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No real recovery without the reallocation of resources – Editorial for Challenges by Denis Kessler

Chairman & CEO of SCOR, Denis Kessler publishes an editorial piece in the French weekly Challenges, covering economic, political and financial current events in France and worldwide.

Our country is once again lagging behind. Less efficient than many of its partners and competitors before the crisis broke, it is now struggling through the current period, which should be one of recovery. Growth is desperately sluggish, the productive investment rate is grossly insufficient, unemployment is ongoing, the correction of the public deficit is slow, debt is rising inexorably, and the external accounts are in the red. France is proving less able than most other developed countries to leverage the low oil prices, the low interest rates and the weaker euro. In terms of the general ambiance, people’s morale is “dans leurs chaussettes”, i.e. at rock bottom or literally “in their socks” - and those socks were made in China.


These relative under-performances are manifest in all phases of the economic cycle: pre- and post-crisis. However, we are having a particularly hard time recovering in the post-crisis phase, progressing neither as quickly nor as well as other countries, although we largely share the same economic backdrop. The explanation for the sluggishness in the French economy lies in the key difference in resource allocation between our country and others. Resource reallocation is a more painful process in France due to its considerably debt-driven economy, the size of its public sector and rigid labour market rules.


In a debt-driven economy like ours, resource allocation is intrinsically more rigid than in capital-based economies. The financial market is by nature much faster and more effective at redistributing capital between the various economic sectors. This is true in expansion phases when growth industries and start-ups must be provided for without delay, and it is all the more true in crisis recovery phases, when the resources of sectors recording declining productivity and demand must be reduced and refocused on emerging sectors able to develop innovations that promise growth. Without the drive to convert decisively to a capital-based economy, our growth will be structurally weaker than that recorded elsewhere. Yet there are many political obstacles to this shift, as demonstrated by the opposition to pension funds, for instance, or to the changes to the tax system aimed at promoting financial markets and accumulation. This phenomenon is further aggravated by the fact that all banking systems are always weaker in the wake of an economic crisis, and that the new solvency rules (Basel III) limit the credit supply. And what a paradox that the low-rate policy and quantitative easing do not encourage the revival of new credit, but rather the retention of old debt, and public debt in particular.


The other difference which explains the relatively poor recovery is the importance of the public sector. The State always defers any adaptations to companies or sectors it has a hand in – whether directly through capital shareholdings or indirectly through regulations. It only takes action when the situation turns critical. Recent examples abound. The private sector always takes quicker and further-reaching action, particularly if it is broadly immune from State activism. So it is hardly surprising that countries with less State intervention than in France are enjoying a more buoyant recovery.


Resource reallocation is a key factor in re-establishing sustained growth. A genuinely active labour market is also necessary, as all production factors must be reallocated. In this area too, France is outstanding…for the rigidity of its labour market, which significantly curbs job reallocation between qualifications, companies, sectors and employment areas. The various incarnations of the bill under discussion provide countless examples of the cultural lag in France. It is painful to see the trade organisations of the public sector – which is not affected by this bill – oppose these few measures, which would reduce unemployment in the private sector.


As the English saying goes, you have to accept “short-term pain for long-term gain”. We should not delude ourselves. All the lags and obstacles to resource reallocation will come at a very high cost for France: potentially weaker growth, a lower investment rate, lower productivity gains, sluggish innovations, compromised competitiveness, fewer jobs, and lower salaries.