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 " !

Striking the old year out...

As predicted in my last post, the public transport strike has turned into a battle to influence public opinion between the government and France’s most militant trade union, the CGT. Its secretary general, Philippe Martinez, declared over the weekend that Emmanuel Macron has reached his “Thatcher moment”, meaning presumably that he is determined to fatally weaken the power of trade unions to oppose his reforms. In response, the secretary of state for transport has accused the CGT of trying to bring the country to a standstill and intimidating non-strikers. There is surely some truth in both assertions.

For all its rhetoric, it is easy to forget that the CGT, although strong among train drivers, has seen its influence erode for a number of reasons since the last big public transport strike of 1995. Its former pride of place among unions has been taken by the more reformist CFDT and its leader's stance is not always supported by his own rank and file. It is also worth pointing out that union membership in France in general is among the lowest in industrial countries and concentrated in the sprawling public sector. The spread of the Internet has not only enabled many people to work from home but has also facilitated last-minute on-line reservations for car-pooling rides and trips on long distance coaches and buses (largely liberalised by Emmanuel Macron himself when he was a minister under François Hollande). “How come the trains are empty?” asked one seemingly surprised anchor man on the evening news two days ago, as cameras panned slowly over half empty carriages in high speed trains. The obvious answer seems to be quite simply that many French employees and/or holiday makers have made alternative arrangements to get where they want to go, to work, to join their families for Christmas or take a holiday on the ski slopes. If the usually rapid and efficient trains are seen as temporarily unreliable, they grumble a lot but are quick to find alternatives. Driving of cars, scooters of all kinds, from near motorcycles to electrically driven runabouts, bicycles and walking have increased massively as a way of getting to and from work for instance, and by the time the Christmas holidays end on January 6, strikers, and more importantly, the top managers of the SNCF, will probably have drawn the conclusion that the much feared competition to public sector trains and metros has already arrived. People have been able to adapt and can no longer be stopped going about their business by strike action, as was the case before the Internet era. Some strikers seem to have drawn such a conclusion already and their number has fallen steadily over the past week or so. And thanks to 4G enabled smart phones and mobile apps, it is now possible to see which trains and metros are running and adjust travel plans accordingly. In all likelihood, the strike will eventually peter out, despite desperate and largely illegal action by CGT members to prevent trains running by physically occupying their tracks or temporarily cutting power supplies to some areas.

The government, it must be said, has also, played a skilful hand, even if its announced  grand design of a “universal” pension system had had to be sacrificed for political expediency, in application of the age-old principle of divide and rule: the police force, the fire service, airline pilots, stewards and stewardesses, fishermen and ballet dancers at the Paris opera have all been bought off with promises of specific arrangements for their pension scheme and retirement age, but the determination to put an end to the remaining retirement privileges of many public transport workers and public sector workers in general remains intact.  With some further face-saving concessions in the negotiations scheduled for early January, the government is still likely to have a points-based system for pensions adopted by parliament in 2020 and ensure that when it is finally introduced in 2025, for everyone except those entering the workforce before then, the deficit of between 8 and 17 billion Euros predicted by the official pensions watchdog will have been reduced to zero.

All this being said, the political price that Emmanuel Macron will ultimately have to pay for his probable victory remains uncertain. It was interesting to see for instance that for the first time last Saturday, a street demonstration saw members of the CGT and a large number “gilets jaunes” marching side by side. Does this mean that they have found common ground, and will this show of unity lead to anything? Somehow I doubt it, given that for the moment the only factor that unites them is their intense dislike of the President and their distaste for his reforms.  The next big national test will come with the country-wide municipal elections next March. Macron’s party, la République en marche has invested heavily to prepare them, by selecting or supporting candidates for all of France’s major cities and most towns. The “gilets jaunes” for their part, have not moved on much from their stance as a protest movement and the unions traditionally play a very minor role in such elections anyway.

As we strike the old year out and ring the new one in, the only certainty is that 2020 will be another eventful year for France!

Wishing all my readers a very Happy New Year!

A strike for pension reform

Former French Prime Minister Michel Rocard once quipped that “pension reform has the potential to bring down several governments” (avec la réforme des retraites, il y a de quoi faire sauter plusieurs gouvernements). On Thursday of this week, France will suffer once again what promises to be a more or less total shutdown of public transport in the Paris area, a very limited number of mainline trains in the rest of the country and union sponsored street marches, probably accompanied by masked and helmeted hooligans hiding behind them. Many people who remember the three week long public transport strikes of 1995 are openly wondering whether the current President and his government will suffer the same fate as President Jacques Chirac and Prime Minister Alain Juppé, who were eventually forced to retreat ignominiously and withdraw the pension reform that they had proposed. In 2019, Emmanuel Macron’s chances of bringing his five-year term to a successful close by introducing a reform that has been fiercely resisted every time it has been attempted, hinge on the outcome of this show of force. Be that as it may, it is such repeated failures to bring about fundamental structural reform that have earned France a reputation among foreigners for being ungovernable.

The terms of the current conflict are deceptively simple. Back in 2016, when Emmanuel Macron announced that he was standing for President in 2017, he declared that one of his main policy ambitions was to reform the French pension system, turning it into a “universal scheme” in which every contribution would give rise to the same pension entitlement, regardless of whether one worked in the private or public sector or was self-employed. The simple message was that “1 euro of contribution would give the same entitlement to every pensioner”. Nothing was said at the time about raising the retirement age or increasing contributions or the dire and converging forecasts about future deficits, but it is worth noting that the French pension system as a whole absorbs more than 14% of GDP, quite a lot more than in other comparable countries. Much of it comes out of the state budget.

In contrast to the proposed reforms put forward by Alain Juppé’s government in 1995, for which there was hardly any prior consultation with those most directly concerned, there is no doubt that this time the government has fallen over itself to consult as many parties as possible and public debate has been vigorous and encouraged. However, as these consultations have proceeded, under the guidance of the avuncular Pensions Minister, Jean-Paul Delevoye, what looked like a simple solution has turned out to be a lot more complicated and the attempt to merge 42 individual pension schemes into one has hit many obstacles. For a start, to whom should the reformed system apply? To those who are 5, 10 or 15 years from retirement? Or only to those entering the workforce after the reform is adopted, a situation that would be tantamount to no reform at all for the next 40 years or so? What about the pension schemes that have managed themselves quite happily for many years, whose demographic characteristics are favourable and who are likely, under the proposed reform, to lose control over the reserves thy have built up? Is it fair that metro and bus drivers in Paris should be able to retire almost ten years earlier than their colleagues in other large French cities? Is it true that their working conditions are so much worse than those of nurses and doctors, whose jobs can be considered just as demanding and essential for society but who have no particular pension privileges? And on top of the proposals for a systemic reform, other more short-term but constantly recurring questions have also been raised: should the retirement age be raised for all, contributions increased, or existing pension entitlements reduced?  In the face of the number and complexity of such issues and the very different possible outcomes, the government had been criticised for not making its intentions clear, and by the more suspicious in nature (a large majority of French citizens!) for having a hidden agenda! But when all is said and done, the point has now been reached at which it is clear that the crux of the current reform effort is the reshaping of pensions in the public sector and particularly in big public transport companies like the SNCF and the Paris based RATP. And once again, the majority of unions in these and other public sectors have made it clear that they are prepared to bring the country to a standstill to stop the reform. Listening to a union representative on the radio this morning describing what he characterised as appalling working conditions in the Paris metro, I was left wondering why he and so many of his colleagues had not already left their jobs to look for something more congenial. But rightly or wrongly, their determination seems as strong as ever. In this respect at least, nothing has changed since 1995.

And in this conflict, as in so many others between the government and the unions, it is the evolving state of public opinion that will ultimately determine the outcome. For the moment, the attitudes of men and women in the street are inconsistent and contradictory. Some polls indicate that a majority is in favour of a straightforward, one-size-fits-all pension system, but other polls have found that many also have sympathy with those who are presented as, or loudly proclaim themselves as, losers in the process of simplification.  Now that the strike has been called and is likely to be massively observed, any objective assessment of the “facts”, difficult at the best of times, will take second place to a battle of soundbites and images against the background of all too familiar scenes of demonstrations and paralysis. In 1995, one of the reasons the strikers won the day was that Chirac was perceived, correctly as it turned out, as a half-hearted reformer. Macron is of a very different mettle. It is too early to tell whether Michel Rocard’s prediction will once again turn out to be true or whether Emmanuel Macron is the President who will at last break the curse of fundamental structural reform in France and succeed where many others have failed.

Does France want a federal Europe ?

In the U.K referendum of 2016, the case for Brexit was essentially about “taking back control”. Many years before, a London taxi driver had explained to me, repeating the mantra of Margaret Thatcher at the time, that “Europe” was fine but that a “federal Europe” was out of the question.  It seems therefore worthwhile exploring the extent to which the European project in general is indeed federal and whether France in particular is keen on a federal Europe, a concept that the UK has always rejected, even before the fateful referendum of June 2016.

The influence that France has always sought to exert over the rest of Europe has strong historical roots. Only going back as far as Napoleon Bonaparte, his German, Italian, Austrian, and Russian campaigns of the early 1800s were intended to produce a federation of Europe, with members of his own family in charge of its component parts. Carl von Clausewitz, the Prussian general who theorised the philosophy of war in his major work “On War”, was so influenced in his outlook by Napoleon’s campaigns, that he encapsulated their essence in famous phrases like, “War is therefore the use of force to impose one’s will on an adversary” (“Der Krieg ist also ein Akt der Gewalt, um den Gegner zur Erfüllung unseres Willens zu zwingen”) and “War is simply the pursuit of political ends with other means” (“Der Krieg ist eine bloße Fortsetzung der Politik mit anderen Mitteln”). It is an irony of history that in the 20th century, Germany itself, under the Nazis, would also set out to put these ideas into practice.

The European Union, as it has now become, was designed precisely to banish war forever as a means by which European countries could pursue political ends. But the gradual process of European construction has not put an end to France’s political ambitions in Europe. Far from it. For its part, Germany, sometimes characterised as an economic giant but a political pygmy, is still living with the political and psychological consequences of its recent history and subsequent partition and has been reluctant to define and project any European ambition. France has had no such qualms. But it is also striking to observe that it has always taken grave exception to any post-war integrationist agenda of which it disapproved, starting as early as 1954, when its Parliament torpedoed the European Defence Community. And only a few years after the successful establishment of The European Economic Community by The Treaty of Rome, built around French agriculture and German industry, it was General de Gaulle who simply refused to attend EU ministerial meetings for six months, for fear of being outvoted, before accepting “the Luxembourg compromise” in 1966, which effectively gives member states a veto over any decision if its “vital national interests” are at stake. It was another French President, Valery Giscard d’Estaing, who succeeded in upgrading the European Council to a highly effective tool of intergovernmental cooperation to counter integrationist initiatives of the supranational Commission. The European Council, that was enshrined in the EU’s institutional machinery by the Lisbon treaty of 2007, is now the key body that sets its political agenda and strategic direction.  In short, as far as France is concerned, the European project, it seems, can only advance on French terms and as a result of intergovernmental agreement. Emmanuel Macron’s current attempt to assume the political and intellectual leadership of the EU  (see: “The Economist” - November 9th ) at a time when Germany is temporarily weakened by the long drawn-out end of the Merkel era and the UK is on its way out, is simply the latest example of a very long-standing French ambition to forge Europe and its current incarnation, the EU, in its own image.

But is that image one of a federal Europe? There are almost as many definitions of federal as there are federal countries. The most obvious example is that of the United States, but Brazil, Mexico as well as Germany and many others are also federal in structure with different types of relationship between central government on one hand and regional, state or provincial governments on the other. When people use the word “federal” in the European context, they usually mean a gradual process of greater integration and sovereignty pooling but the phrase “an ever closer union….”, first enshrined in the preamble of the Treaty of Rome, is sufficiently lofty sounding but at the same time sufficiently non-binding to accommodate different visions of integration and an open-ended timetable. And as far as France is concerned, as I have suggested above, further integration can only come in small steps and in slow motion  - and, to the greatest extent possible, on French terms.

The major integrationist steps in the EU so far have been mainly economic, with common policies on agriculture, trade and competition, among others, culminating in a (partial) monetary union and open borders between some countries of the Union, but not all. These policies have benefitted all member countries of the EU in terms of GDP growth and per capita income. And in spite of its occasional grumblings about “unfair competition”, particularly from the newer member states, France is no exception. And yet all this is still very much work in progress - economic and monetary union is far from complete and the current negotiations about rounding it out with a banking union are difficult and will be long drawn-out. The Schengen system has undoubtedly made life easier for many EU citizens, particularly in France, that shares a land border with six other European countries, five of them members of the EU. But in this sensitive area of national sovereignty, the Union has repeatedly failed to define an effective immigration policy and its external borders are, as everywhere, difficult to police. It is also worthwhile noting that the U.K, years before the term Brexit was even coined, opted out of both the Maastricht Treaty and the Schengen agreement. Why worry, one might ask, about “taking back control” when the country has already skilfully managed to sidestep the EU’s most decisive moves towards greater integration?

More significantly though, France is caught in a dilemma between its stated desire to pursue European construction and its profound nature as a centralised nation state. Its history, at least since the reign of Louis XIV, has been one of bringing its outlying regions like Brittany, Corsica, French Catalonia, and the Savoy under the control of a centralised state. After the Revolution, that centralised state became a centralised Republic, with its much-vaunted values of liberty, equality and fraternity. And indeed, in pursuit of these “republican values” centralisation is all pervasive in France. Prefects appointed by the central government ensure that legislation voted by the Parliament in Paris is applied uniformly in every corner of France, including its overseas territories. The National Education Ministry administers a monolithic and supposedly egalitarian public education system. A huge body of administrative law has been created and conflicts with the administration are handled by administrative courts. The powers that municipal mayors and local authorities do enjoy over local or regional matters can quickly be overridden by national laws and regulations. In one recent and telling example, the mayor of a small provincial town who had decided to ban crop spraying within 150 meters of residential areas was overruled by an administrative court enforcing a decree issued by the Ministry of Agriculture in Paris. Even local powers of taxation can be removed at the stroke of an imperious pen, as the recent government decision to phase out the locally important “taxe d’habitation” shows – a move that has left many local authorities in dire financial straits.

There are many other examples of central government’s heavy hand in French society. The inevitable consequence of course is that whenever anything goes wrong, anywhere, from street lighting in a blighted suburb to the closure of a factory in a small town, the “state” is called upon by all concerned to sort it out. A Financial Times correspondent in France recently interviewed Priscillia Ludosky (FT Weekend November 1^st) one of the leading lights in the gilets jaunes movement. She rehearsed once again the idea that many people in France feel they are trapped in “left-behind communities” and that it was this feeling that sparked the multiple demonstrations that started last November and continue, with varying degrees of intensity, to this day. And yet, the specific issues she pinpointed like inadequate child care facilities, lack of local transport and potholes in streets are not the responsibility of central government. They should normally and could realistically be solved by local authorities.

As I have suggested in this blog before  (“The state of the state” – April 2018) the French centralised state would therefore have a lot to gain, in terms of efficiency and acceptability, by embracing a more federalist approach and devolving real power, including inalienable power to raise taxes, to the regional or local level and concentrating on matters of national sovereignty like defence and security, justice and immigration for which, even in a federal system, central government is responsible. But for this to happen, France would have to break with its long-standing centralising traditions. And as far as greater economic and financial integration and steps towards a European security and defence policy are concerned, examples of where future European cooperation may be focussed, the central state would have to pool sensitive parts of its national sovereignty with other nation states. It is hard to see either of these two developments happening any time soon!

If there were still time for the U.K to wake up from its Brexit nightmare and take a more dispassionate look at the progress of European construction, it would find that the much-feared bogeyman of a “federal Europe” is nowhere on the near horizon and that “ever closer union” will continue to be a very slow and very tortuous process!

Thomas Piketty's second tome

Thomas Piketty was on the radio yesterday lunchtime, interviewed by a good economic and business journalist, Hedwige Chevrillon, about his new book, “Capital et Ideologie”, published a month ago in French.  As the translators into English and other languages beaver away over the 1232 pages of text, charts and graphs, the least of their worries will be the straightforward title!   

After the considerable interest in his last work  “Capitalism in the 21^st century”, not only in France but throughout the world – so far 2.5 million copies have been sold in over 40 languages,  (“only a small portion in English”, Piketty revealed)  - this second book will undoubtedly also be widely read and commented on.

Starting the interview on a provocative note, the journalist asked Piketty if he considered himself a latter day Karl Marx,  “Certainly not”, Piketty answered, “Karl Marx did not have the benefit, as I did, of 150 years of economic history from which to draw his conclusions and he was also unaware of the abject failure of Soviet style communism”. He then went on to give 20^th century western style capitalism credit for having raised standards of living and reduced inequalities through progressive taxation, even in the United States,  but blamed it for reducing taxes and preferring ownership and rent seeking to redistribution, starting with the “Reagan revolution” of the 1980s, making it clear that in his view, the policy stances of both Roosevelt and Reagan were based on ideological rather than economic choices. Interestingly, he admitted that after being liberally inclined when studying economics in the 1980s, he had changed his economic philosophy on the evidence of the collapse of the Soviet Union but also what he sees as the objective failure of Reagan’s economic policies, and those that followed his lead, to generate growth and investment.  The publicly stated justification at the time for drastically lowering taxes was the assertion that it would lead to greater investment, and therefore growth that would benefit the whole of society. This turned out, according to Piketty, to be false: the evidence he has gathered shows that since the 1990s, in the major developed countries, the rich have grown richer, growth rates of the post-war years have stalled and inequalities have worsened. He admitted sympathy for the main planks of the democratic platform for the 2020 election and scorned those who claim, once again on the basis of ideological convictions, that they are tantamount to socialism or communism by the back door.

Continuing the theme of his first book, Piketty also stated that progressive taxes should not only be levied on income but also on capital accumulated during a lifetime. A young entrepreneur, however brilliant his idea, however beneficial it may be to society and however big his ensuing business may become, has no right to be immune from the progressive taxation of income and accumulated wealth, both during his lifetime and when he dies. Turning from the US and Europe to Asia, he pointed to the paradox that inherited wealth is taxed at 55% in Japan, that runs a western style capitalist economy, whereas in China, ruled by a purportedly egalitarian Communist party, it is taxed at 0%.

All this of course is of more than just passing interest in France, given the continuing debate about the wealth tax that Emmanuel Macron controversially abolished soon after taking power in 2017. His publicly stated economic argument for doing so was very similar to that of Ronald Reagan in the 1980s: wealthy people will invest the money they haven’t been obliged to pay in taxes and therefore generate growth.  A recently released report produced by a panel of French economists, who were given the task of evaluating the impact of the measure, concluded that it is still too early to tell. It’s only tangible impact that they could point to for the time being is a considerable reduction in the number of tax exiles from France in 2017 compared to 2014. And while it is true that the trend growth of the French economy is a little higher than that of comparable countries, in particular Germany, many commentators put this down to the boost to consumer demand after the injection of more than €11 billion into the economy as a result of the gilets jaunes protests last autumn.

Will Macron’s more structural measures, like those in favour of vocational training or reducing unemployment benefits, add momentum to economic and wage growth in one or two years time? Again, it is too early to tell, but a lot of Macron’s credibility and therefore his chances of being re-elected in 2022, will be riding on their results.

Macron has also gone on record as saying that one of the greatest factors of inequality in France today is not having a job. This ties in with another of Piketty’s findings, that education and training are fundamental to reducing inequality and that the state should therefore encourage massive investment in education at all levels.

One imagines, although he didn’t say so, that Piketty would therefore give Macron credit for the measures that his government has taken to boost apprenticeships and vocational training, as well as focusing more resources on primary education, but that he would not be so complimentary about the abolition of the wealth tax! Nor can he be expected to have great sympathy for Macron’s championing of France as the “start-up nation” together with his frequently repeated encouragement to young entrepreneurs “to become millionaires”.

Towards the end, the interview degenerated into hubbub and confusion as both interviewer and interviewee spoke across each other and at cross purposes - too many questions to ask and too much information to impart. Radio interviews often, disappointingly, end this way for lack of time.

To find out more, there is no alternative therefore but to plough through the 1232 pages of Piketty’s book!

The future of Renault

France more or less comes to a halt in August, particularly over the 15^th of August, which is a public holiday. This year is true to form, with August 15^th falling on a Thursday and most people intending to take a summer holiday adding a long weekend to their entitlement. Like every year, the rolling news networks are clutching at straws to keep themselves going, covering mainly, in the absence of major international developments, the weather, traffic jams on the Mediterranean bound motorways and the all-too-frequent forest fires.

It is also a time therefore for discreet discussions about business mergers and acquisitions as the media spotlight is dimmed and the rumour mill running on empty. One imagines that this year in particular, intense discussions are ongoing between Renault, Fiat Chrysler Automobiles and Nissan, a month or so after the withdrawal of a merger proposal to Renault by Fiat and almost a year since the arrest of the erstwhile boss of both Renault  and Nissan, Carlos Ghosn, in Tokyo on charges of financial improprieties as CEO of Nissan, his ensuing dismissal by both Nissan and Renault and the serious deterioration of relations between the two companies.

That the global car market is suffering from overcapacity and has become fiercely competitive is not in doubt. One only has to listen to any French radio station or watch any TV network for more than ten minutes to hear at least two advertisements for some French or foreign car. Excess capacity has been exercising the minds of industry executives for at least 30 years. Sorting through some old papers the other day, I came across a glossy brochure prepared by the Renault communications department in October 1993 announcing details of the agreed merger between Renault and Volvo, which had been involved in an alliance for some years. “Why is the announced merger between Renault and Volvo necessary when, as has often been asserted, the alliance was working very well?” is the first question put to the boss of Renault at the time, Louis Schweitzer, on page 1 of the brochure. “Renault and Volvo are intending to merge because the alliance has been a success and that give us the guarantee that the merger will also be a success” is the answer. Had a merger between Renault and Nissan gone ahead, as Carlos Ghosn undoubtedly wanted but that Nissan was fiercely resisting, one could imagine almost identical words being written today. But they won’t be because the merger didn’t happen (or at least hasn’t happened yet!). Nor did the merger between Renault and Volvo. The underlying reason was the same in both cases: the presence, or as some would have it, the meddling of the French state.

Why exactly the French state finds it not just desirable but seemingly essential to be a major shareholder of a car company is for many observers outside France a puzzle and even an aberration. Interestingly, Emmanuel Macron, for all his purported credentials as an economic liberal has in this case adopted much the same attitude as his predecessors, espousing the long French tradition, initiated by Colbert under Louis XIV, of promoting and keeping a firm grip by the state on parts of French industry. As finance minister under François Hollande, Macron came up with millions of Euros of taxpayers’ money to buy enough additional Renault shares to force its AGM to adopt a resolution on double voting rights, thus ensuring effective state control of the company. It is now known that Carlos Ghosn was very much against this move and that Nissan was furious about it. It had long complained that Renault, with its 43% stake, whereas it only holds 15% of Renault, was the predominant shareholder in the alliance while Nissan contributed most of its profits! Ironically, this was the result of Carlos Ghosn’s 20-year stewardship of the alliance, starting in 1999, when Louis Schweitzer sent him to revive the almost bankrupt company in which he had just purchased that 43% stake. Similar to Renault and Volvo in 1993, Renault and Nissan were ripe for a merger after 20 years of a largely successful alliance. The surprise arrest of Ghosn in Tokyo last November seems to have been the last spanner that Nissan could throw in the works of a merger that would have formed a global company under the effective control of the French government. The Volvo scenario revisited 25 years later, but with much larger stakes.

None of these developments of course have done anything to reduce overcapacity in the global car market. Carlos Ghosn had thought that he was running a global car company with the clout to become a, if not the, major force in the global market. Regardless of whether the charges against him are proven or not, he has done a superb job of turning around both companies and, with the addition of Mitsubishi, was on the cusp of achieving an ambition in tune with his exceptional talent - and exceptionally large ego!

The main conclusion I draw from this sad story is that the French administrative elite, unlike its business elite, is still under the influence of Colbert almost three centuries later and has not yet come to terms with some of the realities of globalised markets. Renault will have to engage in a merger soon as it cannot survive alone, given the huge investments that carmakers in general will have to make in zero-emissions and self-driving vehicles.  A merger with the other French champion, Peugeot, run by a former associate of Ghosn at Renault, Carlos Tavares, seems out of the question in view of the companies’ very different cultures and the EU competition issues it would raise. A merger with the smaller and struggling Fiat would bring Chrysler into the picture and with the addition of Nissan/Mitsubishi could form the leading car company in the world. The French government must soon decide if it can bear to loosen its grip on a national champion in order to replace it with a global champion with a French core. As negotiations proceed quietly before the end of the summer holidays, it does not have much time to make up its mind.