.

But I will respond to your questions with a second very interesting example, the Undergraduate Degree. It is not selective. There is a 92% success rate in the General Baccalaureate and the first grade of university study, entry to university is today offered to almost any student in the final year of secondary school.

But today, through preparatory classes, STS, IUT, 450,000 students are undertaking a Bac + 2 years course of extra studies. We have a system of degrees requiring an initial Bac + 3 years’ study. Why not recognise preparatory classes as two years of study towards an undergraduate degree? This would create a three year cycle ensuring that final year college students who take preparatory classes are not only preparing for competitive exams but also, working towards completion of a full programme. The only reason why this system is maintained is that preparatory classes are selective.

Why are there now IUT or DUT awarded after 2 years without establishing any equivalence with the curses of a university technology undergraduate programme in the LMD system? The only reason is that we don’t want selective entry for undergraduate degree. This is another regulatory impediment which constitute a blockage, a mental taboo.

It prevents the development of consistent qualifying 3 year programmes. The main victims are students, mostly those with a technological baccalaureate who are swallowed up by the university system. 6 out of 10 students do not obtain an undergraduate degree in 3 years and are offered no second chance. So, I am proposing that, on the basis of the 2 years training for a DUT, there should be a consistent, 3 year programme which prepares students for middle management positions. This is a common sense idea, endorsed by all – but which is not applied for two reasons. First of all, because the IUTs are selective, which means the undergraduate degree would also have to be selective and also very attractive. What is more, such an undergraduate degree, leading to a job at the end of the programme, would not automatically give entry to a Masters. So students wishing to study for a Masters would be recruited according to certain preconditions.

These barriers are also very simple to remove for the construction of a consistent study programme to which students could commit in the knowledge that they would be able to complete it.

A technological undergraduate degree, oriented towards employment would open up a new social pathway to success for students who are currently victims of the social centrifuge. But we don’t adopt this policy because of taboos we cannot overcome.

A final example is the absence of selection for university. In many universities there is limited capacity for undergraduate study. Students who apply for a certain highly-demand sector are drawn at random. This is an extreme form of social democracy – dividing students at random. There is a one in two chance of selecting a student of average ability with little motivation over a student who is far more motivated. This is totally absurd.

And I will conclude by stating that excellent networks, in particular undergraduate degrees, are semi-clandestine. That means you prevent certain establishments from exploiting their networks of excellence, from placing them centre-stage as internal driving forces and external forces of attraction.

We are harming both students and institutions, whereas it would suffice to remove these two regulatory barriers which are raised by purely intellectual blockages.

Benoît Floc’h :

I am going to ask you to say more about selection. For schools, Scandinavian countries – which do not practice selection – are ranked highest in PISA surveys. Inclusive teaching for all children is therefore a factor for success. Why are things different in higher education? And surely accommodating the less gifted and the best offers everyone a chance to progress together?

Laurent Batsch :

This is precisely what I am proposing…

Benoît Floc’h :

No, if you impose selection, you exclude the less gifted.

Laurent Batsch :

You cannot compare selection with cherry-picking. To express this another way, I mean there must be preconditions for one or other course of training. What I am proposing is not selection which excludes, but orientation along diverse new pathways to ensure the success and promotion of members of society who are today victims of what I call the “social centrifuge”.

The second response is the belief that higher education cannot be compared to that of school education and that not everyone can become a profession of mathematics – a standard reserved to only certain types of student. That is not social democracy and equality of opportunity.

We must not be overly naïve: children from all environments like to be stimulated. Children from so-called “difficult” environments appreciate others placing expectations on them from a young age. They like competition and we must offer it to them – because they can succeed.

It is not simply by eliminating all demands that we will achieve social democracy. Social democracy means being demanding with children in the fields in which they have as much chance of success as others, which is not exactly the same thing.

Benoît Floc’h :

I will now hand over to Mr Olivier Klein, Professor of Economics and Finance at HEC and Chief Executive Officer of BRED. You also have identified failings in the French educational system and urge us to be inspired by systems abroad to improve. Is that the case?

Olivier Klein :

Yes, absolutely. First of all, I think we all acknowledge the considerable importance of education and higher education. I am going to paraphrase my friend Philippe Aghion: in an economy which has moved from a catch-up phase to one of innovation, higher education must be the focus of investment because it is a vector for the transfer and enhancement of knowledge.

Today, although French universities have made progress in the last 20 years, all higher education in France is still struggling with inefficiency which must be tackled head-on. We must free ourselves of our intellectual blockages and move from talking to action.

A first criterion to be considered is the level of our PISA and PIAAC scores, which respectively assess the adaptation and standard of students undergoing training and their qualification for work. Our scores are average. A result which is not shameful, but scarcely an advantage in terms of international competition. In France, pay is on average, higher, so we must create more added value to justify this. We can achieve that goal by improving our PISA and PIAAC scores.

Then, unlike many other European countries, our social mobility, that is equality of opportunity, already average, has reduced over the last 10 years. This is measured by the correlation between the standard of education or revenue of parents and that of their children. Unfortunately this correlation is rising only slowly in France – evidence of reduced social mobility.

We cannot accept a system in which equality of opportunity is falling because social mobility creates a dynamic society. It mobilises resources, the best skills, etc. Equality of opportunity also constructs social cohesion, so it’s fundamental.

Sometimes we criticise the ranking of universities, world-class institutions, but these rankings exist. It’s a fact and people look at the rankings and the top universities attract the world’s elite and of course the lower-ranked establishments are less attractive. In terms of higher education establishments, France is not well placed compared with other European countries. Of the 200 best higher education establishments in the world, the United Kingdom has 34, Germany 20, the Netherlands 12, Australia (with 22 million inhabitants) 8, Canada 7, Switzerland also 7, Sweden 6 and France only 5, just ahead of South Korea.

The first effective measure would be to end premature specialisation. In France, in the final year of secondary school, students don’t necessarily know whether they want to study economics, law or medicine. French universities begin with specialisation. In many other countries studies begin with one or two more general years with later specialisation, once the student has explored several areas. In my view, this promotes pertinent orientation and reduces the risk of failure.

The second point is a very sensitive subject causing a significant intellectual blockage in France: selection. Selection means we must examine how best to orient students to reduce failure to a minimum. In France, the solution of selection by failure is widespread. More than one out of two students drop out before their second year at university. Sometimes only fifteen percent of students of a promotion enter their second year of university study. In addition, as Laurent Batsch pointed out, students enter a Masters year 1, but true selection is only on entry to the Master’s year 2. What happens to the students who are not selected? The system is not logical and indicates a problem.

There is an astonishing paradox in France, we reject selection at the universities, but the IUT and BTS are both selective. And businesses like this type of course. The grandes écoles are also selective and companies recruit other categories of employees from them. This is not healthy because selection occurs also in universities, but it’s concealed and once again, most frequently by failure and exclusion.

What’s more, this is not fair. Frequently a university has the best professors, remarkable teachers, just like the grandes écoles. Except that in the professional sector, there is an asymmetry of information between the employee and employer. It is easier for the employee to obtain information on an enterprise than for an employer to know who it is recruiting. To save time, the employer selects applicants on the basis of their academic cursus. So, for more certainty, why not simple select those applicants who were selected when starting their higher education? Of course, after recruitment, an employer can judge for itself if the person is competent. But there is less chance of a mistake with those who have been preselected.

Hence the importance of positive selection which, rather than excluding, gradually orients students towards the right programme. And we must accept that ultimately this allows including all those who wish to be included in the knowledge that not everyone wants to become a nuclear physics research scientist, for example.

Competition and complementarity between the universities operates well in many other countries. Holding a competition is intelligent since it incites students to improve and seek to achieve excellence. It also allows integration by differentiation. Competition results in the less well-endowed and less sought=after universities becoming more inventive so they stand out and adapt to their own specific fields. Absolute uniformity and equality between universities is a myth. Everyone knows, notably employers, that it’s preferable to select students from a particular university or a particular specialised Master, rather than another less valued one. So, an intelligent review is required of cooperation and competition between universities.

I also believe that academic staff should be assessed transparently, by their students. This serves as definite incentive to become a good teacher – always calling oneself into question. There should be pride in teaching well. This is done abroad. It’s done in the Grandes Écoles. It offers an undeniable advantage to the students and raises the standard of teaching.

A highly effective approach abroad is the option of joining the professional world after a few years of study, then returning to an academic programme to evolve in another area or to enhance knowledge in the same field. These students are far more decisive and highly motivated. This system keeps people in the educational loop unlike the French system – and this must change.

To end, I believe that French universities haves never really focussed on professional training. On the contrary, many grandes écoles do precisely this. Professional training requires teachers that remain part of the professional world. This brings universities and the world of work closer together and demonstrates the requirements and evolutions. It also strengthens the relations between universities and the professional world, so it becomes easier to place students in the job market. This connection is missing today, whereas the grandes écoles are very successful in forming such links.

Universities have considerable advantages and some outstanding teachers – but we must give them a chance to perform to the best of their abilities.

Benoît Floc’h :

Should more emphasis be placed on competence rather than knowledge? Should university assessments evolve towards checking that students have the right skills to enter the job market, rather than abstract knowledge, which is pointless without the contemporaneous development of skills?

Question from a student :

Yes, because we are confronted by employers whose expectations are highly specific.

Olivier Klein :

From my point of view, the good universities and the good schools inevitably create a mix. In fact, if they restrict themselves to academic study, detached from the entrepreneurial world, they will produce only researchers. Obviously the number of academic research staff required is small compared with that of students destined to work in businesses. Hence, establishments must orient their programmes to satisfy current needs.

At the same time, the best universities and the best grandes écoles avoid restricting themselves to a short-term vision. They offer knowledge, understanding and intellectual methodologies so that students, once they join the world of work, can evolve in the long term, with more success than those who have learned short term “by rote”.

I believe excellence derives from the ability to push out the boundaries and an ability to reason in the long term. Of course, the écoles, the universities, must not be disconnected from the world as it exists. They must be a correspondence between theoretical teaching and reality. But we cannot propose learning only concepts which are immediately useful to business. We need the right mix of both.

Question of a student :

I am a student, doing a double law and economics degree at Université Paris 10 – Nanterre. I would like to return to the question you were asked about knowledge and competence. You said that training given in universities is not purely theoretical but creates the ability to reason. My question will this be sufficient? Today, the main difference between the grandes écoles and the universities is the fact that the écoles mostly have partnerships with key enterprises, with universities abroad which creates mobility. This makes their training programmes more attractive from an employer’s perspective. I would like to hear your opinion, Mr Klein.

Olivier Klein :

That’s correct. But at the same time universities have set up Masters, some with a very good reputation and of high standard taught by academic research staff and others engaged in the world of business. This has brought the world of work inside such establishments. Of course, if the university programme provided for a mandatory intern year to test knowledge of the world of work, this would certainly be positive. As would offering far more exchanges with businesses and institutions abroad. This would considerably enhance the attractiveness of students on courses for employers.

To conclude, inclusive growth does not mean rejecting constructive selection, but rather rejecting exclusion by failure, as happens today. And if there is selection, it must not be purely on the basis of mathematics, as emphasised by a student, but also on desire, motivation and personal interest expressed. This should count as much as knowledge and the ability to reason.

Categories
Global economy

“Network banks enhanced by digital technology”, published in Revue Banque, may 2016

The digital revolution has transformed existing relations between individual customers and their bank. We were obliged to reinvent our business – both in terms of customers’ ongoing banking needs and our structural assets.

For each one of us, the digital age has created a new relationship with the world, a new way of conceiving time and space, another way of thinking about information, knowledge and autonomy of action. In fact, it has triggered a chain reaction of revolutions in daily life and in business. The bank – and more specifically the commercial bank – is not immune to these upheavals.

Customers rely more on the Internet and all its applications. Visits to branches are on the decline. Between 2008 and today, visits to branches have reduced by a factor of 3. However, this reduction concerns mainly day-to-day banking transactions: account to account transfers, follow-up of transactions, etc. Appointments at the branch have fallen only slightly and the decline more than offset by telephone appointments. Added value meetings have increased. This is satisfactory because we would prefer sales staff to be advising customers rather than restricted to tasks without real added value, such as handing out cheque books or managing cash. We are glad our customers use the tools available to them with increased autonomy, so our advisers can dedicate their time to customer relations which create value for both the customer and the bank.

Adapting to the new world

Yet the technological revolution has justifiably made customers increasingly demanding of their bank. If banks fail to adapt, they will be overtaken by online banks which now frequently offer more convenience at less cost, but frequently without any offer of support from a well-qualified adviser. Or physical banks risk disappearing, possibly to the benefit of more disruptive models.

Provided it can continue its metamorphosis and adapt to the new world and confront the fundamental customer revolution, added value network banks will most probably remain at the heart of the banking relationship.

In this perspective, two types of high added value developments merit a more detailed examination. First, we must offer more convenient banking which we are now doing thanks to gradual integration of digital technology and process review. Following the technological revolution, many tasks are performed online – no one wants to wait in a queue or make a pointless journey. Previously banks were not shining examples of convenience. For example, in the past, our advisers were not always easy to contact. Today, the situation has changed. At BRED, for many years now, customers have been able to contact their personal adviser directly by phone or email, without getting lost in the maze of interactive servers on anonymous telephone platforms. We must also prove we are adept at handling customer complaints or problems. This requires upgrading our practices to enhance the customer experience.

Simplicity and convenience

Improving the “customer experience” is fundamental. The customers’ dealings with the bank must be fluid, efficacious and transparent. For example, opening an account, which is very easy to perform at an online bank, must be just as easy at our bank. Another telling example for our customers – taking out a mortgage. The procedure to obtain a mortgage is already completed in a very short time, but soon our customers will be informed in advance at each stage in the process, by text or email, according to their choice. They can consult their digital case file and if necessary add missing documents directly online. All thanks to digitisation and considerably increased ease of use and convenience for customers.

We must also take the initiative vis-à-vis our customers. Our proactivity is a key factor in our success. We will be well received by our customers if we call them intelligently and proactively to discuss their needs and their projects. E-sales are also important. They must be carefully fine-tuned to match the conduct and profile of each customer. Depending on their lifestyle and problems, when customers want to approach their bank they may prefer to call at the branch and discuss a specific issue directly with an adviser, or deal with it remotely by email or telephone – but with the same adviser. The bank can then send out an agreement once the question is resolved and the sale concluded, in digital format or by post, according to the customer’s preference. E-selling is a facility our customers really appreciate.

Quality of advice

Second major topic, the quality of advice. Digital technology has also increased the requirement for advisers’ skills. Simply because access to information and comparison has become the norm on the Internet. It is obvious that 100% of our advisers cannot be 100% competent in the full product range, but 100% of our advisers are specialists in their own customer segment, so they can offer the necessary skills according to the specific needs encountered. We are continuing segmentation according to customer profiles to match the right advisers to the right customers. Obviously, the product range offered is not strictly identical for all types of customer. Personal projects, whether major or minor, may require savings, a loan or insurance. If these are dealt with separately, customers feel their plans are being split up without any overall vision. Dealing with customers’ needs on a holistic basis adds value and convenience.

The quality of advice is also largely improved by the time an adviser spends following up the same customers. Digital technology is also of decisive importance from this standpoint, because banks have an exceptional wealth of data in relation to other distributors and, if correctly analysed, this data allows for a combination of human skills and strong personal relationship with advisers with the power of Big Data and artificial intelligence – for an optimum response to customers’ personal projects. At Banques Populaires we want to offer our customers the best of the human and digital worlds. This is what we call a banking without distance, a bank which abolishes physical and temporal distance thanks to the best possible combination of technological and human resources.

True customisation

Will FinTech threaten existing banking models – whether physical networks enhanced by new technologies or online banks? This challenge should not be underestimated. Thanks to the widespread use of mobile technology and development of the ability to exploit data sources, FinTech could lay siege to various financial service market segments: credit card payments, savings or factoring. Would this result in a true “disaggregation” of banking relationships to the benefit of companies who each capture a part of the value chain? This risk was further increased by European Directive DSP2, which opens up the financial services market to all, notably aggregators, so they can act as operators. For the moment, they have not disintermediated banks which remain operators and the point of general relations with customers. They are happy to act as pure aggregators, capable of collecting together all the accounts of a customer at various banks so that at any moment they can provide an overall summary. Tomorrow they will also have the possibility of making account-to-account transfers, for example, or even offering third-party sales offers. Customers would then not need to visit their banking website, with an increased risk of disintermediation. This poses major security risks since the aggregators will need personal access codes to obtain information concerning a bank account or possibly to carry out transactions.

The question of what happens next is crucial, since widespread use may be made of services based on artificial intelligence, the famous “talking robots”, with the aim of automatically offering products to customers that are certainly relevant, since based on an analysis of all customer accounts. We can also imagine that an aggregator, combined with an artificial intelligence tool with the ability to send texts and emails to customers making appropriate proposals, could become a substitute – even a far more efficient substitute – for a personal adviser. But banks, like insurers, health funds, etc. are almost all in the process of acquiring or establishing aggregators. The excess number of aggregators may avert the feared result. Perhaps the answer resides in the capacity of each bank to have its aggregator and combine the latter with an even more virtuous customer relations model. For if we can further valorise and improve the overall relationship model, it is not certain that all customers will want to “split” their banking relations. Individuals already receive a large number of advertising emails or texts which permanently make offers, despite the development of systems to block them. Confronted by the future excess requests and subsequent saturation, telephone conversations with a qualified adviser, combined with sending relevant texts and emails by the bank, could represent significantly increased added value, specifically because there will be a positive differentiation by targeted customisation of the relationship and the specific contribution of the adviser who knows both the customer and the business. Now, for all commercial offers sent by text and emails to our customers, the sales conversion rate is multiplied by ten if backed up by a call from the customer’s qualified adviser.

Moreover, FinTech cannot autonomously develop services that will compete with some banking activities. They are forming cooperative relationships possibly by banks acquiring FinTechs or entering into partnerships to integrate some aspects of their innovations in the banking offer.

Complementary digital and physical approaches

It is very probable that the dominant model, as in all other sectors of distribution, will ultimately be complementary digital approaches – many of which are not profitable in the real world if they are the only channel used – and physical models which, if they remain unchanged, are certainly condemned to extinction. Already there has been major convergence of the human-digital mix. For example, recently Amazon announced the creation of 400 physical bookshops. We would add that banking involves dealing with finance and personal or business projects which require even more trust and a long-term relationship. We deal with highly emotional topics over a long timescale, i.e. security, assets, inheritance … and probably, human contact.

Of course, several approaches may coexist, but if we evolve rapidly and effectively, the dominant model can remain that of the bank, not classical or traditional, but a banking network enhanced by digital technology.

Categories
Global economy

“Reasoned hope within the crisis”, published in Les Échos on 19 January 2016

Accelerated changes like the ones associated with economic globalisation and the development of new technologies are all opportunities for reinventing, innovating and envisioning the world, new needs or new ways of working. These times of transition from old to new are important, as they question economic rents and promote social mobility and equal opportunities by rewarding innovation and giving an advantage to those which are not simply the products of reproducing prior cultural, sociological or economic knowledge.

However, in order to exploit the benefits of the technological and industrial revolutions currently under way, we need to unleash creative energy, to offer microenterprises the will and the chance to grow, just as much as we need to promote innovation and creation. Consequently, the quality of the economic and social environment, in legislative, regulatory and cultural terms, is crucial.

The new drivers of economic growth will almost certainly be biotechnology and nanotechnology, which, among other factors, pave the way for living longer, healthier lives and more effectively preventing or curing serious illnesses; energy storage technology, energy saving technology and renewable energies themselves, without which no energy transition or sustainable development would be possible; digital technology and Big Data for creating new services from massive data repositories currently stored but only partially used, thanks also to miniaturisation, for developing robots and other mobile and connected objects even further. All of these sectors are in a position to ensure future growth – if we use them properly and if the context of their emergence is intelligently thought out.

These hopes could indeed be thwarted by dangerous use of new techniques, which could just as easily drift towards applications that would gradually transform humans into machines or be used to establish totalitarian control of society. Their ethical and humanistic use is something that absolutely must be guaranteed. But these hopes might also be crushed if economic globalisation were to lead to uncontrollable distrust, introversion or religious fanaticism. Naturally, with the globalisation of trade, accelerated by new technologies, comes a vital need for proximity and protection, in a dialectic that is specific to human history.

In a more open, more mobile world, strengthening proximity and the protective capacity of institutions may be both essential and a generator of wealth and values – without undermining the responsibility of each individual. In the labour market, for example, flexicurity may be a response to the concomitant need for greater flexibility and risk-taking together with protection for individual career paths in an economy where mobility is more necessary than ever.

If human fears give way to listening more attentively to populist proposals or religious fanaticism, if the national framework cannot offer an open vision and, at the same time, legitimate and reasonable protection for the population, the world will close up, and fear of the future will lead to the refusal of progress. As Gramsci wrote, ‘The old world is dying, and the new world struggles to be born: now is the time of monsters.’

In order for this hope to thrive, we must fight for the virtue of our humanist values and the secularism that allows different religions to live together. But we must also trust in our ability to invent the world of tomorrow founded on an economy and institutions (labour market and rules, education, security, etc.) that are efficient and close to the people, paving the way both for innovation and for the creation of added value, on the one hand, and better job security and equal opportunities on the other. An open, fluid and dynamic society, but one that is also just and offers protection.