Whatever it takes !

The former President of the European Central Bank, Mario Draghi, will go down in history for three words that he uttered at the height of the Euro crisis in 2012. His famous sentence “The ECB is prepared to do whatever it takes to preserve the Euro” pronounced on July 26, 2012, is widely credited with having saved the Euro from imminent collapse. For his nationwide TV address on the coronavirus crisis last Thursday evening, President Emmanuel Macron found an excellent French equivalent. The French government would take every necessary measure to protect the population and the economy, “quoi qu’il en coûte”, he declared.

It is of course an enduring feature of French history that in times of crisis, when the people are not rising up to try and overthrow their government, they expect it to take the lead in organising and financing whatever measures appear necessary for the common good. During his short presidential term, that has not yet run three years, Emmanuel Macron has already experienced both types of crisis – the “gilets jaunes" movement with its attendant insurrectional violence in late 2018 and early 2019 and today, the coronavirus crises. In his nationwide address on Thursday evening, he did not disappoint, stating no less than three times that the state would do its duty “quoi qu’il en coûte”. His stated reliance on expert medical opinion, an implied sideswipe at conspiracy theories flourishing on social media, also sounded convincing, at a time when, as “The Spectator” put it the other day, “a social media lie often has greater power than the considered opinion of an expert”. I found myself thinking that for someone who had had so little political experience before being elected President, he has come a long way since May 2017. Can anyone seriously imagine the self-styled leader of the opposition and candidate against Macron for the presidency in 2017, Marine Le Pen, delivering such an address?

The “whatever it takes” will nevertheless have a high cost. Bruno Le Maire, the finance minister, spelt out the next day that “several dozen billion Euros”, would be needed to fully compensate businesses obliged to put their employees on short time work, pay out loss of earnings to employees and the self-employed, postpone tax and social security levies etc. etc.  And that was before Saturday’s announcement by the Prime Minister that cafés, restaurants and other non-essential services would be closed down for an indefinite period. The commitment is clearly open-ended as nobody knows at this stage for how long such measures will be necessary. And the fiscal impact will be substantial, meaning that, “the 3% deficit target demanded by Brussels will not be met this year”, as a radio journalist unhelpfully and inaccurately noted. Of course it won’t, but then it hasn’t been for most of the past 40 years. 

Taking a big step back from the fast-moving situation of the coronavirus epidemic, not only in France but throughout Europe, it is sad but true that so many countries have made no serious attempt during the boom years to tackle the underlying reasons for the expansion of public spending and implement the kind of structural reforms that the OECD for example has been urging for years, rather than take the easy way out by starving essential public services of cash that only the state can provide. Had they done so, they would be better placed to face a situation like that of today, in which public spending is both essential and inevitable. Taking just three examples from around Europe, Italy’s public health system has been struggling for years to cope with the austerity that has been imposed on it, UK governments of the past ten years have systematically made cuts to the National Health Service, France’s public hospitals have long been protesting about dwindling investment and staffing levels. Most commentators in France seem to agree that for all his reforming zeal, Emmanuel Macron has done little to curb the seemingly inexorable upward movement in overall public spending, let alone start to reduce it.  To do so, he would need, as many have advised, to initiate a radical reform of the tentacular civil service in order to dramatically increase its overall productivity, oblige the state to relinquish areas of the economy in which the private sector would be better equipped to impose the necessary financial and management disciplines and prepare the national budget for precisely the kind of crisis that France is facing today. None of this of course can be done overnight, and the next major national elections are looming in just over two years’ time. Pension reform, in which many have placed their hopes of stopping a permanent drain on the public purse, has been contested every step of the way and has not yet cleared all of its legislative hurdles. Even if it eventually does, it will not produce tangible results for many years. But in the very real here and now, Emmanuel Macron is facing his second major fiscal splurge in as many years.  

A tale of two companies

February and March are the months in which companies all over the world release their financial results for the previous year. France is no exception and the results season in Paris is now in full swing. Two companies particularly are in the public eye at this time: Aéroports de Paris (ADP) and La Francaise des Jeux (FDJ). Their respective destinies are an interesting illustration of French peoples’ contradictory attitudes to companies in general, their role in wealth creation and the role of the state as a shareholder, attitudes which are also reflected in the ongoing national debate about pension reform. 

ADP is the operator of the very lucrative Paris airports of Roissy, Orly and Le Bourget. The French state has a controlling stake in the company but privatised it partially in 2006, during the presidency of Jacques Chirac, keeping just over 50%. Anyone who bought shares at the IPO and has kept them ever since would have seen them increase in value by well over 200%, not counting a regular and comfortable yearly dividend. The current government’s intention to sell its controlling stake to investors has generated a wave of intense and vocal hostility in some sectors of public opinion, to the extent that the whole operation is at best delayed and at worst in doubt.

FDJ is the operator of the very lucrative French national lottery. It was wholly owned by the French state until last November when 80% was sold, effectively privatising the company. The operation was oversubscribed to the extent that orders from small investors were served in totality and larger orders were reduced. The introductory share price was at the top end of the expected range, rose by about 15% after the IPO and stayed there. The announcement of the company’s results for 2019 have boosted it by a further 15%. The government has congratulated itself on a resounding success.

It is difficult to fathom why the prospect of one privatisation has attracted so much popular hostility while another actual privatisation has been such a popular success. Both companies share similar characteristics. Both can be described as “safe”, in the sense that they can both continue to do well in an economic downturn. Both are de facto monopolies, both are well managed by teams of former top civil servants with close links to government, the core activities of both will continue to be subject to some degree of government regulation, both will serve regular dividends. Neither can be moved offshore.

An expression often used by opponents of the privatisation of ADP is that the state is selling its “crown jewels”, an expression that could equally well apply to FDJ. The state wants to privatise ADP “just because it needs the money” is another, often heard, criticism, as if this were a heinous crime on the part of a state whose public debt to GDP ratio is now over 100%. The same point could be made about FDJ but never is.

The real sore point among opponents of the privatisation of ADP appears to be the mooted suitor for the government’s controlling stake, the construction company, VINCI, that took an 8% stake in ADP in 2006 and has made no bones of its ambition to take it over when it is fully privatised. VINCI’s original sin, in the eyes of these opponents, is that it became the concession holder of a large network of French motorways when the state sold them at about the same time as it partially privatised ADP. Since then, the motorways and the company that runs them have been the subject of endless controversy: the tolls are “too high” and have “increased more than inflation” and “motorists are being wildly overcharged”, “the state sold them far too cheaply in the first place”, etc. etc. Few opponents seem prepared to accept the argument, which is hardly ever heard, that large infrastructure projects can either be paid for by the state budget out of general taxation or by their users. In the case of the motorways, there seems to a good economic rationale for the second option as, contrary to public services like the police, the courts, health care, pensions and education that stand to benefit everybody, infrastructure primarily benefits its users, many of whom, it should be noted in passing, are drivers from outside France and not therefore subject to French taxation.  Nobody seems willing to admit either that since purchasing the motorway concessions, VINCI has done an excellent job of managing and maintaining them, that motorists flock to them to speed down South or out West come holiday time, complaining all the way to the toll booths as they go.  Populist politicians, mainly from the hard left, fall over each other to denounce a capitalist conspiracy to cheat the state and gouge motorists.  At the height of the gilets jaunes protests at the end of 2018, toll gates were often delberately opened by protestors and sometimes even destroyed by fire. A number of the perpetrators have recently been convicted of arson and wilful damage by the courts.

Mainly as a result of the gilets jaunes’ demands for a "peoples’ referendum", the French government felt obliged to concede that any issue of “major” public concern could be put to a referendum of this kind if a petition to request it was signed by 10% of the electorate. Opponents from both the left and the right wings of politics were quick to seize this opportunity and launched a petition for a referendum on the privatisation of ADP. They seem very unlikely to gather the 4.7 million signatures necessary by the deadline of March 12th. What the government will do then is uncertain, but it will certainly not take any controversial decision quickly, just a few days before the first round of municipal elections and still embroiled  as it is in trying to get legislation on pension reform through parliament. 

Meanwhile, VINCI has purchased control of London’s second airport, Gatwick, after acquiring a string of Portuguese airports some years ago, positioning itself as a major airport operator worldwide. Like LVMH or Airbus and other successful and world-renowned French firms, it could become another French champion. But strangely, many in France seek to deny it that role. This is all the more puzzling as those who have complained loudly about high taxes, and particularly the gilets jaunes, do not seem to want to realise that the more they ask the state to do, the less likely it is that taxes can be reduced. And the more likely it is that those public goods that so many rely on throughout the country like the police, the courts and other universal public services, will continue to be starved of cash.

Funnily enough, it was France under Napoleon 3^rd in the 1850s that pioneered the concession of public services to the private sector - what would be called “outsourcing” in today’s jargon. Water was the first of them and led to the creation of private companies like Lyonnnaise des Eaux or Compagnie Générale des Eaux, that are still around today, even if in different guises and under different names. Most consumers pay privately owned water utilities for their water supplies without a murmur and many of them are probably unaware that these “public services” are outsourced to the private sector. Telecommunications, after being a state monopoly for many years, is run today by four private sector operators in a competitive market. Now that FDJ has been privatised with a minimum of fuss, the controversy over infrastructure concessions in general and ADP in particular is all the more difficult to understand. To coin a phrase often heard in a country supposedly steeped in Cartesian logic, " c'est pas logique " !