Philippe Aghion: “To fight stagflation, pensions must be reformed”


stagflation, the return? The latest economic data published by INSEE shows a dark economic situation in France. Gross domestic product (GDP) remained stable in the first quarter of 2022, growing at… 0%. At the same time, price increases continued to accelerate in April to 4.8% year over year. The French economy is exhibiting several symptoms of ‘stagflation’, a contraction of a period of slow (or zero) growth and inflation. Point asked Philippe Aghion, professor at the College de France. This renowned economist, an inspiration to President Macron, says he is “optimistic about action” despite the dark clouds that are accumulating. Optimism, a rare thing in economics.

Point : Has France already entered a period of “stagflation”?

Philippe Agion: Behind the term ‘stagflation’ lies the idea of ​​a price-wage spiral. That is, the increase in consumer prices leads to an increase in wages and this increase in wages feeds that of prices. For the time being, this spiral has not yet started in France, unlike in the United States, where it is already at work.

How do you explain this tricolor representation?

Largely thanks to the tariff shield on gas and electricity: two energy sources whose prices have risen with the economic recovery after Covid and now the war in Ukraine. The discount on the fuel price at the pump also contributed.

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It’s all hanging by a thread, right?

If the war in Ukraine goes on too long and inflation continues, yes, the price-wage spiral could kick in. If so, it is likely that interest rates set by the European Central Bank will go up, which would threaten growth. The best response is to increase the offer.

What do you recommend?

An effective way to increase the supply is to reform our pension system: it is imperative to extend the contribution period to get a full old age pension. Naturally, negotiations will have to be held with the unions on how to take into account both the hardships at work and the long career. The more French people are employed, the more wealth we will produce. According to the OECD, in France only 67.7% of 15-64 year olds have a job. In Germany that is 76.7%! Other reforms, such as unemployment insurance and vocational training, have already been implemented. It remains to reap the benefits of reducing unemployment to 5% from 7% today.

We have no choice but to invest in green growth.Philippe Agion

What are the benefits of increased labor participation?

This increases economic activity. As a result, tax revenues rise and government deficits shrink or shrink. In addition, by reducing our recurring government spending, increasing the contribution period will give us budgetary margins to invest more heavily in growth – particularly in innovation, reindustrialization and training – and to accelerate energy transition. In fact, we have no choice but to invest in green growth: the climate crisis and the rise in fossil fuel prices are forcing us to do so.

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In an interdependent Eurozone, it’s hard to imagine France escaping stagflation and its infernal price-wage spiral on its own…

Germany itself will have to invest enormously. It is aware that it needs to accelerate the energy transition to free itself from its dependence on Russian gas. And as soon as possible. And she knows she has to reconstruct an army in a context of war in Europe. Finally, it also needs to invest in its infrastructure, which was often dilapidated and damaged by severe flooding in the summer of 2021.

You seem optimistic, it’s rare in an economist!

I am not a Panglossian optimist, but I am an action optimist! Yes, we have an inflation problem. Yes, monetary policy will tighten. Hence the importance of creating the conditions for the adoption of fiscal policy!

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Why is the specter of stagflation so scary?

We fear a return to the 1970s, where inflation sometimes exceeds double digits. The two oil shocks of 1973 and 1974 caused a jump in the price of gasoline and raw materials. Price growth then spread to all consumer products and services. In response to rising prices, wages rose significantly, and as the crisis hit, growth slowed sharply and unemployment rose.

Have we learned lessons?

The European Union is avoiding stagflation thanks to a more flexible implementation of the Maastricht criteria. Until the pandemic, we treated all spending at the same level and said, “We don’t exceed 3% of GDP. “We need to change software while practicing between reducing recurring deficits through state reform and pensions and investing in green growth. This idea that you can drive and drive long-term growth was not well understood in the 1970s.

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