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26.06.2017 15:25 Age: 1 year
Category: Blog entry

A tidal wave is coming our way

(Les lames de fond se rapprochent by Jacques de Larosière, Paris, May 2017)

This is a rather literal translation of the title of the latest book from Jacques de Larosière, unfortunately only available in French for now. 

Does Jacques de Larosière really need an introduction… former Director General of the International Monetary Fund, of the French Central Bank, of the European Bank for Reconstruction and Development, and also one of the “fathers” of the European financial regulation reforms triggered by the 2008 financial crisis? 

The accumulation of global threats

In this concise book written in plain language, we are privileged to witness this great monetary policy expert now also turn his brilliant mind to less familiar but highly worrying issues: the impacts of an aging human population, of rising economic inequalities – focussing more on inequality within countries than between countries - of the slowing of global growth, and the protection of our environment. All the major threats hanging over mankind are very clearly analysed here, except perhaps the rise of barbaric ideologies and backward dogmatism, although this in itself can partially be seen as direct consequence of the rising inequalities within countries. 

His book, peppered with vivid analyses is a must to read and raises important questions for the citizens of this planet to ponder, particularly for those residing in Europe. I will only highlight a few:

Current monetary policies contribute to the malaise 

De Larosière is particularly critical of monetary policies since the ending of the fixed exchange rate system in 1973 by the USA, as well as the more recent “quantitative easing” measures adopted since 2008, resulting in the ballooning of the money supply to unprecedented levels and driving  the ECB into budgetary and political territory, stepping in and  buying up about two thirds of the debt issued by Eurozone States. The “QE” policy “has worked relatively well in the US”, but did not in Europe due to differences in the financing of the economy. In the US, 75% of financing comes from capital markets, and households as savers and individual investors are very exposed and vulnerable to the rise of equity markets (the “wealth effect”), whereas in Europe, 75% of financing comes from banks, and EU households are far less exposed, and therefore vulnerable, to the fluctuations of the equity market.

This is certainly true, but I have to respectfully disagree with one of the explanations provided, possibly my only disagreement with what has been put forth by Jacques De Larosière:  indeed, there are other reasons for this than the by now infamous “risk aversion” of EU citizens. First of all, one cannot buy a product that is simply not on offer: it has been decades since European financial retail intermediaries last promoted equities, favouring  fee-laden packaged retail investment products (funds, life insurance, pensions, etc.) instead, thereby  estranging EU savers from the real economy assets into which their funds are deployed.  Even packaged, but simple, investment products such as index ETFs are sold for 50% to households in the US, but only to the tune of 10% in Europe. Second, EU financial institutions themselves certainly do not lead by example, as they are even far more risk averse than EU households who are directly and indirectly invested for about 35 % in equities: pension funds are currently invested for 28 % in equities, and insurers for only 6%. Finally, taxation is also frequently discouraging for long-term equity investments. On top of it, EU politicians and eurocrats are also generally equity averse (or ignorant at best), and are discouraging EU citizens from investing directly in equities, despite the new “Capital Markets Union” initiative which, inter alia, is supposed to “foster retail investments into capital markets”.

Banks and Governments share responsibility

Neither are Banks and those EU governments cultivating public deficits spared by his analyses.

The former have grown the derivatives markets from 100 to 700 trillion dollars from 2000 to 2011, a size “without any link to the underlying economic assets”. More generally, de Larosière is sceptical vis-à-vis any claims of positive economic contribution from financial innovations over the last twenty years, and points to the fact that banks now mainly transact among themselves, without any direct link to the economy. He also considers the compensation of traders and of top banking executives to be excessive.

The latter – in France in particular - have failed to seize the benefits of the exceptional window of opportunity recently created by the combination of decreasing interest rates,  oil prices and euro exchange rates. 

And much more… A must read!


Guillaume Prache, June 2017


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