Tariff shields a burden on future generations
In Kathimerini interview, Nobel-winning economist Jean Tirole voices concern over rise in Europe’s public and private debt
“Really? No one will pay?” asks Dr Jean Tirole, honorary chairman of the Foundation JJ Laffont-Toulouse School of Economics (TSE) and scientific director of TSE-Partnership, about the state subsidies introduced by European governments on electricity and gas bills to protect households from the energy crisis. Speaking to Kathimerini, the 2014 Nobel Prize winner in economic sciences warns that the tariff shields place a burden on future generations to finance current consumption and debt while at the same time trapping governments politically.
Concerning political developments in Italy, Tirole appears worried about the debt in the eurozone and expresses his anxiety about the scenario of stagflation, through a spiral of increases in prices and wages. He also emphasizes that, in contrast to the US, the need to increase interest rates is not so strong in Europe.
The Nobel-winning economist also believes that the green economy is necessary, but it will have costs and will not facilitate development. He said that “the state ideally sets the rules and intervenes to correct market failures, rather than substituting itself for the market as a mediocre manager of enterprises.” As for the future of globalization, he provides a blunt answer: “I don’t know.” But, “make no mistake, if it may be unavoidable, slowbalization will come with a decline in our living standards.”
The French economist will deliver a lecture titled “Economics at the Service of the Common Good” at the Theo Angelopoulos Auditorium of the French Institute in Athens on Wednesday, September 28. The lecture is organized on the occasion of the publication in Greek of his book “Economics for the Common Good,” by Crete University Press.
– There is concern that the state’s spending on supporting citizens and businesses in the face of the pandemic, the energy crisis and inflation will give rise to another crisis, a debt crisis. At the end of the day, who will pay the bill?
The rise of public and private debt in European countries is a concern. We successively faced the financial crisis, the eurozone crisis, the Covid recession and now the Ukraine crisis. Each time we lose a bit of room for maneuver. Inflation, the extra costs associated with the new cold war (energy, rearmament, less-diversified supply chains) will take their toll. Hopefully these shocks will be temporary, but we cannot fully guarantee that. Above all, we need to fight climate change – we have been procrastinating for 30 years and are now standing with our back to the wall.
States systematically emerge from crises with more debt, frustration grows and inequality increases. But there is good news too. We knew, for example, that one day there would be a major global pandemic (and there will be others), but technological progress has made it possible to produce vaccines in a few months where it would have taken a decade before. Many deaths and lockdowns have been avoided. This is because we had the US National Institutes of Health and the European Research Council had invested earlier in the fundamental science that allowed a rapid deployment of vaccines.
Thus, while the current situation could be the perfect storm, there is also hope, provided we invest in our future and do not borrow to finance
current consumption. Populists are often keen on letting the budget deficit slide, with limited investment that would reassure investors that our countries are solvent. I was less worried about the Italian debt under Draghi. The return of demagogic politicians could create negative expectations; of course, the ECB would still be able to monetize Italian debt
to rescue Italy, but that would fuel inflation and in the long run it is the euro as a whole that could lose the trust of investors.
We must invest massively in education, research and development, the prevention of chronic illnesses, the reduction of inequalities and obviously climate change. There obviously is a war in Europe, as well as a war against global warming. I don’t see our fellow citizens ready to make the necessary efforts. This is my real concern, even though the means to get out of the crisis exist.
– Eurozone fiscal rules. What is your contribution to a debate that has not yet begun at the institutional level?
We know that despite some improvements after the financial crisis budgetary rules are rather rough. In part because there is no magic number ( 40% debt may be unsustainable for one country, another may easily bear 150%). How much is sustainable depends on a series of factors: the growth rate (a given debt is much easier to sustain if the rate of interest lies below the rate of growth), who owns the debt (investors are less concerned if a large percentage of the debt is held domestically, as the country is less likely to default on its own citizens and banks), the ability to increase fiscal pressure if needed, the maturity of the debt (short maturities are harder to meet), the currency denomination of the debt etc. And off-balance sheet exposures, such as guarantees on mutual eurozone debt or on state-owned enterprises, are sometimes hard to evaluate (in contrast, pensions, which are another off-balance sheet liability, are easier to predict). In part because we are not that good at telling what an investment is or is not. Spending on education can be a formidable investment in our future, but it also can be pure consumption, depending on whether the corresponding public service improves in proportion to the education budget.
The control of public finances is a complex exercise, and no single policy will solve it. Independent internal bodies such as courts of audit are useful, but their recommendations are often followed by too few effects. Scenarios for public finance stress tests prepared by independent budget committees and followed by a democratic debate can be useful, as is the creation of independent public observatories that try to measure long-term public performance. But in the end a well-functioning, mature democracy with informed citizens is the best remedy against financial skidding.
– The inability of the market to hold prices steady in the face of the current conditions brings back the debate on the degree of state intervention. We even have examples of nationalization of companies in the sensitive energy sector. What is your opinion?
It is true that we are facing an unprecedented shock in energy prices. We have to protect the poor in view of the huge increase in energy prices. I am not sure our democracies are doing it the right way, though. The tariff shield that was put in place in many countries (in France no consumer increase in the price of gas and a very limited increase in the price of electricity) amounts to telling people, “Gas, electricity and oil prices have soared, we are collectively impoverished, but you will not suffer any increase on your bill.” Really? No one will pay? We are forgetting about future generations who will be burdened by the resulting debt. We are out of line, even if I understand the political decision.
We are also totally forgetting the ecological objective. The tariff shield, which costs the state a lot of money – €24 billion over one year in France – is an additional subsidy to fossil fuels, and does not target the needy since everyone benefits from it. The economist’s preferred solution would have been to give a check to the most needy households but to keep a form of “price signal” so as to encourage savings on fossil fuels; or more likely to play a bit of both instruments, as it is clear that compensation never perfectly reaches its target. We have probably gone too far with the tariff shield. It will be politically very difficult to get out of it.
‘We have probably gone too far with the tariff shield. It will be politically very difficult to get out of it’