Art of the Possible
Is it just me or did this year’s banker’s cotillion at Jackson Hole betray a sense of fin de siecle? Loosely translated as “the end of an age.” There was Fed Chair Janet Yellen and her junior partner in global stimuli, European Central Bank Chairman Mario Draghi, allowing not the slightest hint as to when The Great Liquidity might finally shift gears into The Languid Taper.
And who could blame them? Inflation continues to elude Fed targets and stock prices in both the US and Europe are still roaring ahead despite sky-high valuations and the occasional threat of thermonuclear war. Watching the coverage from Wyoming while flipping burgers in my back yard, I asked myself if central bankers had lost their relevance. Does the financial economy, now large enough to follow its own instincts, really need a headmistress and master? I thought of those late-19th century photos of Queen Victoria seated with a dozen of her children and grandchildren – including Czar Nicolas and German Emperor Wilhelm – caught in the oncoming headlights of their fate.
Or, to use a less melodramatic metaphor, is Jackson Hole going the way of the Bohemian Grove?
But there is inspiring news as well. Emmanuel Macron, France’s recently elected president, has unveiled an economic reform plan that, if enacted, could break the spell of statism that has bedeviled French companies for generations. If he succeeds, the 38-year-old Macron could, with the help of badly needed banking reform, lead the rest of Europe towards a more competitive, high-growth future.
Macron aims not to dismantle France’s welfare state but to re-allocate its tax burden from income to consumers in the form of a VAT. It would cut taxes on employers, diminish the country’s ruinously generous unemployment benefits in favor of training programs and allow companies to effectively opt-out of national or industry-based regulations. Predictably, there is stiff resistance from France’s hidebound but still potent unions and bureaucrats. Last month Macron and leaders of low-wage European states closed ranks against a proposed European Commission law that would discourage employers from hiring cheaper labor in one European Union country to work in another, high-wage one, without respecting its labor laws such as collective bargaining agreements. Macron said the proposal, which is popular in rich EU states including France, would be “a betrayal of the European spirit.”
Until now, many French business owners limit their hires to short-term open-ended contracts, so difficult is it to fire unproductive staff. Others launch redundant enterprises rather than expand existing ones so as to avoid higher payroll taxes that kick in when staff rises to a certain level. The result is low investment and labor participation in a country that averaged a miserly 0.79 annual growth since 1949.
Though Macron’s ambitions may exceed the comfort zone of a people as profoundly risk-averse as the French, he enjoys considerable legislative support and his election confirmed that France wants to remain of the world as well as in it. Paris has been angling for some of London’s post-Brexit financial refugees and if it plays its cards right it just might succeed. In addition, the French economy rests on solid fundamentals, with high productivity and savings rates and a demographically young, well-educated and wealthy market. It boasts world-class engineering, medical and high-tech companies while retail giants such as sporting goods outlet Decathlon and home improvement supplier Castorama are proof that efficient, friendly service and Parisian retail can happily coexist.
However, in addition to obstreperous union leaders and legacy fonctionnaires, France shares with other EU members a weak banking sector. European lenders helped trigger the 2008 crisis with an abundance of non-performing loans and since then they have been priced at below their book value. It will take political resolve – not just rising interest rates, assuming the price of capital is poised to rise at a faster pace than it is across the pond – for European lenders to restore themselves to profitability.
Which brings us back to leadership. Yellen and Draghi are tasked with controlling a global financial system that has evolved over the last four decades into a $300 trillion nebula. They are also expected to liquidate some $10 trillion of assets without stressing global markets and at the same time pre-empt an asset bubble that not a few respected sources believe is in embryo. A third interest rate hike this year would be welcome but inflation remains too sluggish to accommodate one. This would be a quandary for any central banker.
Macron on the other hand has a mandate to modernize the world’s sixth- largest economy and it’s his to lose. To succeed he will need a full complement of guile, charm, eloquence, cunning, and that rarest of human virtues, restraint. If he prevails he may even redeem the seemingly irredeemable: faith in democratic governance.