For the French and European economy, successful after-Cavid
For the French and European economy, making a success of the post-Covid period: summary
For two years, our economic debate has lived under the pressure of the Covid emergency, in a permanent present that masks our structural challenges in the post-crisis period. Today, the picture is one of worrying inflation, but solid growth despite Omicron. Within two years, however, concerns should reverse: inflation would normalize to a “new regime” close to our 2% target. Conversely, growth would fall back below 1.5%. This is what we need to change. Gaining 0.5% in potential growth each year would mean getting out of two permanent French ills: household purchasing power which is increasing but – somewhat artificially – at the cost of a drift in public debt; an unemployment rate which, despite recent progress, remains well above the 5% of almost full employment for many of our neighbours.
How do I do it? The European dimension could bring us a third of this additional growth, through the two major “Schumpeterian” transformations: the digital revolution and the ecological transition. But it will take three cross-cutting levers: relaunching the single market; increase the chances of training and skills in the countries of the South, including France; pool our funding. On the one hand, Europe has the resources, a savings surplus of 300 billion € per year, on the other the enormous digital and ecological investment needs: to build the bridge between the two, it is urgent to accelerate on the Capital Markets Union.
There remain, for the most part, two challenges more specific to France, and first of all the inadequacy of our available labor supply. To increase potential growth, we are not short of public spending, nor overall of capital, we are short of work. France sees the coexistence of recruitment difficulties for more than 50% of companies, and another 2.4 million unemployed, including 600,000 young people: this paradox is socially unacceptable. Our employment rate deficit compared to Germany represents nearly 3 million workers, concentrated in young people and seniors. The levers for reform are deduced from this: for young people, the strengthening of basic education and apprenticeship; on seniors, a fair pension reform. And for all workers, vocational training better oriented towards the key battle of qualifications; an unemployment insurance system that provides good incentives for the long term and for work; negotiated salary increases for jobs that suffer from a lack of attractiveness. These levers, many of which have been initiated, must be added instead of being too often opposed, and implemented with perseverance rather than remaining ephemeral announcements. So we could aim for full employment within ten years and finally control our debt.
Massive public debt is indeed the other major French challenge: after its justified increase in the face of the Covid crisis, the continuation of current trends in the future would only lead to its stabilization at around 115% at best. of GDP. This would not be sustainable, given the likely rise in interest rates, ecological investment needs, and the possibility of a new crisis. It must therefore be said in the face of the many current proposals for new spending or tax cuts: our country no longer has the means to further deteriorate its public finances.
A credible debt reduction strategy is conversely possible by combining three ingredients: time – over 10 years, we can reduce the French public debt below 100% – growth, linked to the aforementioned reforms but not sufficient ; and finally better control and efficiency of our public expenditure. These are today the highest not only in Europe but in all developed countries. It is not a question of reducing them, through such dreaded austerity. But to curb their annual increase: finally talking about the quality of spending can help. Faced with the current crisis in public services, the necessary modernization and mobilization are not incompatible with performance and management; and spending on the future – from education to investment – has a better multiplier effect on long-term growth.
Ladies and gentlemen, dear teachers, dear students,
I am very happy to be with you again today, in this essential place of teaching and knowledge. I had the honor of speaking there in January 2020, on the very contested low rates at the time. Two months later, the Covid crisis broke out, which both reformed the consensus around these low rates, but called into question all our forecasts and many of our collective benchmarks. Since then, we have been living under the continuous pressure of urgency, in a permanent present that masks our structural challenges. I measure and I share the suffering. But one day, we will definitively overcome this Covid ordeal: it is obviously both a wish for this new year, and a requirement. It is time that we finally talk about the basic choices for Europe and for our country, and that we find a longer horizon for this.
I. A vision that must go beyond the short term
On the short-term situation, I will therefore limit myself to three remarks:
a) The French economy is resisting well today to Omicron and the fifth Covid wave. Each of our monthly surveys confirms this, including that of early January: GDP returned to its pre-Covid level last August, earlier than expected and earlier than our European neighbours; the fifth health wave should not prevent further significant growth in 2022, at 3.6% in our forecast. The French economy would thus catch up with its previous growth trajectory in 2023 and the Covid will leave few scars on the French economic fabric. Overall, the Covid crisis has been economically well managed by the public authorities. These very successes justify firmly resisting today a return to “whatever the cost”: entrepreneurs are not meant to be subsidized for life.
b) Due in particular to this recovery, there are undoubtedly supply difficulties for companies. They weigh little on the volume of activity (excluding automotive), but push up prices, including manufactured goods. At 3.4% year-on-year at the end of 2021 (2.1% excluding energy and food), inflation in France is the highest since September 2008. This "bump" is higher and longer than expected, but it should remain temporary: inflation in France should gradually decline throughout the year, falling back below 2% by the end of 2022. This is a good forecast; this is obviously not a blind certainty. We keep our eyes wide open on the economic data. If inflation were to prove more persistent, have no doubt that we will have the will and the ability to adapt our monetary policy more quickly, to ensure a return to our 2% objective.
c) In the next two years, however, the concerns should be reversed: inflation would normalize around a "new regime" which would not be inflation too low pre-Covid, but close to our 2% target. Conversely, the growth currently amplified by the catch-up would run out of steam: according to our latest projections, growth in France would fall below 1.5% in 2024. It would be desirable to aim for a more ambition of potential growth, between 1.5 and 2%, a gain of half a point compared to the spontaneous trend. Because we need the income from growth to finance our collective projects, in particular ecological ones, and our solidarity – this is therefore not contradictory with a renewal of the content of growth. This ambition would also make it possible to better reconcile increased household purchasing power and control of the public debt, where we have so far sacrificed the second to ensure the first somewhat artificially. The Banque de France is legitimate to talk about it, because monetary policy cannot ignore economic imbalances, nor compensate for them in the long term. And I am doing it this evening with all the independence that is ours: when it puts forward facts and its expertise, the Central Bank is free from any political influence, and respectful of the democratic debate to which, fortunately, the choices then belong.
This half-point of potential growth goes through a path of medium- and long-term reforms: the efficient firefighters of the crisis must gradually hand over to the architects. Two transformations on a European scale (II) can first provide a third of the necessary path – through investment, digitalisation and the associated productivity gains –, the rest falls under two challenges specific to France (III).
II. Two Schumpeterian transformations for Europe
Europe, like the rest of the world, will have to succeed in two major transformations in the next decade: the digital revolution and the climate transition. The Covid crisis obviously accelerated the first, and fortunately did not slow down mobilization on the second.
Compared to the rest of the world – and in particular the United States – our Europe is behind the first transition, and still ahead of the second. But above all it suffers from a structural handicap: its lack not of economic weight – we have it, together – but of speed; Unfortunately, Europe has had less growth for thirty years than the United States, and less capacity for economic renewal. In a speech last March at the College of Europe in Bruges, I hoped that we would finally reconcile the two great European economists of the 20th century: Keynes – who inspired us well in the Covid crisis – and Schumpeter – the man of innovation, which we are going to need to succeed in these two transformations. They are a difficult challenge of course, with the reconversion of part of our productive apparatus, but also a source of opportunities and growth.
First on digital: technologies have been slow to express their full potential on productivity, which has remained sluggish for two decades in the euro zone. It is, however, potentially at a turning point, with the latest advances in AI, biotechnologies or reorganizations induced by teleworking – after a latency period which would correspond to the process of appropriation of technologies by the economic fabric (investment, training , etc.).
Europe will have to seize the opportunity of this reservoir of productivity growth. However, it still suffers today from a lack of innovation and adoption of these new technologies, particularly vis-à-vis the United States. We spend less on R&D (2% of GDP compared to 2.8% between 2015 and 2019), have fewer researchers and have filed fewer patents, particularly in biotechnology (2,400 compared to 5,500 over the period 2015-2019) or information and communication technologies (7,900 against 17,100).
The climate transition represents an absolute constraint at the global level. Its macroeconomic impact will largely depend on the transition strategy adopted: the faster and more orderly it is implemented, the lower the cost in points of GDP will be. Thus, according to the Commission, the EU plan would have an overall neutral effect on real GDP by 2030, a forecast deemed too “techno-optimistic” by Jean Pisani-Ferry. According to Banque de France simulations for our country, a disorderly transition would lead to a reduction in GDP of up to -5.5% by 2050 compared to an orderly transition scenario.
To succeed in these two transformations, we Europeans must join forces more than ever. And I am aiming here at three “cross-cutting” levers that should guide our economic agenda: pooling our customers, our talents, and our funding. Our customers are the single market, one of the biggest in the world with 450 million people. It is not just the legacy of Jacques Delors. Thirty years after 1992, we must have the audacity to relaunch the single market, and to optimize its power by combining its different components much better: free movement, of course; but also regulatory power. We can use the power of standardization, especially to drive innovation, as exemplified by data regulation where Europe is at the forefront.
Our talents and our “human capital” is the strong correlation between growth and training. In Europe, we have some of the best education and vocational training systems – and you are the best proof of that! But there are big disparities: in the southern EU countries, including ours, there are more low-skilled people – Spain and Italy have twice as many as Sweden, as a proportion of the adult population – and fewer highly qualified people – France has half that of the Netherlands or Finland. It is here largely a national competence, but to be exercised in an upward European convergence: that is to say rather towards the solutions of Northern Europe, including a much stronger development of learning and professional training.
Finally, pooling our funding is partly through public investment programs, such as those made possible by the famous “Next Generation EU”, this decisive step forward in the Covid crisis. But it is at least as much a private driver: Europe must be able to mobilize and redirect its domestic savings, the largest in the world; in recent years we have had a surplus of domestic savings over investment of nearly 300 billion euros per year. These savings must be redirected towards corporate equity financing, which is a method of financing particularly suited to innovative projects – by nature more risky and requiring long-term support, but also more profitable in the event of success. Our lag behind the United States in this area is striking: the largest European venture capital firm appears to be three times smaller than the 10th American. The technical agenda is identified, but not very visible and much too slow in its realization: it is the Capital Markets Union (CMU). On the one hand, we have resources – savings –, on the other the investment needs of companies: we must resolutely accelerate on a European financial ecosystem that better allocates the former to the latter, if we want to finance the digital revolutions and environmental future.
III. Two challenges more specific to France
I would now like to discuss with you the two medium-term challenges, which more particularly concern our country. I mean the insufficiency of our potential growth linked to that of our labor supply, and the excess of our public debt.
1) Potential growth and labor supply
I want to make two clarifications here. First of all, I am aware that the word “growth” has become ambivalent, carrying for some environmental risks more than economic promises. GDP growth is not enough: it must – and can – be greener and fairer. But it remains essential to finance the European social and environmental model in which I deeply believe; decay would kill him.
Secondly, it can be difficult to measure potential growth – the “cruising speed” of the economy excluding variations in the cycle – because it is not a directly observable variable. At the Banque de France, we estimate it today at around 1.1 to 1.2% per year only, a fairly stable figure for ten years, after a halving for thirty years. Other estimates go as high as 1.35%, but all “cap” between 1 and 1.5%, which is clearly insufficient.
Our growth potential depends closely on the use we make of our production factors. We are not lacking in capital overall in France – public and private investment is rather high – we are lacking in work, in the labor supply available to employers. The most blinding symptom of this is the recruitment difficulties reported today by 52% of companies, and about 300,000 unfilled jobs, even though France still has 2.4 million unemployed, including 600,000 young people. This is an unacceptable paradox economically but even more so socially.
There is no greater priority than getting out of this French impasse, and for that to understand, and for that to compare with the labor supply in Germany, which is at full employment (at 3, 4% unemployment). While hourly productivity is comparable, the average number of hours worked per inhabitant is 10% higher. This gap is largely attributable to the low level of our employment rate. While in the mid-2000s it was 63%, substantially identical to the German employment rate (64%), it is now clearly behind even if it has started to rise (67% against 75%) . This difference is partly due to the more widespread use in Germany of part-time work and dual training. The fact remains that for a population of working age of just over 40 million people, this gap represents a deficit of nearly 3 million jobs, concentrated on young people on the one hand (1.2 million missing jobs) and on seniors on the other hand (1.3 million). So let's talk first about young people, then about seniors, then about measures for all working people.
For a decade, the proportion of young people who are “neither in employment nor in training” (the famous “NEETs”) has remained globally stable. Everything must therefore be done to stop the slow erosion of fundamental skills observed in the various international surveys (PISA, TIMSS).
We must then amplify the recent take-off, since the Avenir Pro law of 2018 and the 1 young 1 solution plan of 2020, of apprenticeship, a formidable tool for training and professional integration. The record number of nearly 700,000 new contracts signed in 2021 should only be the start, when rethinking the financing of work-study.
As for seniors, the French lag is sharply accentuated at the time of retirement. For this economic reason too – which is added to the good financing of old-age insurance, pension reform is necessary. It will have to be fair, and companies will have to make a better place for seniors.
Three measures remain to increase the labor supply of all workers:
All these levers on the labor supply must be added together, instead of being too often opposed in our public debate. And pursued with perseverance, rather than remaining fleeting announcements. So we can hope to gain the other two-thirds to increase potential five-year growth by half a point. So we can hope to drop to 5% unemployment within ten years. And so, I come to that, we can help to finally get our public debt under control.
2) Public finances and debt
On the public debt, the figures are known. The shock of the health crisis has led to a historically high level of debt, slightly below 115% of GDP in 2021, because we were unfortunately starting from a ratio significantly higher than the average for the euro zone before the crisis. .
If we extend into the future the current trends which are those of the last ten years – low potential growth, increase in expenditure in volume of more than 1% per year, deficits still above 3% for several years –, this debt ratio would only stabilize at best. At best, because the public debate today sees a proliferation of proposals for new spending and additional tax cuts. The reality is that our country can afford neither. I recall it with all the independence of the Banque de France: we can no longer deteriorate our public finances any further.
This simple stabilization is not sustainable, for several reasons. First, because it would be irresponsible to bet on the lasting maintenance of the extremely favorable level of interest rates. An increase of only 1% of these – which is by no means an extreme scenario – would cost €39 billion per year after 10 years: this is the equivalent of the current defense budget. Unsustainable then because France must be ready to face another crisis in the future, and in any case to expenditure shocks such as the aging of the population or climate change. We cannot eternally postpone the bill on the following generations, that is to say on yours: sooner or later, this would generate a political and social crisis, or a crisis of confidence among international investors.
Criticism is easy, but art is certainly difficult. However, a credible debt strategy is possible by combining three ingredients. All are necessary, because none is sufficient on its own. The first is time, acting over time, while starting quickly as soon as the Covid crisis emerges in 2023. Over ten years, we must bring the French public debt to at least below its pre-Covid level, therefore in- below 100% as clearly as possible. The second ingredient is that of growth, to be increased by the reforms mentioned above. There remains a third ingredient, also essential: the best efficiency and control of our public expenditure, whose share in GDP is the highest not only in Europe but of all the developed countries.
The discussion here often becomes very sensitive: reforms in the public sphere are, in France more than elsewhere, easily associated with austerity, or even with a liberal ideology of which they would be the Trojan horse. But yet Sweden, which is not considered to be a liberal country, managed to reduce its public expenditure to less than 50% while we increased ours. This is the French paradox: we always denounce an austerity from which we are however far. I am passionately convinced of the need for public service, and touched by its current crisis: its necessary modernization, its re-legitimization, the recognition of its agents, is not incompatible with its capacity for performance and innovation, on the contrary . The transformation of the Banque de France is a modest but real example.
It is therefore not a question of reducing public spending overall, but of tending towards their stabilization. Expenditure growth in volume reduced to 0.5% per year from 2023 would reduce, at constant tax rates – I emphasize this condition – the debt ratio to 100% of GDP, in ten years; stabilizing our spending in volume would allow us to reduce our debt even better, to 90% of GDP. The target to be set is, of course, a matter of democratic debate. But the most important thing is that the targets set for this "global expenditure standard" are actually achieved, which our country has unfortunately never been able to do sustainably.
The choices of priorities or savings to be made also belong legitimately to the political debate. I would just point out that the essential question of the quality of spending constitutes the blind spot of our budgetary debate, whereas it can guide us here. Economic analysis shows that spending on the future – most investments, education, research – has a much better “multiplier” on future growth than simple current spending. The comparison with our neighboring countries, which share the same social model, also suggests some fields where our public costs seem significantly higher: certain social benefits, economic aid – including tax credits –, stacking of multiple local authorities, etc.
None of what I have discussed in front of you is easy. But everything is possible, and the essential depends on us: not on others, on globalization or even on Europe. An ambition for reforms is guaranteed to produce results, provided that it is comprehensive, persevering – the effective implementation over several years counts more than the initial announcement –, and equitable; the gains then benefit everyone, and first of all those who are currently excluded from employment and the most disadvantaged, who must be assured of national solidarity finally financed over time. This is the challenge of finally re-projecting ourselves beyond the very short term. To conclude with Henri Bergson “To act freely is to regain possession of oneself, it is to replace oneself in pure duration”. Good luck to our dear country, and thank you for your attention.