Jacques de Larosière’s CV is undoubtedly one of the finest in the world of finance. Director of the Treasury under the presidency of Valéry Giscard d’Estaing, he left in 1978 to direct the International Monetary Fund in 1978, before becoming governor of the Banque de France in 1987, then president of the European Bank for Reconstruction and Development in 1993 Since then, he has continued to denounce the excessive financialization of our economies, the denial of reality and the false promises of financial magicians who have brought French debt to unprecedented heights. In his new book, Is the French decline reversible?published by Odile Jacob, this tireless observer of French economic and political life takes aim at the former Minister of the Economy Bruno Le Maire. And defends a policy of reducing public spending over at least a decade. Nothing intolerable for the former head of the IMF…
L’Express: With a public debt of nearly 3,200 billion euros, is France the Portugal, Italy or Greece of the early 2010s?
Jacques de Larosière: Portugal has done what was necessary to improve its credibility on the financial markets. France, no. This is the reason why the famous spread – the difference in rates at which States borrow – has increased in recent months to our disadvantage. If the French decline continues, the worst is to be expected. But I see in the recent debates around the budget a small source of hope. For the first time, a Prime Minister recognized the seriousness of the facts. As soon as he arrived at Matignon, Michel Barnier explained that budgetary overflows could not continue and he initiated a recovery program. It’s a sign…
Certainly, but Michel Barnier also immediately resorted to a very French “remedy”, the tax increaseby targeting large companies, very high incomes, but also all households with the increase in taxes on electricity…
Yes, it’s true and personally I would not have put such emphasis on the tax increase. France already has the international prize for compulsory deductions. If we want to restore the competitiveness of our economy, it is not a good idea to increase taxes on our businesses. The result of decades of deindustrialization, French industrial companies represent only 11% of GDP, but they pay 23% of corporate tax. It’s abnormal. French companies are overtaxed. That we ask more efforts from very high incomes or from those who receive huge pensions, that does not shock me. There is a political aspect that I can understand. But businesses are a mistake.
On public spending, the Prime Minister mentioned the figure of 40 billion in efforts compared to the spontaneous growth in spending. Necessary rigor?
It is an undeniable fact: the weight of our public spending is completely outside the European and international standard. Relative to Gross Domestic Product, they peak at nearly 57%, while the European average is 50%. This enormous gap, of nearly 200 billion each year, explains our under-competitiveness. We can reduce it in ten years, with annual efforts of 20 billion. When I was head of the International Monetary Fund, I saw larger budget adjustments. Asking France to make an effort of 0.8% of its GDP per year is tolerable, but it takes real political will to do it over the long term for a decade, for example. There is no objective reason for the French state to spend massively more than our neighbors, for an administrative service that is not better. One figure is striking: the Germans have a population greater than ours by 15 million, but they have a million fewer civil servants than us. The scope of the civil service is certainly not the same between countries. Even when you make the statistical adjustments, it remains an incomprehensible discrepancy. The French citizen should be concerned about this.
How can we explain the denial of a large part of the French on the subject of public debt?
For twenty years, some political leaders and economists lectured the population that the budget deficit was not serious, and that we could always resort to very cheap borrowing. These speeches anesthetized the French. The awakening is brutal. Today, we are waking up, because interest rates are higher since the inflationary crisis of 2021. The cost of servicing the debt is therefore rising. The debt service burden is now no longer around thirty billion euros, but is around 50 billion, and it will probably rise to 70 billion in a few years. A sum equivalent to a year’s defense budget! It’s not nothing. The role of a government is to plan, and not to be lulled by illusions. The belief that interest rates would remain low forever has done a lot of damage.
“After the yellow vests, Emmanuel Macron sought to hide his “investment banker” side.”
What is your assessment of the work of Bruno Le Maire, the longest-serving Minister of the Economy since the Second World War?
I observe the facts. When he arrived at the Ministry of the Economy in 2017, the public debt was 2,200 billion euros. Today it amounts to 3,200 billion. 1,000 billion more in 7 years: an unimaginable drift. Bruno Le Maire was the most expensive minister of the Fifth Republic, with a deficit rising from 3% of GDP to just over 6%. The result is deplorable.
According to you, our leaders have a real lack of interest in financial subjects. But Emmanuel Macron comes from the financial world, and he has been widely criticized for it…
At the start of the first five-year term, Emmanuel Macron launched reforms favorable to the economy, such as the abolition of the tax on financial capital or the reform of the Labor Code. But the yellow vest crisis, caused by a relatively modest increase in the price of gasoline in the name of ecology, stopped the momentum. The government should have carried out an impact study of this carbon tax and it would have seen that there are 9 million poor people in France for whom an extra twenty euros for the petrol bill is intolerable.
After this episode, the president sought to hide his “investment banker” side. He played on easy debt, which was also offered to him by the ECB. The way he handled the Covid crisis is interesting. Having shut down a large part of the economy through authoritarian measures, the government wanted to compensate for the loss of income. But the cost was enormous, much higher than that of our neighbors because this aid was less targeted. Once the pandemic passed, the country emerged from this abundance much more slowly than the Germans. Today, across the Rhine, the budget is balanced and France has still not come out of its excess spending.
What does a household do that is having difficulty making ends meet? He looks at his expenses, not his income, because he has no control over his salary. He therefore reduces his trips or his restaurants. Everyone thinks like that. Only one economic actor acts in a different way: the State. Is he having a difficult time making ends meet? He goes to see his banker to borrow more, like a Pavlovian reflex.
Yes, but the State is not an economic agent like the others: it can raise taxes, not a household…
The State, like a household, is subject to a financial rule, which dates from the creation of humanity: one can only borrow for projects which contain within themselves their repayability, that is to say which generate new resources. However, the State, when it has to pay its civil servants, escapes this fundamental rule. He goes to the banker to ask for a loan, but without giving him a guarantee that he will be able to repay this new loan. Is there a problem? We borrow. Is the debt already very high? We borrow. This logic only contributes to the financialization of our economy. It also accelerates our decline.
However, renowned economists have assured that the debt is not a problem. Were they wrong?
Why couldn’t economists be wrong, like everyone else? They relied on the following rule: as long as the growth rate of the economy is higher than the real interest rate at which the state borrows, then everything is fine. Fortunately, many believed it. This theory was foiled by reality.
Another doctrine that appealed to our leaders: more money created would equal prosperity. But that is false. For twenty years, we had a very accommodating monetary policy, with easy money. The ECB was convinced that this almost free money would be used for investment. The greatest economist of our time, John Maynard Keynes, was certainly in favor of low interest rates, because he believed that it was a good thing to maintain growth and internal demand in times of recession. But he also added – which the Keynesian thugs always forget to point out – that interest rates that are too low create what is called a liquidity trap. The return on money is so low that the saver turns away from long-term projects, which are by nature more risky but which are no longer sufficiently remunerated in real terms in the case of a zero-interest money policy. . He then takes refuge in more liquid investments. I wondered if Keynes’ liquidity trap applied to our world. And it is. Since 2000, the “liquid” portion of household savings has become decisive, while that devoted to long-term investments has declined sharply. Invested capital – equipment, factories, software, etc. – fell by 2 points between 2000 and 2022, which is considerable, and has never been observed in a growth economy.
Finally, no one is really asking the question of whether this zero-rate money policy is responsible for the current weakness in productivity gains. This means that those in charge of economic policy in ministerial palaces do not look at the facts, but prefer false doctrines.
Is the French decline reversible?by Jacques de Larosière. Odile Jacob, 160 p., €17.90.
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