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Global economy Management

“The company of the 21st century”

Throughout the ages, developments in capitalism have brought about a number of different forms of corporate governance and structure which have overlapped and coexisted in the past, and continue to do so. But at each stage, certain forms have always been able to dominate. During the 19th and early 20th centuries, the countries of the West were dominated by so-called “family” capitalism, through which capital-owning families held power.

From the middle of the 20th century to the 1980s, this was succeeded by “managerial” capitalism, characterised by power being taken over by the corporate technostructure. The power of shareholding families was diluted, their shares having been partly or wholly sold off by successive generations, or the capital increased in order to deal with business development challenges by making use of “anonymous” shareholders.

In exchange for the liquidity of their capital and the possibility of increasing the value of their shares over the long term, such shareholders more or less willingly ceded their decision-making power to professional managers without any capital interest. The 80s marked the return of shareholder power within companies, although not specifically family-held, which once again aligned managers’ interests with those of the shareholders. Accordingly, to counteract the trend during the preceding period which paid too little attention to shareholders’ interests, various methods were employed to ensure that managers’ real objective was not to increase their own power and/or security, but shareholder return. Since the 2000s and their repeated crises, the question arises as to whether the 21st century will see the birth of a capitalism based on partnership capable of acting in the interests of shareholders, customers, employees and society as a whole.

These successive forms of capitalism, each replaced in turn for objective reasons, are associated with specific corporate structures. They provide an appropriate prism through which the company of the 21st century may be viewed.

Two questions must be answered:

  • Which forces drive the transition from shareholder capitalism to partnership capitalism?
  • To the extent that each form of capitalism results in a specific structure, which new corporate structures will lead to partnership capitalism?

By virtue of its excesses, notably during the 1990s and 2000s, shareholder capitalism helped lead to upheaval accompanied by major financial and economic crises as the excessive demands of ROE (Return On Equity) became unsustainable. Questionable creative accounting practices arose alongside high levels of both household and corporate debt, an accelerated pace of construction and deconstruction of groups of companies or of individual companies, LBOs, LBOs of LBOs… But also an ever higher proportion of profits to dividends to ensure shareholder return. And frequently transferring risk to employees.

The partial failure of shareholder capitalism is obviously the first force likely to lead to partnership capitalism. But public opinion in favour of greater morality in the economy remains an insufficient argument on which to base the transition to partnership capitalism which places greater emphasis on the interests of customers, employees and the company, alongside those of the shareholder. Each major crisis is accompanied by a resurgence in morality. Yet the crisis phase is followed by a sort of blindness to the disaster and the progressive repression of its causes. And events once again take up their previous course. The fact alone of the occurrence of a crisis in shareholder capitalism does not seem to be sufficient to explain and understand the appearance of partnership capitalism, although it constitutes an undeniable factor.

A number of fundamental and enduring forces appear to me to lay behind the transition. The first of these, which gives rise to the others, is the technological revolution.

It has first of all brought about a commercial revolution which is transforming relationships between producers, distributors and customers. Customers have seen their power increase significantly as they enjoy greater freedom of action, are better informed, have more data, are able to compare prices and therefore have greater freedom of choice. The customer therefore obviously becomes the focus of interest for companies. This is why many companies have for some time been developing a customeroriented approach, as though it is a completely new idea.

Power relationships have accordingly been turned around in favour of the customer. Yet in many economic sectors, this phenomenon is also perceptible between producers and distributors, whose position has been strengthened. The transfer of power to the customer has put an end to the traditional hierarchy born in the 20th century based on the ability of the producer to impose its products on selected distributors and on that of the distributor to impose the very same products on consumers.

It is now the customer who holds the power. Accordingly, if the distributor has a good understanding of their customer, if they know how to use their “big data”, if they develop effective CRM (Customer Relationship Management), if they are therefore able to anticipate and fulfil individual customer needs, if they finally consider the customer to be an “active consumer” capable of joining in the process of researching the right combination of products and services, then the distributor will be able to find the right solutions for each individual customer and retain their loyalty. Service even takes precedence over the product itself. We are no longer in an economy centred primarily on the product, but a world in which utilisation and service are becoming more important than ownership of the product itself.

For example, applications are more important than the telephone itself. Bicycles can be hired for individual journeys and even the car is going down the same route. The Cloud is progressively rendering ownership of large computers obsolete… The quality of the relationship with the salesperson or advisor and the ability to find individually tailored solutions, in other words good service, are taking the place of the product as such. This being the case, the distributor is therefore able to hold power over the producer by introducing competition from other producers to find the right combination in terms of both price and quality of products and services which best meet the needs of the individual customer.

A transformation of the historical forces is therefore currently emerging in numerous sectors between producers, distributors and consumers. This evidently requires excellent customer management on the part of the distributor. But the distributor will be severely undermined if it is not able to understand customers and obtain their loyalty, all the more as it is now possible for the producer to sell directly. Poor quality of advice and the inability to offer better combinations of products and services tailored to the individual will directly lead to the complete automation of the customer-supplier relationship and the disappearance of the economic role of the distributor. With the emergence of a direct producer-client relationship, wherever this is feasible, or with the emergence of web-based pure-play distributors, low-cost customer relations are formed.

The technological revolution also brings changes in employee behaviour which place them at the centre of the company, with organisational implications. Vertical hierarchies are now increasingly less acceptable and much less relevant. Today managers can no longer be credible and lead their employees if their authority is not based on the value they bring to their teams, as opposed to being a repository for information which is nowadays freely available, circulating throughout the company. It is therefore no longer possible to be a manager by exclusively relying on your position within the hierarchy.

At the same time employees expect greater autonomy, sustained and enhanced by the technological revolution, which poses the question of entrepreneurship within the confines of the company itself. Developing the spirit of initiative has become a major issue for large companies, even though in essence they reduce it to a bare minimum by virtue of the organisational structure itself. Today individual employees aspire to understand the nature of their contribution to the company, they want to buy into the strategy and the chosen organisational structure in order to be able to share the corporate vision. It is vital that management takes account of such aspirations.

Moreover, very hierarchical and vertical organisations which emerged during the managerial capitalism and dominant technostructure phase have become much less effective and much more difficult to manage:

  • They are less effective at mobilising employee resources as managerial proximity is now more crucial than ever;
  • They are more rigid and less flexible, no longer in step with an increasingly complex world and environment. Increasing complexity and more numerous and more intense exterior shocks demand greater flexibility from organisations, just as with individual and team autonomy, in order to be able to react promptly and to skilfully manage dysfunctionality and effectively adapt to the new reality.

Nowadays, size and centralisation result in entropy. Conversely, companies organised in networks spanning the various parts of the company or different companies are more adaptable, more effective. The centralisation/decentralisation equation is now increasingly tipping in favour of decentralisation.

Furthermore, with the commercial relationship becoming of central importance, the organisation must be fully oriented towards the customer, from production to sales, from front office to back office. The development of sales staff skills in order to enhance their ability to manage customer relationships and to provide them with greater autonomy, enabling them to be proactive with each and every customer, is now becoming imperative, the objective being that all sales employees should find themselves in an entrepreneurial situation, managing and enhancing the value of the assets entrusted to them, and with the necessary tools and responsibilities. And consequently with greater job satisfaction and the ability to get results.

Greater managerial proximity, a better understanding of customer expectations, openness to an entrepreneurial working mode, a high capacity to absorb shocks, changes and complexity; such are the ingredients for the company of tomorrow.

Should greater emphasis be placed on the technological revolution which now more than ever requires managers to consider their company’s reputation, and the aspirations of society as a whole, as it has become impossible to operate without comments permanently appearing on the Internet about what the company is and does? Or about its environmental impact, or the quality of its products and services…? The social factor must therefore be treated very seriously with society becoming a genuine stakeholder in the company.

Effectively, all companies are biological organisms and, like all biological organisms, live in a state of permanent compromise, striking an unstable balance between order, verticality, uniform management routines and, on the other side of the equation, individual autonomy, initiative, the need for entrepreneurship…  The balance is currently tipping clearly in favour of the second part of the equation, to the detriment of the first, even though elements of both are indispensable.

In conclusion, the transition to partnership capitalism requires the modification of corporate structure and reserves a place of honour alongside shareholders for customers, employees and society. Happily this is not only due to the failure of the previous mode of governance and corporate structure and to a temporary resurgence of morality, but to a commercial, behavioural and managerial revolution, itself based on technological developments. These are very powerful, enduring and dispassionate forces which, it can only be hoped, will lead to this new form of capitalism.

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Categories
Economical policy Global economy

«Lack of growth and lack of reforms: time for action»

The structural reforms capable of improving growth potential and the efficaciousness of the economy are today well known. The question is not one of political left or right. There is an economic and social urgency for stemming French decline and defending our model by rendering it sustainable. Why are we experiencing so many difficulties in resolving the twin problems of the French economy, lack of growth and lack of reforms? 

Our conflictual culture – left/right, employers/employees, rich countries/poor countries, multinationals/peoples etc. – should no longer blind us from reality and the need to deploy necessary and tangible concrete solutions. 

Another hindrance on reform: a historically super-powerful centralising government. This organisational structure, once useful for France, is no longer adapted to a global economy and a society organised in networks. Digital technology has changed the relationships with authority. By its omnipresence, the State intermediates in the relationships between each citizen and society, between each citizen and other citizens. Instead of feeling responsible towards the collectivity, the individual expresses strong demands of Government. Everyone then rejects reforms, distrustful of the reality of the effort required from others and questioning the inability of the State to take charge of all problems. 

Simultaneously over time, powerful corporatist interest groups have been established. Trade unions are not truly representative within private enterprises. The result: a vacuum of social construction, a kind of “social corporatism”, duplicated by “social technocracy”*. This makes it difficult to think in symmetrical fashion of one’s duties as well as one’s rights and to accept reform. 

Add in a historic cultural heritage which frequently makes compassion the alpha and omega of political action and media debate and prevents us from seeing things as they truly are or giving ourselves the means to correct the situation. Declining competitiveness, high unemployment, the exclusion of far too many young people from the labour market, increasing inequality of opportunity, average skill levels too low relative to other countries… Confronted by the reality of the facts, compassion cannot serve as a policy and exempt us from overcoming a certain number of fixed ideas and specifically French ways of thinking. 

Fortunately the French are becoming aware of the limits of inadequate competitiveness. Rules which are too restrictive. Abuses which are all too frequent and uncorrected. And permanent public deficits caused by a public sector which has long not adequately strived for efficiency in the system, resulting in expenditure of GDP (and so of taxes) among the highest in Europe, whereas the quality of public services is only average. 

Our citizens are now learning, on the strength of the examples set by foreign neighbours, the benefits of the reforms needed to end this suicidal downward spiral and to protect our way of life and our standards of social protection, to enable the happy and necessary conjunction of living in society and fostering entrepreneurship. In a society founded on fairness. 

This new awareness should allow governments to combat the specifically French atavisms and to find credible answers to questions so that the French cease to be one of the most pessimistic populations in the world regarding the collective future of their country. 

Relying on public opinion, perhaps daring to conduct referendums to counter corporatist opposition, the government must have the courage to find the way towards change, to explain implications and to convince the population. A reduction in public expenditure is of course a must, but with an overall plan for effective reorganisation of the public sector. But again, reform must be free of ideology, notably with regard to the employment market and the pension system, to take into account the increase in life expectancy and to balance the books. Finally, competitive policies must be implemented, notably by reducing taxes and the social security contributions of enterprises. All these changes together will make possible, despite our constraints, long-term protection of our standards of living and social protection, combining in the medium term an increase in growth and a reduction in public deficits. 

There remains one key element: how to formulate the right programme and the right support. We must trust that if the pathway followed is virtuous and resolved, the rate of change will be adjustable.

*Expression coined by Denis Olivennes

«Complement to the article : 13 graphs»

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Categories
Global economy

«The financial crisis: lessons and perspectives»

I will structure my presentation around three main strands:

  • The causes of the major financial and economic crisis of 2007-2009
  • The causes of the Euro Zone crisis
  • The lessons. What lessons can we learn? Have we learned them? Has the crisis been resolved or could it recur?

I)  The causes of the major financial crisis of 2007-2009

Let us travel back in time to try and explain the origin of the crisis. A good starting-point is the violent crash of 2000 caused by the burst of the dot.com technology bubble. In June 2000 the CAC 40 was at 7,000 and in March 2003 it was at 2,300. So we are looking at a gigantic stock market crash. Recall that between 2000 and 2003 – namely in 2001 – the 9/11 attack in the United States further undermined the foundations of confidence. Then in 2002-2003 it emerged that a number of enterprises, including some of the biggest, had given in to the temptations of creative accounting. Remember the falsified accounts of ENRON, WORLDCOM or PARMALAT, for example. This triggered a significant crisis of confidence and a violent credit crisis since in 2003 liquidity almost vanished from the corporate bond market. Almost all major groups were hardly able to borrow at all on the financial markets and their risk premiums increased to dizzying heights.

This combination of events caused severe recession and real fear of deflation. Fortunately, the US Federal Reserve and various other central banks reacted strongly and fairly rapidly by pumping in liquidity and reducing rates. Remember that in 2000 the Federal Reserve’s reference rate was 6%-7% and in 2003 it was just 1%. Interest rates were divided by almost a factor of 7 over a very short timescale. This is also a measure of the extent of the crisis. Thanks to the vital intervention of the Federal Reserve and other central banks, there was a low interest environment until 2004, avoiding an even deeper world recession. The action on interest rates in fact supported not so much the stock markets but the property market, thereby generating a psychological “wealth factor” which enabled the American consumer to serve as the “consumer of last resort”. Then, at the end of 2003 and early in 2004, growth was restored.

The second contextual aspect is globalisation which also contributes to explaining the 2007-2009 crisis. Globalisation was clearly the fruit of the emerging countries which in the 2000s opted for a very different development model from that adopted by the Asian countries and which proved its limits with the 1997-1998 crisis.

The latter model was based on domestic consumption but was held back by the constraints of current trade balances and the abrupt fall in previously excessively buoyant capital markets. In 1997, short-term capital investments in emerging countries, made in search of higher yields, were suddenly withdrawn – creating panic.

The emerging countries and notably those in Asia learned their lesson and sought another method of development more favourable to them. They adopted a model based on exports by seeking out demand in the developed countries. This was totally legitimate and rationally based on their comparative advantages – i.e. low labour costs and therefore highly competitive prices in certain product ranges.

The model was also developed on the basis of undervalued currencies to facilitate exports and therefore support growth dynamics. In the 2000s, the production capacities of the emerging countries increased sharply From then on, world supply was confronted with significant production overcapacity since during the same period the developed countries, which in consequence faced competition for their own production in certain product ranges, did not reduce their own production levels proportionately. Internal demand in the emerging countries was not yet driving world growth via sufficient extra demand.

World supply of goods and services exceeded demand with, as a corollary, high levels of savings worldwide, exceeding investment. This is what Bernanke, the former president of the US Federal Reserve, when he was still a professor, referred to as the “savings glut”. In fact, the emerging countries themselves saved a great deal since they consumed little and enjoyed increasing revenues. They generated significant excess savings which were not sufficiently absorbed by a concomitant increase in domestic investment. Interest rates were structurally low because the world’s financing capacities exceeded the financing requirement.

At the same time, real wages in the developed countries increased very little or not at all, since worldwide wage competition in given sectors of activity and in the product ranges concerned prevented any ongoing regular increases in purchasing power. This resulted in very low inflation and very low interest rates.

The third contextual element: automatic refinancing of the American current trade deficit which was the counterpart of the above. China, the oil-producing nations and other emerging countries decided, as we have just seen, to expand growth by increasing exports with domestic consumption remaining low. They experienced growth of their current account balance of payment surpluses.

Symmetrically, the United States in consequence experienced current account balances which were increasingly in deficit. But, with in addition exchange rates deliberately kept low, these accentuated deficits did not act as a constraint for a very simple reason: as the Chinese accumulated currency reserves through the build-up of current account surpluses, they invested them in the United States. So that capital shifted spontaneously to the United States, fundamentally painlessly financing the increase in American debt (of individuals, companies and even States).

There was a kind of automatic recycling of surpluses from the emerging countries to the countries running deficits – primarily the United States. Long-term interest rates, here again, remained very low, since additional American debt was refinanced without any difficulty and without tension. Then in early 2004, as growth was restored, although the Federal Reserve increased its short-term rates significantly, up to 5%, long-term rates rose little or not at all. This historic de-correlation between the movement of long and short-term rates aroused a reference by Greenspan, then the head of the American Central Bank, to a “conundrum”, that is an enigma. The enigma was as follows: “How come that whereas the Federal Reserve significantly increased its short-term rates, the long-term rates did not automatically increase?”. The reason was probably not such an enigma as we have seen.

The consequence for private borrowers was that debt was greatly facilitated by rates lower than nominal growth rates from 2003 to 2007. In a way it all happened fundamentally as if the world overproduction created by unregulated globalisation had been concealed by means of increased consumption in the developed countries, except that it was on the basis of progressively unsustainable debt ultimately resulting in a real situation of excess debt. The all-round increase of debt against a backdrop of stagnating purchasing power in the developed countries sustained – in a highly artificial manner – growth levels which otherwise could not have been achieved.

In 2000 household debt in the United States was 100% of disposable income and in 2007 it was 140%. In Spain or Great Britain it increased from 100% to 170%. In France it increased from 55% to 70% and in the Euro Zone, from 65% to 85%. The only country which did not experience an increase in household debt was Germany: 70% in 2000 and the same in 2007.

Company debt also increased significantly between 2000 and 2007. With the return to growth from 2004, borrowers and lenders entered into a euphoric phase and forgot the traditional rules of prudence both concerning debt levels which exceeded their historic average and risk premiums which reduced dangerously, as for all credit bubbles. This was the effect of a well-known form of cognitive bias referred to as “disaster blindness”.

In fact, as the last great crisis becomes more and more remote people forget that a new large-scale crisis could recur and they also forget the disastrous consequences. The more time passes, the more probable becomes the return of a catastrophic crisis. As a result, in the financial sphere debts are gradually accumulated along with vulnerable positions which obviously turn out to be dangerous when the bubble bursts after the economic downturn. Banks and market lenders ease the conditions for granting credit, require fewer guarantees and accept lower margins. Selection becomes more lax and leverage increases. In parallel, borrowers forget the elementary rules of prudence.

It should be added that from the mid-1990s there was a phenomenon which accelerated in the 2000s and which facilitated high debt levels: securitization. Securitization consists in removing loans from the balance sheets of lending banks and converting them to packages of debts sold to financial investors or indirectly to individuals.

From 2005, securitization experienced exponential growth, notably at American banks. Unregulated securitization occurred in the most anarchic way possible. There was securitization of non-homogeneous debt, securitization of securitization… The complexity contributed to the opaque nature of the practice and made it very difficult to assess the true value of these investments. In addition, securitization allowed certain banks to shrug off any sense of responsibility for the loans they were granting.

If a bank grants a loan which it then securitizes and sells shortly afterwards, it can exonerate itself both from any serious risk analysis of the borrower or any monitoring of the borrower. It is part of the economic role of banks to monitor and advise customers, if only to avoid excess debt for both companies and individuals. In certain banks, a kind of conduct known as “moral hazarding” became endemic inasmuch as their own actions generated excess risk for the economic system.

Finally the general dissemination of securitization packages, whether to non-professional investors or those who were supposedly knowledgeable, resulted in general uncertainty as to who bore the risks and what were the effects, systemic or otherwise, of the situation: to sum up, there was no prudential supervision. Traditional financial and economic theory, which assumed that a broad spread of risk is better than a concentration of risk at banks even supervised and professionally trained to manage risk, was proved to be totally wrong. The devising of increasingly more sophisticated instruments (CDOs, CDOs of CDOs etc.) enabled many investment banks to reap increasing revenues since they were the financial engineers behind the products.

In America, the paroxysm of securitization consisted in setting up various types of subprime loans. In many cases, real estate loans were offered to people without revenue to repay them. These were referred to as NINJA loans “No Income, no Job, no Asset”. Everything was based on the idea that the price of real estate would permanently increase and that it would suffice to sell the asset to reimburse the loan, regardless of regular household income. When securitization was revealed to be problematic, the holders of the securitization vehicles, seeking to obtain reimbursement from the debtors, occasionally realized that even contractual documents did not exist. So it was not only “No Income, no Job, no Asset”, but sometimes “No Document” either.

Investors, whether individual or specialist, had been trapped by a classic cognitive bias: the anchoring effect. In fact, until the end of the 1980s, long-term interest rates were set at very high levels. These rates reduced regularly and significantly in the 1990s and 2000s. Investors had in mind (this is the anchoring effect) much higher yield rates than those they were offered which were compatible with the prevailing economic growth rates and inflation rates. They wanted a yield offer satisfying their expectations and they did not trouble to understand how such “abnormal” yield rates were possible, i.e. at the cost of overlooking the level of risk intrinsic in the investment, with high debt levels or cascading debt, for example. Some companies agreed to increase their level of debt to present a return on equity compatible with investor expectations – sometimes through recourse to accounting and financial acrobatics.

The period 2003-2004 to 2007 was a euphoric phase, not very different in reality from the euphoric phases of the 19th century or the first half of the 20th century. These phases comprised credit bubbles, real estate bubbles and/or stock bubbles. In a recent phase, there was a real estate bubble and a credit bubble, which were self-fulfilling prophecies. During all these euphoric phases, blindness to disaster (“disaster myopia”) was amplified. Preventive reactions were dulled as time passed, therefore causing a very real possibility of a return of crisis.

To conclude this first part, note that the 2007-2009 crisis was history repeating itself, aggravated by a new development in the form of securitization. There was an extraordinary real estate crisis notably in the United States, England and Spain. At the same time, there was a debt and leverage crisis, followed naturally by widespread disposal of debt and deleveraging which is still continuing and indicates that for some time, growth will remain very low. Add to the mix the major liquidity crisis which then emerged, intertwined with the real estate crisis, the credit crisis and that of debt.

In 2008, there was a liquidity crisis of extraordinary violence. Confronted by the fundamental uncertainty as to who held what, and on the very content of securitization instruments, no-one was prepared to lend to anyone. Notably the inter-bank market was totally frozen. If the central banks had not intervened on a massive scale, there would have been no more banks. A very serious liquidity crisis also occurred in 2010-2011 for banks in the Euro Zone.

From 1987, badly regulated financial globalisation de facto caused the reappearance and repetition of systematic crises combining the aforementioned three types of financial crisis.


II)  Analysis of the Euro Zone crisis

I will now analyse the Euro Zone crisis. It could be said that the Euro Zone crisis was a consequence of the previous world financial crisis. I am not in total agreement with this statement. Although various arguments may hold true: governments were confronted by public debt which increased following the 2008-2009 crisis and some of them contributed funds to their banks to save them, and growth collapsed, so these governments sought to counter the cycle and spent a great deal more, which was relatively legitimate.

However, in European countries, the increase in expenditure was combined, in some cases, with long-standing pre-existing public finance deficits. In France, for example, the budget had not been balanced since 1974. I am a great believer in the efficacy of budgetary policy and the utility of public deficits, but subject to one single condition, that they are temporary and that when the economic climate improves, surpluses are generated. This allows incurring debt at an appropriate time and reimbursing the excess debt when times are better. Permanent deficits, in reality, exhaust the budgetary policy for when public debt is too high, the budgetary weapon can no longer be used. The public debt crisis in the Euro Zone was not a simple consequence of the previous financial crisis, since the same increase in the rates of public debt, following that of private debt, did not pose the same fundamental problems in the United States, Japan or elsewhere. This problem was idiosyncratic to the Euro Zone. Why?

As a consolidated entity, in fact, the Euro Zone did not experience a problem. Its situation would have been even better than that of the United States and significantly better than that of Japan. The creation of the Euro Zone was an interesting and forward-looking gamble, provided the missing vital ingredients were added or that only countries experiencing long-term strong economic convergence were admitted.

Two schools of thought opposed creation of the Euro. One imagined that, according to the history of the creation of Europe from the outset, economic progress would drive political progress. In fact, if a monetary zone incorporates countries which are not all similar in terms of economic standards or their economic climate it is vital, if the monetary zone is to function effectively in the long term, for it to possess three attributes:

  • Coordination of the economic policies of the countries comprising the monetary zone;
  • A fiscal transfer system which allows, as in the United States, assisting a State in temporary difficulty thanks to the existence of a federal budget;
  • Mobility of labour between the various countries according to the development of their reciprocal economic climates, to prevent building up unemployment zones in countries experiencing more difficult economic times.

Under these conditions, creation of a single currency facilitates both intra-zone trade and stable expectations of economic players. But above all, it is strongly advised to analyse the current account balance in the periphery of the monetary zone and not that of each constituent State. This would immediately avoid restricting the growth of a country experiencing a more favourable economic climate than the others, for example given its demography, whereas if an external constraint is exercised within its own boundaries, the growth differential would immediately result in a deficit in the current account balance that sooner or later would require a restrictive policy to restore its balance of imports and exports. A good example is the various States in the United States.

Unfortunately the Euro Zone does not have any of these attributes:

  • Mobility of labour: in Europe this is hindered because different languages are spoken. In the United States everyone speaks English. This facilitates mobility. Historically, geographical mobility is stronger in the United States than in Europe;
  • The coordination of economic policies: in Europe there is no economic government. Only France seems to desire a European Economic Government, irrespective of the political shade of that government. There is therefore, properly speaking, no well-constructed mandatory coordination of economic policies, which would allow, if applicable, organising recovery in Germany while obliging the Southern European countries to slow down to restore their budget balance, thereby reducing the economic and social effects of the slowdown;
  • Budgetary transfers: the European budget is approximately 1% of the GDP of the European Union. And none of its countries and populations exhibit solidarity with the others or accept the idea of the transfers necessary for satisfactory operation of the monetary zone. Obviously for such transfers to occur, a necessary but unfortunately insufficient condition is establishing federalized supervision of national budgets. In fact, no population can exhibit solidarity if it believes there is no basis for that solidarity, or may even encourage other populations to exercise no self-discipline and promote morally hazardous forms of behaviour. But the supervision condition is not adequate and manifestly for historical reasons and certainly for reasons of political will, Europe lacks both the desire to share and to manifest solidarity between Nations, any sense of belonging to the same community of shared interests.

Without mobility of labour or coordination of monetary policies and budgetary transfers, the only method of adjustment in the event of an asymmetric shock between countries within the zone is for countries in difficulty to seek out the lowest-cost social, economic and regulatory solutions. Internal devaluation is the only option since adjustment by movement in exchange rates is no longer possible. This new method of regulation and adjustment leads to a lack of sustainable growth in the Zone and to medium or long-term social and political difficulties given the permanent obligation to adjust downwards.

This does not at all imply that countries in a zone of full monetary union can allow themselves to become lax or avoid structural reforms essential to the search for competitiveness and an increase in their growth potential. Nor would full monetary union in the zone exempt them from efforts to eliminate the unsustainable nature of their deficits and public debt. But even assuming that all countries had carried out structural reforms, it remains the case that an incomplete monetary zone, i.e. one without the aforementioned attributes, inevitably leads to deflationary pressure within the zone. The Euro Zone is incomplete and has dangerous bias.

The second school of thought on creation of the Euro Zone was based on the premise that any form of federalism was not desirable and not realistic. The attributes of a complete Euro Zone could not, in their view, be envisaged. The solution was to ensure that all countries participating in the zone were similar and shared the same economic climate. This required respecting convergence criteria (on rates of inflation, public deficits and public debt) at the time of entry to the zone and subsequently. By adopting this view the second school of thought also made several errors as has been proved over time.

The first error was to allow entry to the zone of countries which were not convergent. Either because they were “creative” with their statistics and people were unaware, or even because that was the case and was known to be the case.

The second error was the failure to grasp that a monetary zone would probably result in industrial polarisation. With a single currency, by definition there is no more variation in exchange rates between the participating countries. This gives companies the possibility of producing exclusively in a single country in the zone to take advantage of optimum production conditions. These companies need not be located in the major countries with a view to avoiding exchange rate fluctuations capable of vitiating the competitiveness of their production plants.

We should add that a single monetary policy for countries experiencing divergent situations can aggravate the divergence. In Spain, for example, which experienced a higher inflation and growth rate than Germany, the interest rate fixed by the European Central Bank for the whole zone was below that desirable for Spain itself, which permitted painless debt and fostered the property bubble. In the long term, the growth rate was driven in Spain by growth of household and corporate debt.

The third error was a market error. Financial markets, contrary to the traditional theory, are not omniscient. They are not permanently wrong, but they are frequently wrong. In this case, with the creation of the Euro Zone, they believed that the Greek or Spanish current account balances did not need to be supervised as such. In fact they conflated the long-term rates of all the countries in the Zone towards the German rate. In consequence, there was market seism, no warning concerning the unsustainable trajectories of certain countries in the zone. The markets failed to play their role. If, prior to occurrence of the crisis, the markets had sounded the alarm bells by increasing long-term interest rates to warn that the risk was increasing, given domestic debt and current account deficits that were difficult to sustain, macro-financial constraint could have been exercised upstream and avoided all or a part of the crisis.

In 2010, the markets suddenly became aware of the increasing divergence in the Euro Zone and of its incapacity to self-regulate. Both schools of thought had in fact been proved wrong. No solution for this type of situation had been envisaged by any of the public authorities within the Euro Zone. As a result, for too long, the Greek crisis was simply denied. When it was acknowledged as a serious problem, too much time had elapsed to deal with it.

But above all, given the absence of the aforementioned attributes constituting a full monetary zone, we have not experienced any true economic coordination or assumed transfers of public subsidies from the more favoured countries to the less favoured countries, as occurs to good effect in the United States.

Apart from the specific question of Greece, which had failed to respect the basic rules and to show economic common sense, the only method of adjustment in the Euro Zone was to ask for a considerable effort in each country in difficulty to reduce public expenditure, increase fiscal pressure and restore competitiveness through internal devaluation of the zone by reducing costs.

This certainly resulted in a weakening in demand which, in turn, reduced imports with a drastic reduction of the current deficit. But this type of policy, in addition conducted by several countries at the same time, inevitably results in a widespread slowdown in growth. Tax receipts are linked to growth levels. This creates a kind of high-speed chase with on the one hand, a reduction in public expenditure combined with compression of costs and increased taxes and, on the other, reduced tax receipts caused by the induced slowdown of growth.

However, this does not mean that structural reforms were not strictly essential for the countries concerned, for only these reforms could increase growth potential and bring about an underlying restructuring of the situation with a change from growth driven by debt to growth based on productivity gains, innovation and mobilisation of the working population. However such structural reforms, to be successful and accepted, must be accompanied by an economic policy which is not in itself depressive.

The Euro Zone, confronted by the lack of institutions permitting regulation, experienced two vicious circles.

The first vicious circle was that of public debt and interest rates. The domestic competitive devaluation policies and reduction in public expenditure, as described above, reduced demand and weakened growth which, in turn, prevented collection of taxes at the anticipated levels and therefore any reduction in budgetary deficits. Public debt continued to increase and the financial markets became increasingly mistrustful of the sustainability of the trajectory of public finances of the countries in question, then suddenly increasing the long-term interest rates in these countries, thereby causing a spiralling increase in their public deficits since governments were obliged to borrow at increasingly high cost. The first vicious circle was then fatally formed.

The second vicious circle was that which links countries to banks. European banks, in general, hold the debt of their State but also, given the financial integration caused by creation of the Euro Zone, that of other States in the zone. When some of these States are considered as excessively in debt, the corresponding assets of the banks are considered as potentially toxic. This then triggers the following vicious circle: the financial markets are distrustful of the banks in question and lend to them at much higher rates, or lend far less capital, which makes them far more vulnerable. This makes the States appear even weaker, and eventually under an obligation to save their own banks. This triggers increased distrust vis-à-vis the same banks.

We have broken out of these two fatal vicious circles thanks to two measures. The first: Mario Draghi launched a vast programme for supplying liquidity to European banks (VLTRO) and, in 2012, announced that the European Central Bank could buy public debt of States in the Euro Zone if their interest rates were too high and speculatively moving away from a balanced rate. Mario Draghi added: “Whatever it takes”. By this announcement, the President of the European Central Bank successfully calmed the markets, allowing the long-term interest rates of countries in difficulty to return to a more sustainable trajectory, i.e. to a level closer to that of nominal economic growth. Ultimately the European Central Bank holds significantly less public debt of Member States than reciprocally the Bank of England or the US Federal Reserve.

The second measure was the establishment of European Banking Union. This incorporates three elements. First of all, so that solidarity really works, federal supervision must be accepted. Therefore, supervision of the major European banks has shifted from the national to the federal level, i.e. to the European Central Bank in Frankfurt. Solidarity operates on two levels. After having applied the “bail-in” rules, i.e. to re-float banks in difficulty via their own shareholders and creditors, a pooled fund between European banks to save any bank still in serious difficulties may be established. The second pillar of solidarity: an inter-bank guarantee fund for customer deposits.


To conclude

Is it possible to believe today that all the fundamental problems of the Euro Zone have been resolved? Short-term confidence is in order principally because the European Central Bank is credible in its determination to intervene if the situation should deteriorate. But can the Euro Zone countries concerned recover thanks to the time Mario Draghi has so skilfully bought for them?

Many so called “peripheral” countries in the zone have significantly improved their current account balances. Time seems on their side. But, on examining the situation more closely, as we have noted previously it was essentially the reduction in demand which had an effect. Restructuring of production facilities and reindustrialisation, if it occurs, will only be slow. Debt reduction of economic players, whether public or private, also takes time. The consequence is a very low level of growth for a significant period, with correlated unemployment rates. The question is therefore one of the patience of populations regarding these long-term phenomena. The increase in populist movements and anti-European feelings is not unexpected. Once again, this is not a calling into question of structural reforms which were put off for too long and were strictly necessary, but merely underlines the difficulty of reducing expenditure and reducing the debt of many countries simultaneously and rapidly.

Finally, will there be other financial crises? Our opinion is that these are inevitable in the world as it currently is. On the one hand, because finance is intrinsically unstable and we have long experienced, for the last thirty years, financial cycles followed by euphoric phases with credit bubbles and asset bubbles – notably involving equities and real estate – and then depressive phases with the bursting of these bubbles, reappearance of a liquidity crisis and then a major financial crisis.

Financial and banking regulation is necessary, but even assuming it to be perfectly efficacious, it would simply smooth over the ups and downs without eliminating the sequence of up and down phases. On the other hand, prudential regulations themselves are not exempt from errors. From time to time, they seek to correct the causes of a previous crisis but underestimate future causes. Finally, in some cases excessive or poorly judged regulation can itself increase the cyclical propensity of finance, or even trigger the next crisis.

In our opinion it is possible to attenuate financial instability through good measures and prudential good regulation, but it is illusory to imagine instability can be eliminated. Also, it is absolutely vital to regulate the banks. But it would be dangerous to seek to reduce the risks they take to excessively low levels, since their economic and social utility resides in the fact they are risk centres – for credit, interest rates, liquidity etc. – and that they are responsible for professional management and supervision of those risks. It would probably cause even greater instability to shift the risks outside banks into “shadow banking” and hedge funds not subject to much or any control or to individual companies and households which are not armed to manage such risks.

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Read in French «La crise financière : enseignements et perspectives»

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Global economy

“Structural reform is difficult, but unavoidable”, published in Le Monde on 20 March 2014

The Nordic countries and Canada introduced such reforms in the 1990s with great success, as did Germany in the early 2000s with equal success. Spain and Portugal are actively going down the same road, although in mid-crisis, and their social costs are consequently high, at least in the short term. In France, irrespective of the government’s hue, such structural reform is very difficult to implement. However, there does exist a fairly strong convergence of ideas. Here are some of the more noteworthy ones:

  1. The cost of labour is crucial to an economy’s competitiveness, but only in relation to productivity. On average, Germany’s cost of labour is only slightly lower than in France, but the country has the advantage of a competitive economy and a largely surplus balance of trade, reasonably high levels of growth and low unemployment. In France, with only slightly higher labour costs, the situation is the reverse. This is due to a cost of labour, after corrections for productivity gains, which greatly increased in France during the 2000s compared with Germany. The country also produces mid-range and medium quality goods, while in Germany specialisation tends to focus at the top of the range. France must achieve a cost of labour, after corrections for productivity, that correlates with its range of manufactured goods.
    Higher labour productivity underpins economic growth and is necessary if salaries are to be raised without losing competitiveness. Just as with the search for top-of-the-range goods, productivity gains also require both research & development and investment. Companies must maintain adequate profit levels to achieve this. Yet over the past ten years, France is one of the few OECD countries to have seen a fall in its companies’ profit levels. So how do we finance investment, modernisation, innovation and a move to high-end goods and services? To encourage innovation, competition must be increased in certain overprotected sectors.
    And, lower labour costs are vital for the employment prospects of underqualified workers in non high-end sectors. Empirical studies demonstrate this very clearly. This could be achieved via lower social charges or lower salaries, with additional welfare payments supplementing salary to ensure a decent standard of living.
  2. An increase in the working population – which, just as with productivity gains, is a determining factor in economic growth potential – must lead to labour market reforms by limiting inflexibilities such as threshold effects, complexity of employment law, etc. There must also be greater incentives to return to the labour market. There is a clear empirical relationship between the rate of unemployment and the length, level and especially the degressivity of unemployment protection. Such reforms must necessarily go hand-in-hand with better training and improved support to get back to work. It is a question of developing “flexible security”. At the same time, it is vital to reform pensions by raising the number of contribution years so as to increase the working-age population. As the example of many other European countries shows, this is the only way to stimulate growth while resolving the pension system’s financing conundrums. Like any additional taxes on assets, any lowering of pensions depresses the economy.
  3. Potential growth and competitiveness can also be increased by seeking out more efficient public services, by establishing a better relationship between the usefulness and quality of public service and the level of public expenditure. Yet France has one of Europe’s highest rates of public expenditure and taxation as a proportion of GDP, yet its level of public services (social security, local authorities, state) lies only within the European average. In other words, efficiency is not up to scratch while public debt is increasing to dangerous levels. So reform is the only option.

I believe there is cause for optimism: given all the examples in other countries, the French seem to be gradually coming to terms with the fact that the level of social protection and public services has been artificially kept up for many years via increasing levels of public debt, which have now become unsustainable. The effort to be made is therefore better understood, as is the necessity of seeking out a better balance between individual rights and obligations in order to protect what really matters, namely an equitable society with high living standards and strong welfare protection, which at the same time promotes social cohesion and enterprise.

As reform in the short term may have social costs and only bear fruit in two or three years’ time, implementation must go hand-in-hand with measures whose effects will be visible in the short term, supporting both the economy and employment. A significant lowering of social security contributions for low-paid workers together with an increase in VAT could bring about such an effect. It is therefore up to the governments, of whichever hue, to explain the direction and necessity of reform and to ensure that measures are introduced at the right time, backed with adequate support, accompanied by just and equitable implementation.

 «Complement to the article : 13 graphs»

Structural reform is difficult, but unavoidable

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Global economy

Crises and mutations : a progress towards new opportunities?

Nouvelle revue de Géopolitique

Economic crises are often the subject of analyses framed within more or less short-term contexts. Here I want to set out a long-term vision of the crises, not without first bringing to mind this thought from Antonio Gramsci: “a crisis is what comes between the old and the new”.

Taking a more “regulationist” approach, you could say that each severe crisis of capitalism is a time of fundamental change affecting a collection of elements which constitute and organise society and the economy. These are moments of major transition where it can be observed in hindsight that they have given rise to new systems of regulation and new models for organisations, society and the economy. They generally bring into play new industries driving the economy, new ways of organising work, new kinds of consumption, often new ways of combining private and public, as well as new centres of the global economy. In my understanding, we are currently in that phase of major change and deep crisis which, as this renewal gradually emerges, could be accompanied by a long phase of growth and significant gains in productivity, as has occurred each time in history.


An economy in transition 

I am listing four main transitions today.

The first transition, globalisation and the emergence of new countries, has occurred in two phases.

The first phase, especially at the end of the nineties and throughout the years after 2000, sees emerging countries concentrate their efforts on the determinants of their success, their export industries, taking particular advantage of their low labour costs.

These industries benefit from the demand by already developed countries, causing global overproduction, as there is no parallel destruction of production capacity to the same extent in the developed countries. Accordingly this global overproduction and low-cost competition produces a slowdown, even a stagnation, of purchasing power for people in the developed countries.

This phenomenon leads to an increase in debt, allowing the over-production crisis not to be felt so severely. The increasing indebtedness of actors from the developed countries allows a development in demand at a global level during this period, masking the consequences which should have arisen from the stagnation of purchasing power associated with a large excess of global production capacity.

This increase in debt involving all economic actors, primarily those in the private sector, degenerates into crises of over-indebtedness. These lead to severe economic and financial crises, which relentlessly worsen the public debt situation. This stronger and stronger growth in the developed world’s debt corresponds to an increase in balance of payments imbalances, with current deficits in the North and matching surpluses in the South.

The second phase of globalisation is where emerging countries become increasingly mature. A middle class gradually appears, then its purchasing power grows and little by little, systems of social protection and retirement benefits appear. It is probable that an internal growth will develop, gradually rebalancing previous imbalances, in an unplanned fashion.

The second transition is a consequence of the first: the debt reduction phase. Historically, debt reduction phases, within contexts of quite serious debt crises, begin abruptly but are completed over long periods of between five and ten years. These are resolved with levers of different types, operating alternatively or in conjunction, such as credit depreciation and zero or very slow growth with a slow reduction in the rate of indebtedness achieved by growth in savings and the reduction or limiting of consumption, investment and public spending. They are accompanied by risks of deflation. We are currently in this phase for the euro zone taken as a whole. Another outcome of debt crises can be an increase in inflation when circumstances permit, as inflation does not occur as a matter of course.

The third transition is that of demographic change. It is very well known, but an ageing population remains a key phenomenon in many emerging and developed countries, with the exception of Africa. It raises fundamental questions about the cost of social systems, social security and pensions, which have further repercussions on the debt question. Up to now in France we have partially dealt with these questions by increases in debt within these systems.

The fourth transition rests on the transition in energy, the major issue of this century. The scheduled end of energy from fossil fuels, with these resources gradually being exhausted, ought to have the end result of increasing raw material prices, leading to a worldwide deceleration in growth. This redoubled struggle for energy sources has caused a change in the balance of power between countries which possess natural resources and those which do not, leading in the end, technical progress permitting, to the slow, uneven, uncertain appearance of substitute forms of energy which could lessen the constraints on growth to a greater or lesser extent.


Prospects for industrial renewal

Having talked about these major transitions, we need to turn to what the drivers of renewal could be, without claiming to be exhaustive or even any claims as to their success; the drivers that would allow us to emerge gradually from this crisis, allowing new systems of regulation to appear which would permit a return to a long phase of growth.

Each great phase of capitalism in fact has seen the appearance of new driver industries bringing fundamental changes to the economic environment, ways of producing and consuming, the merchandise itself,  ways of working and spending leisure time… This was notably how we moved from the steam engine that made railways possible, to the internal combustion engine that made cars possible, and then to the electric motor which made household electrical appliances possible. Three potential drivers of future development warrant further attention:

The first one, the digital one, which is already substantially developed but whose impact in my opinion is still in its early stages. Whether we are dealing with changes in modes of consumption or work, changes in business models between produces and distributors, distributors and consumers or producers and consumers, with the appearance of new productivity gains as a key factor, it seems to me that we are still very far from finished with development of this kind.

The digital revolution gives increased power to consumers. Consumers in fact have the capacity to become significantly more demanding because they are better informed about the quality of goods and services as well as their price, thanks to data gathered on the internet. This revolution also allows them to increase comfort by considerably improving the practical benefits they can expect as a result.

These days we no longer queue for cinema or train tickets because of the internet; similarly our consumer transactions involve less and less movement because we can purchase directly from our computers and arrange delivery. “Business models” have been substantially changed as a result. If distributors can build the loyalty of their customers and operate pro-actively with them by intelligent use of the data they hold, they can gain power over producers by positioning themselves so as to propose solutions better adapted than previously to each “consumer-individual”, building the solution together with the customer who has become a “consumer-actor”. In this new relationship, distributors take power over producers, making them compete to find the best combination of goods and services most appropriate to each customer. And where the distributor does not develop sufficient legitimacy, the producer can appeal directly to the consumer and squeeze out the distributor.

Radical changes like this in relationships between producers, distributors and consumers will no doubt allow every cycle to be reworked. In this way there will be a drastic selection process between the three groups of players, allowing the most efficient to emerge and enabling the greatest gains in productivity.

The second driver of renewal is biotechnology. Developments in this field can particularly stem from the desire to combat the ageing of the population where it turns out to be possible to satisfy that demand. These biotechnologies are being perfected on a daily basis and will in the future enable repair of the body and a more effective fight to prevent disease. Finally, biotechnology machines will be developed in the near future which will allow different parts of the body to be replaced, broadening the whole scope of merchandise yet further at the same time.

Finally, energy, a key sector bringing together renewable energy, energy storage technology (a really fundamental problem) and energy saving, will be an essential key to future growth due to the development of these industries and because they will loosen the constraints caused by the gradual exhaustion of energy from fossil fuel sources.


A transformation in consumer and working practices

In parallel and consistent with these new industrial drivers we are seeing the emergence of different modes of consumption. These are the result of digitalisation, of a variety of new technologies, with network effects attached, of stagnating purchasing power and a change in mindset (including people’s awareness of the increasing scarcity of natural resources.) Changes are occurring in essential spending, where the emphasis is changing from the ownership of the object toward its use. For example, buying a telephone these days is no longer a simple matter of purchasing a device; we are acquiring the ability to access a catalogue of applications and phone and internet services.

We now have access to cloud computing and, as a result, ownership of computers with very high memory capacities will drop. We are buying fewer books, CDs and films and renting more and more. In the same way, self-service hire of a car for one single journey in town will develop. And we are still speaking of heating and air conditioning, but in the future we will pay for a service that regulates the temperature of each room in our home, when we choose, rather than buying the energy that makes this possible. Such practices will grow over time. In turn, these new modes of consumption will lead to radical changes in company “business models” and in the organisation of the economy as well as new opportunities for growth.

Alongside new modes of consumption, new modes of working and possibly new norms for salary payment are also appearing. This is only in its infancy, but we can already see the development of teleworking or working via a network, thanks to new technology. Work outside the office and without fixed hours is beginning to become more widespread, leading to discussion of changes in methods of payment.


Positive outcomes depend on greater agility

As in any time of profound crisis and change, we face changes which are uncertain, painful and challenging. At those times we see geographical areas or strata of population becoming winners or losers. We must hope that a country like ours knows how to make the choice, because it really is a choice, to pursue structural policies which will facilitate a constructive way out of the crisis. We need to promote the flexibility to transform ourselves, playing to our strengths and our know-how, cutting down the factors that inhibit the necessary adaptation, and reduce the areas of inefficiency. We have the means to do this, as long as we provide the right framework of legislation, regulation and incentives to encourage implementation.

Download Crises and mutations:a progress towards new opportunities ? (PDF)

Read in french : Crises et mutations, vers de nouvelles opportunités ?

Extract from an address by the author during the Aix-en-Provence Economic Forums in July 2013.

Categories
Global economy

Crisis and changes : new opportunities ?

Economic crises are often the subject of analyses framed within more or less short-term contexts. Here I want to set out a long-term vision of the crises, not without first bringing to mind this thought from Antonio Gramsci: “a crisis is what comes between the old and the new”.

Taking a more “regulationist” approach, you could say that each severe crisis of capitalism is a time of fundamental change affecting a collection of elements which constitute and organise society and the economy. These are moments of major transition where it can be observed in hindsight that they have given rise to new systems of regulation and new models for organisations, society and the economy. They generally bring into play new industries driving the economy, new ways of organising work, new kinds of consumption, often new ways of combining private and public, as well as new centres of the global economy. In my understanding, we are currently in that phase of major change and deep crisis which, as this renewal gradually emerges, could be accompanied by a long phase of growth and significant gains in productivity, as has occurred each time in history.


I am listing four main transitions today.

  • The first transition: globalisation and the emergence of new countries, broken down into two phases. The first phase, especially at the end of the nineties and throughout the years after 2000, sees emerging countries concentrate their efforts on the determinants of their success, their export industries, taking particular advantage of their labour costs. These industries benefit from the demand by already developed countries, causing global overproduction, as there is no parallel destruction of production capacity to the same extent in the developed countries.
    Accordingly this global overproduction and low-cost competition produces a slowdown, even a stagnation, of purchasing power for people in the developed countries. This phenomenon leads to an increase in debt, allowing the over-production crisis not to be felt so severely.
    The increasing indebtedness of actors from the developed countries in fact allows a development in demand at a global level during this period, masking the consequences which should have arisen from the stagnation of purchasing power associated with a large excess of global production capacity. This increase in debt involving all economic actors, primarily those in the private sector, degenerates into crises of over-indebtedness. These in turn lead to severe economic and financial crises, which in turn relentlessly worsen the public debt situation. This stronger and stronger growth in the developed world’s debt corresponds to an increase in balance of payments imbalances, with current deficits in the North and matching surpluses in the South.
    The second phase of globalisation is where emerging countries become increasingly mature. A middle class gradually appears, then its purchasing power grows and little by little, systems of social protection and retirement benefits appear. It is probable that an internal growth will develop, gradually rebalancing previous imbalances, in an unplanned fashion. 
  • The second transition follows the first and results from it: the debt reduction phase. Historically, debt reduction phases, within contexts of quite serious debt crises, begin abruptly but are completed over long periods of between five and ten years. These are resolved with levers of different types, operating alternatively or in conjunction, such as credit depreciation and zero or very slow growth with a slow reduction in the rate of indebtedness achieved by growth in savings and the reduction or limiting of consumption, investment and public spending. They are accompanied by risks of deflation. We are currently in this phase for the euro zone taken as a whole. Another outcome of debt crises can be an increase in inflation when circumstances permit, as inflation does not occur as a matter of course.
  • The third transition is that of demographic change. It is very well known, but an ageing population remains a key phenomenon in many emerging and developed countries, with the exception of Africa. It raises fundamental questions about the cost of social systems, social security and pensions, which have further repercussions on the debt question. Up to now in France we have partially dealt with these questions by increases in debt within these systems.
  • The fourth transition rests on the transition in energy, the major issue of this century. The scheduled end of energy from fossil fuels, with these resources gradually being exhausted, ought to have the end result of increasing raw material prices, leading to a worldwide deceleration in growth. This redoubled struggle for energy sources has caused a change in the balance of power between countries which possess natural resources and those which do not, leading in the end, technical progress permitting, to the slow, uneven, uncertain appearance of substitute forms of energy which could lessen the constraints on growth to a greater or lesser extent.

Having talked about these major transitions, we need to turn to what the drivers of renewal could be, without claiming to be exhaustive or even any claims as to their success; the drivers that would allow us to emerge gradually from this crisis, allowing new systems of regulation to appear which would permit a return to a long phase of growth.

Each great phase of capitalism in fact has seen the appearance of new driver industries bringing fundamental changes to the economic environment, ways of producing and consuming, the merchandise itself,  ways of working and spending leisure time… This was notably how we moved from the steam engine that made railways possible, to the internal combustion engine that made cars possible, and then to the electric motor which made household electrical appliances possible.

I shall deal essentially here with three potential drivers of the future:

  • Digital, which is already substantially developed, it is true, but whose impact in my opinion is still in its early stages. Whether we are dealing with changes in modes of consumption or work, changes in business models: producer-distributor, distributor-consumer or producer-consumer; with the appearance of new productivity gains as a key factor, it seems to me that we are still very far from finished with development of this kind. The digital revolution gives increased power to consumers. Consumers in fact have the capacity to become significantly more demanding because they are better informed about the quality of goods and services as well as their price, thanks to data gathered on the internet.
    So it is much easier for them to collect information and compare quality and price. On the other hand, this revolution allows them to achieve a very significant increase in comfort by considerably improving the practical benefits they can expect as a result. These days we no longer queue for cinema or train tickets because of the internet; similarly our consumer transactions involve less and less movement because we can purchase directly on the net and arrange delivery.
    “Business models” have been substantially changed as a result. If distributors can build the loyalty of their customers and operate pro-actively with them by intelligent use of the data they hold, they can gain power over producers by positioning themselves so as to propose solutions better adapted than previously to each “consumer-individual”, building the solution together with the customer who has become a “consumer-actor”. In this new relationship, distributors take power over producers as never before, making them compete to find the best combination of goods and services most appropriate to each customer.
    Conversely, if the distributor does not develop sufficient legitimacy, the producer can appeal directly to the consumer and squeeze out the distributor.
    Radical changes like this in relationships between producers, distributors and consumers will no doubt allow every cycle to be reworked. In this way there will be a drastic selection process between the three groups of players, allowing the most efficient to emerge and enabling the greatest gains in productivity.
  • Developments in biotechnology particularly can stem from the desire to combat the ageing of the population where it turns out to be possible to satisfy that demand. These biotechnologies are being perfected on a daily basis and will in the future enable repair of the body and a more effective fight to prevent disease. Finally, biotechnology machines will be developed in the near future which will allow different parts of the body to be replaced, broadening the whole scope of merchandise yet further at the same time.
  • Energy, a key sector bringing together renewable energy, energy storage technology (a really fundamental problem) and energy saving, will undoubtedly be an essential key to future growth by the very fact of the development of these industries but also by the fact that they will ease the constraints caused by the gradual exhaustion of energy from fossil fuel sources.

In parallel and consistent with these new industrial drivers we are seeing the emergence of different modes of consumption. These are the result of digitalisation, of a variety of new technologies, with network effects attached, of stagnating purchasing power and a change in mindset, including people’s awareness of the increasing scarcity of natural resources. Changes are occurring in essential spending, where the emphasis is changing from the ownership of the object toward its use. Buying a telephone these days, for example, is no longer a simple matter of purchasing a device; in reality we are acquiring a means of access to a catalogue of applications and phone and internet services.

Now, as everyone knows, we have access to cloud computing and, as a result, ownership of computers with very high memory capacities will drop. We are buying less books, CDs and films and renting more of them. In the same way, self-service hire of a car for one single journey in town will develop more and more. And we will still speak of heating and air conditioning, but certainly in the future we will pay for a service that regulates the temperature of each room in our home, when we choose, rather than pay for buying the energy that makes this possible. There is no doubt that practices like this will only grow with time. In turn, these new modes of consumption will lead to radical changes in company “business models” and in the organisation of the economy as well as new opportunities for growth.

Alongside new modes of consumption, new modes of working and possibly new norms for salary payment are also appearing. This is only in its infancy, but we can already see the development of teleworking or working via a network, thanks to new technology. Work outside the office and without fixed hours is beginning to become more widespread, leading to discussion of changes in methods of payment.


As in any time of profound crisis and change, we face changes which are uncertain, painful and challenging. At those times we see geographical areas or strata of population becoming winners or losers. We must hope that a country like ours knows how to make the choice, because it really is a choice, to pursue structural policies which will facilitate a constructive way out of the crisis. We need to promote the flexibility to transform ourselves, playing to our strengths and our know-how, cutting down the factors that inhibit the necessary adaptation, and reduce the areas of inefficiency. We have the means to do this, as long as we provide the right framework of legislation, regulation and incentives to encourage implementation. 

Download “Crisis and change : new opportunities ?” (PDF)