The excesses of easy money and the illusion of the benefits of debt, Jacques de Larosière has been denouncing them for ages. Financial crises, he managed the sometimes dramatic consequences politically and socially as Managing Director of the IMF, Governor of the Banque de France and President of the European Bank for Reconstruction and Development. In his last try Ending the reign of financial illusion published by Editions Odile Jacob, it still denounces the flaws of financial capitalism out of control. While the Court of Auditors has just published its report on the situation and outlook for public finances, the Elders of Rue Cambon are urging the executive to make “a substantial effort” on its spending to reduce the public deficit by 2027 Something to please Jacques de Larosière.
The Express: The Court of Auditors once again denounces the excesses of public finances. Would you say that the situation is dangerous, even out of control?
Jacques de Larosiere: Today we live in a world where financial fiction dominates economic reality. What should be complementary – that is, the use of borrowing beyond self-financing – has become the norm. I won’t say that the French situation is out of control: words have a meaning! France has never failed in its obligations and our financial and tax administration is extremely efficient. However, the French public debt but also – let’s not forget – the private debt, are very high in terms of international comparisons. Public debt exceeds 110% of GDP, which obviously poses a sustainability problem. Especially since the rise in nominal central bank interest rates is changing the situation. One more reason to look into this problem…
Precisely, where does this French addiction to debt come from?
We have to hammer it home: we have a public spending problem. They now account for nearly 60% of GDP, against 35% in 1960. The European average is 50%. We therefore spend nearly 10 points of GDP more than our neighbours, who are also our competitors. This drift has accelerated over the past twenty years. With the heart, a major problem: most of the public expenditure was the fact of current operations and not of investments. Most of these expenditures have therefore served to pay the end of the month for the State and the communities and not to prepare the country for the future. And in particular to face the challenge of energy and climate transition.
How to solve the problem ? I obviously mean those who justify their inaction by the fear of social war. It’s an easy alibi! I am not oblivious enough to advocate social conflict by chopping into the French redistributive system. But I don’t think it’s antisocial – and it would even be supported by the population – to look at all the expenditure, chapter by chapter, department by department. Do this exam by adopting what I will call the Scandinavian method. In Sweden, Denmark or Norway, the budgets are dominated by the principle of examination chapter by chapter. For each of them, only one question: should we renew the existing systems identically? Should we do it again the same way? The answer is often no. In France, the budget has become an addition of layers. The strata of past expenditure – which have often lost their raison d’être – continue to hold together unchallenged. We do not examine each public expenditure individually. With an alibi: to avoid social war.
“There is a scandalous unsaid about the pensions of civil servants”
Why don’t we dare to do this work?
Out of habit, or intellectual laziness… We take up a large part of the budget in “voted services”. This is a very fashionable expression in the ministries. In other words, we don’t even discuss what was voted on in the past. The objective of the method that I recommend is not to devitalize our system of redistribution but to call into question all the layers of tax exemptions, innumerable in France, and which bear the name of parliamentarians or past ministers. The budget of France can be compared to an anthology where we find the names of well-known politicians… By refusing to seriously analyze these measures, we risk throwing taxpayers’ money out the window.
Let’s also look at what our neighbors and competitors are doing, because we are in an open market. If we were withdrawn into ourselves, with customs barriers, we could say to ourselves that it does not matter, that we can devalue our currency. But this is not the case. With the euro, we have a strong currency.
You also criticized the weight of pensions in French public spending, compared to a country like Germany. Doesn’t Emmanuel Macron’s reform change the situation?
We are faced with an arithmetic problem worthy of a 6th grade class. We have a pay-as-you-go system in which the contributions of young people who work finance the amount of the pensions of people who no longer work. Therefore, it is easy to understand that if the active population which contributes is reduced and that of pensioners is increasing, due to aging and the increase in life expectancy, there is an imbalance. However, this imbalance is very important in France. In our 10 points of GDP of public expenditure more than our European neighbors, pensions represent about half. The recent reform which consists in pushing back the retirement age to 64 years improves the things a little. But our neighbors have on the whole been further, 65 or even 67 years old…
Finally and above all, there is an unsaid which is truly scandalous: by a kind of postulate, the deficit of the pensions of the civil servants is not taken into account in the estimates of the council of orientation of the pensions. It is assumed that the civil service system is necessarily balanced since the State pays a subsidy to make up for the insufficiency of civil servants’ contributions. This is democratically unacceptable, because part of our public expenditure is used to finance this deficit. However, this major element does not appear in the calculation of the cost of pensions.
Can we not say that pensions represent an assumed social expense?
After the war, we based the pension system on a simple principle: the balance of the system, with contributions which must therefore reach the level of pensions. You can say to yourself “ah the retirees worked for the country, and today the system is seized up because there are no longer enough young people to contribute”. But the reality is that we are not financing this deficit by taxes, but by borrowing. Which means that in ten, twenty or fifty years, the accumulation of loans, without any productive counterpart, will lead to a debt that is impossible to manage. It will fall on our grandchildren or our great-grandchildren. Is it democratic? I do not believe that.
“Inflation is an extremely anti-social tax”
According to you, this public debt is already having real consequences on our growth and productivity. For what?
For a long time, it was believed that this policy of fiscal drift was conducive to economic growth. But when we look at the figures on the evolution of productivity and growth in Europe, we see that the countries which have better controlled their debt have better results than the heavily indebted countries. It’s a complex phenomenon, but to put it simply, we can focus on zombie companies, that is to say those entities which survive only because they are assured of favorable artificial financial conditions, whereas without that , they would be forced to close up shop or marry a more successful company. It is easy to understand that if we multiply by borrowing facilities for zombie companies, we reduce general productivity.
Recent IMF studies have quantified the extent of the problem. According to them, giving money to everyone is equivalent to keeping companies that represent 10% of national production artificially alive. A tenth of national production is thus zombified. But there is a second effect: non-zombie companies, which do not benefit from this aid, suffer the repercussions. Their productivity declines because their customer base shrinks. If, by definition, we keep 10% of the productive apparatus alive when it should disappear, that takes 10% of the market from companies that are in good condition. Which means that there is an effect in all of the order of 20%, which is enormous from an economic point of view. We must therefore not underestimate the harm in terms of productivity and growth that is inflicted on our economies through artificial aid. The one who borrows the most is not the most productive, quite the contrary.
You criticized the easy money policy. With the rise in interest rates, is this the end of the monetary illusion?
I’m not sure. The European Central Bank has effectively raised nominal rates. They were at -0.5%. Today they are at 3.5%. But inflation has increased by 5%. This means that real market interest rates remain negative. One could even say that the ECB has relaxed its monetary policy!
To come back to the debt, isn’t the current inflation ultimately one of the solutions to the problem?
If we take a short-term view, we can say that inflation reduces debt because it gradually erodes the real value of maturities. But inflation also has many downsides. Notably because it represents a tax that hits the poorest. Affluent households, like the banker who lives in the 16th arrondissement of Paris, will not be affected as much as households who earn one or two Smics. Inflation is therefore an extremely anti-social tax. And it’s a way of not dealing with the problems, by pushing more debt instead of carrying out structural reforms. This leads to reduced economic growth because in times of high inflation, long-term infrastructure projects are discouraged. It’s a way of sweeping the dirt under the rug, to the detriment of the poorest part of our population.
Let’s face it: we have 10 million poor people in France, according to the definition of international organizations. These people are directly affected by inflation. Beware, because it is a cause of social and political unrest. One cannot exalt the benefits of capitalism and the market if, out of a population of 65 million inhabitants, 10 million see the trains pass on the platforms, knowing that they will never be able to use them. This is a deeply moral question.