Back to basics –

The covid-19 epidemic will have been a parenthesis marked by a freeze frame of the economy before the rapid restart. For nearly two years, states have fully or nearly fully offset the economic and social impacts of the pandemic. Accounting, budget and financial rules have been suspended in the name of “whatever it takes”. Fearing the recession could continue, governments have stepped up stimulus plans, even as household incomes have been maintained and savings are at their peak. The memory of the 2008 financial crisis, the scars of which lasted for almost ten years, undoubtedly explain this choice.

The return to economic fundamentals is brutal

This unrestricted support policy has fueled inflation again; the artificial stimulation of demand came at a time when, due to successive confinements, supply was struggling. The trillions of euros of liquidity injected by central banks provide a powerful reservoir for inflation, which is primarily a monetary phenomenon. The Ukrainian conflict marks the end of this “abnormal”, atypical period.

The return to economic fundamentals is brutal. In a matter of days, the prices of energy, commodities and agricultural products rose at an unprecedented rate since 1979, triggering a shock wave. While these increases are largely expected, they affect the purchasing power of households, which are forced to reduce their consumption.

After a rebound in 2021, activity has been declining since the beginning of the year, whether in the United States, Europe or China. This rift is all the more obvious because since 2020 people have been under the impression that there was no limit to easy money and that government deficits such as debt were no longer an issue. † Their sensitivity to crises seems stronger than in the past, with feelings often taking precedence over reason.

The time is for real-time adjustment with the risk of overreaction

Fearing violent reactions from public opinion, governments are inclined to adopt support measures quickly. Live information and social networks influence each other’s behavior. In 1929, the effects of the crisis were many months or even years away. In France, the shock of 1973 led to a recovery plan in… 1975. This belated plan only fueled inflation. Since the crisis of 2008, it is time to adapt in real time with the risk of overreaction.

In constant euros, the price of petrol in 2022 will be the same as in 1980

Emotional aside, it should not be forgotten that the fuel price in France today is no more expensive than it was in 1973 or in 1980 during the two previous oil shocks. In 1973, an hour paid at the SMIC was allowed to buy 2.5 liters of petrol, against 5 liters in 2022. By calculating in constant euros, that is, taking into account the cumulative inflation, the price of petrol, despite the tax increase, is in 2022 the same as in 1980. We must add that vehicles have become more fuel-efficient.

Powerlessness against a background of individualism and mistrust of government

In recent years, the accumulation of crises has not increased the resilience of households, which increasingly need protection of their social situation and security of their income. Over the past forty years, the public authorities in France have responded to this demand by increasing social spending from 24% to over 30% of GDP. Households believe that crises of any kind should at least affect them. The effects of these shocks must be borne by the community.

This evolution is the product of the meeting of powerlessness and mistrust: powerlessness against a background of growing individualism and distrust of government. Risk pooling is justified. This is the principle of insurance, but it requires provisions in advance. It should also be based on probability models to assess contribution levels and funding ratio.

To prevent a new generation from being economically lost, the exit from the world of appearances is essential

The return to budgetary or financial orthodoxy is being tested by many French people. In history, however, every inflationary drive, every unbridled monetary creation, at one time or another, leads to austerity or bankruptcy. In the recent past, it took France about twenty years to get out of inflation at the end of World War II. It also took twenty years to bring about the stagflation of the 1970s.

To prevent a new generation from being economically lost, it is essential to step out of the make-believe world. The villages of Potemkin are only an illusion for a time. The transfers of deficits to the Caisse d’Amortissement de la Dette Sociale or their financing by the European Central Bank are nothing but cauterization on a wooden leg.

There is little room for maneuver in tax matters to restore financial equilibrium, as France is characterized by a high, even very high level of its compulsory levies.

Saving money, a taboo concept but essential

The president has also promised tax cuts, especially so-called manufacturing taxes, which affect the competitiveness of companies. In times of inflation, it is difficult to raise VAT, the first tax in terms of returns. The increase in the taxes on heritage is also mentioned, but the French are in favor of lowering the inheritance law. The wealth tax recovery would be mostly symbolic, yielding only a few billion euros when needs are tens of billions of euros.

In a war economy, it is time for difficult choices, arbitration and perhaps the realization of savings, a taboo concept that is nevertheless inevitable.

  • Philippe Crevel is a specialist in macro-economic issues. He is the founder of the economic studies and strategies company, Lorello Ecodata, and also directs the Cercle de l’Epargne, a center of studies and information dedicated to savings and retirement, in addition to our economic specialist.

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