France Spiraling Down

European Straits #99

Nicolas Colin

Dear all,

The crisis triggered by France’s ‘Yellow Vests’ movement has been going on for three weeks now. On Monday, Emmanuel Macron tried to calm things down by speaking on television in prime time, offering concessions and laying out a path to try and move forward. But to make it short, I think it is just a rolling catastrophe, as I’ll try to explain below.

France: The beginning of the end

First, at the heart of Macron’s new approach is the lowering of the French payroll tax for those earning the minimum wage. There’s nothing new here: French governments have been doing the same thing since 1992, thinking that subsidizing low-skilled jobs in legacy industries is the only way to fight unemployment without hurting purchasing power. But there are two problems with that. First, it doesn’t work: it’s not as if unemployment has been going down in France since 1992! Second, it’s a disaster in terms of economic development. It makes high-skilled jobs extremely expensive in relative terms, and it leads most businesses to focus on mature, commoditized activities rather than exploring new markets and discovering differentiated strategies. Thus it degrades the competitiveness of the French economy and inspires specialization in low-value added legacy sectors such as tourism and retail.

Second, will it improve the situation for those who actually earn the minimum wage? The short answer is “No.” Based on the French experience over the past 30 years, subsidizing low-skilled work reinforces the phenomenon of the so-called “low-wage trap”. It makes it easier for employers to delay improving the quality of jobs, and it doesn't account for other parameters that determine the standard of living, such as how much you pay for gas, healthcare, housing, and your children’s education. To make this all more affordable requires embracing the new techno-economic paradigm and building new institutions—not simply pouring a bit more money into some people’s bank accounts, paid for by all the others. In short: rather than turning bad jobs into good jobs, we subsidize the bad jobs as they are!

Third, it’s a blow for succeeding in the current paradigm shift. Because most of the new measures are about lowering taxes or spending more, it’s likely that the deficit will rise, aggravating the fiscal crisis that France has been going through since 2008. Then things will likely get even worse because an economic downturn is looming over the horizon. It's not that deficits are bad. But if we use them only to finance more of the same, the consequences will be twofold. First, the deficit will have to be dealt with by tapping into social spending—and that during a paradigm shift for which the state should, on the contrary, be spending even more to cover households and businesses against the critical risks of the day. Second, as is often stressed by William H. Janeway, “efficiency is the enemy of innovation”. That can be rephrased as, “If you want to implement radical change, be ready to waste a lot of money”—and that definitely won’t happen in the context of a fiscal crisis.

Fourth, Macron’s turnabout marks the end of a crazy hope that so many people had: France would show that there’s another way of dealing with all this anger and frustration. Now that we’re coming back to business as usual (subsidizing legacy low-skilled jobs while not changing much elsewhere), it’s likely that Germany will hold France accountable for its rising deficits and will cease working with Paris on strengthening the European Union and reforming the eurozone. What makes that scenario even more likely is the changing of the guard at the helm of the German government. By becoming the new leader of the Christian Democrats, Annegret Kramp-Karrenbauer (also known as “AKK”) has become the heir apparent to Angela Merkel and will need to consolidate her power as party leader if she wants to secure becoming the next Chancellor. I bet that she won’t think twice before chiding a deficit-addicted France, because it’ll be the only way to buy support from the CDU’s defiant right wing.

Fifth, Macron’s political capital has now completely vanished. Now everyone knows the playbook to make his government cave, and whenever he tries to implement a radical change he’ll always find a new version of the gilets jaunes on his path to success. That danger has always been present, because Macron epitomizes what the French elite is about: a philosopher turned senior civil servant turned investment banker turned politician. What once saved him is that there’s something reassuring about the elite embracing revolutionary values—like he did in 2017 to his own good fortune. But whenever the elite gets back to business as usual, like today, the French people go straight back to mistrusting them.

Why the terrible lack of imagination? Speaking about my book Hedge on Monday at Nesta in London, I explained that most of Macron’s radical ideas of 2017 have now been taken over by the French equivalents of Sir Humphrey Appleby, one of the main characters in the legendary BBC series Yes, Minister. Macron himself doesn’t have the attention span to personally take care of innovative policies such as inventing a new safety net for freelancers or bringing in more startups to help transform public services. And those who are effectively in charge are cautious and unimaginative senior civil servants that see every innovative idea as a wild animal to be urgently coaxed back in its cage.

As always, France is paying the price for being insulated from the innovative policy discussions that are happening elsewhere in the world. For years, formidable global thinkers such as Mariana Mazzucato (founder of the IIPP at University College London), Dani Rodrik (professor at Harvard University), Richard Florida (author of The New Urban Crisis), Bill Janeway (author of Doing Capitalism in the Innovation Economy), and Carlota Perez (author of Technological Revolutions and Financial Capital) have been exploring the frontier of what economic policy should be about in our time of paradigm shift. In English-speaking countries, prominent politicians such as US Congresswoman-elect Alexandria Ocasio-Cortez are already reading those authors and picking up on their ideas. But France is still lagging behind—stuck in a franco-français conversation that always brings us, Macron included, back to the obsolete and now-irrelevant policy ideas of the 1980s and 1990s.

Highlights of the week

Here’s what I’d like to draw your attention to this week:

  • 🇬🇧 This Friday I’ll be hosting Bill Janeway at the London School of Economics to talk about “The entrepreneurs’ role in the innovation economy”. It’s the last masterclass of a cycle co-produced by LSE Generate, an organization dedicated to fostering entrepreneurship among LSE students, and my firm The Family. It’s at 6pm at the LSE, so if you’re around, definitely join us. Click here to access the details and register.

  • 🇫🇷 Next Tuesday I’ll be in Nantes (Western France) to talk about Hedge. The post-‘Yellow Vests’ context will make the discussion all the more interesting. I’m glad to have that opportunity thanks to my friend Bassem Asseh, who’s a deputy to the mayor there, as I spent several years in Nantes when in high school and college—and it’s a wonderful city! Details are here.

  • Last week I talked about the book at the Fondation Jean-Jaurès in Paris. There’s a video (in French), which you can watch here.

  • 🤼‍♀️ My cofounder & CEO of The Family Alice Zagury just published yet another wonderful article about women in technology—following The Family's visiting Amsterdam and meeting inspiring women entrepreneurs there. Read it! Ambitious entrepreneurs from Amsterdam.

  • 📕 If you don’t have your copy of Hedge yet, definitely buy it by visiting the relevant Amazon website depending on where you are: 🇺🇸US, 🇬🇧UK, 🇫🇷FR, 🇩🇪DE, 🇮🇹IT, 🇪🇸ES.

  • Last Saturday I published a Forbes article on the ‘Yellow Vests’, in which I try to explain why they are so angry. Far from being because of the gas tax, it’s because they’ve been hurt first by globalization, then by financialization, then by the retreat of the welfare state, then by the financial crisis, and now by the transition to the Entrepreneurial Age. Read it here: The Yellow Vests Don't Need Cheaper Gas, They Need A New Deal For The Entrepreneurial Age.

Further reading on the right (and wrong) policy prescriptions for our time

Warm regards (from London, UK),