Philippe Aghion: “To counter stagflation, pensions will have to be reformed”
MAINTENANCE. Faced with the specter of sluggish growth and high inflation, the economist recommends reforming pensions to boost economic activity. I subscribe for 1€ the 1st month
Stagflation, the return? The latest economic data published by INSEE show a dark economic situation in France. Gross domestic product (GDP) remained stable in the first quarter of 2022, registering a growth of… 0%. At the same time, price inflation continued to accelerate in April to reach 4.8% year on year. The French economy exhibits several symptoms of “stagflation”, a portmanteau for a period of sluggish (or no) growth and inflation. Le Point interviewed Philippe Aghion, professor at the College de France and Insead. This renowned economist, an inspiration to President Macron, describes himself as “optimistic for action”, despite the dark clouds that are gathering. Optimism, a rare thing in economics.
Le Point: Has France already entered a period of “stagflation”?
Philippe Aghion: Behind the term “stagflation”, there is the idea of a price-wage spiral. That is to say that the rise in consumer prices leads to an increase in wages and that then this rise in wages feeds that of prices. For the moment, in France, this spiral has not started, in contrast to the United States where it is already at work.
How do you explain this tricolor performance?
Largely thanks to the tariff shield on gas and electricity: two energy sources whose prices have soared with the post-Covid economic recovery and now the war in Ukraine. The rebate on the price of fuel at the pump also contributed.
It's all hanging by a thread, right?
If the war in Ukraine drags on too long and inflation continues, yes, the price-wage spiral could kick in. If so, interest rates set by the European Central Bank are likely to rise, threatening growth. The best answer then is to increase the supply.
What do you advocate?
An effective way to increase supply is to reform our pension system: it is imperative to extend the contribution period to obtain a full retirement pension. Obviously, it will be necessary to negotiate with the unions on how to take into account both the hardship at work and long careers. The more French people there are at work, the more wealth we will produce. In France, only 67.7% of 15-64 year olds are employed, according to the OECD. In Germany it is 76.7%! Other reforms, such as that of unemployment insurance and vocational training, have already been made. We still have to reap the benefits to reduce unemployment to 5% from 7% today.
We have no choice but to invest in growth green.Philippe Aghion
What are the benefits of an invigorated employment rate?
This increases economic activity. As a result, tax revenues are rising and public deficits are shrinking or being reduced. In addition, by reducing our recurrent public expenditure, the increase in the contribution period will give us budgetary margins to invest more heavily in growth – in particular in innovation, reindustrialisation, and training – and to accelerate the transition energy. In fact, we have no choice but to invest in green growth: the climate emergency and soaring fossil fuel prices force us to do so.
< p>In an interdependent euro zone, it's hard to imagine France alone escaping stagflation and its infernal price-wage spiral…
Germany itself will have to invest enormously. It is aware that it must accelerate the energy transition to free itself from its dependence on Russian gas. And as soon as possible. And she knows that she must reconstitute an army in a context of war in Europe. Finally, it must also invest in its infrastructure, which is often dilapidated and damaged by violent floods in the summer of 2021.
You seem optimistic, that's rare in an economist!
I'm not a Panglossian optimist, but I'm an action optimist! Yes, we have an inflation problem. Yes, monetary policy will tighten. Hence the importance of creating the conditions for fiscal policy to take over!
Why is the specter of stagflation so scary?< /strong>
We fear a return to the 1970s, with inflation sometimes exceeding double digits. The two oil shocks of 1973 and 1974 caused the price of gasoline and raw materials to jump. The price growth then spread to all consumer products and services. In response to rising prices, wages rose significantly, and as the crisis took hold, growth slowed sharply and unemployment soared.
We have some Have we learned any lessons?
The European Union will avoid stagflation thanks to a more flexible implementation of the Maastricht criteria. Until the pandemic, we treated all expenses on the same level and said: “We do not exceed 3% of GDP. “We must change software and practice a “at the same time”, between, on the one hand, the reduction of recurring deficits, by reforming the State and pensions, and, on the other, investing in growth green. This idea that you can stimulate and direct growth over the long term was not well understood in the 1970s.