Gillet, Roland. "La classe moyenne souffre déjà pas mal dans le contexte actuel." Interview par Marc Lambrechts, L'Echo, 16 décembre 2022. English Version.
"Europe classifies us among the budgetary underperformers, and this should concern us," confides in an interview the professor of financial economics at the Sorbonne in Paris and ULB (Solvay). Often consulted abroad on similar themes, he emphasizes that Europe is right to demand a healthier budgetary trajectory from us.
Was the financial event of 2022 not the central banks' interest rate hike ? This week, the ECB and the Federal Reserve raised their rates by another 0.50 points. Is most of this increase behind us ?
Yes, but despite this rise, the bond rates at which states finance themselves remain relatively low. The rate stands at about 2% for the 10-year German government bond, which remains the benchmark or “risk-free rate” in the eurozone. In the U.S., it is 3.5% for the similar maturity bond. However, real interest rates remain largely negative, given an inflation rate of 10% in the eurozone and 7.1% in the United States. Even if real inflation, particularly expected inflation, has receded in recent weeks, has the gap between nominal interest rates and inflation widened in 2022 ? Indeed. To return to the situation that prevailed before the inflation surge, German nominal rates would need to hover around 5.5%-6%. For countries like Greece, Italy, and Spain, considering the risk premium, rates could then rise to 8-9%. We are far from that. States are well aware that if rates rise to levels of 8 or 9%, it would be quite problematic when it comes to refinancing their debt—not to mention the negative impact a probable recession would have on their tax revenues and therefore on their capacity for action.
Should states be wary of a future rise in long-term rates ?
It is indeed a real gamble to believe that long-term rates have fully adjusted upward and that central banks will soon ease their monetary policy. The U.S. Federal Reserve has just increased its rate by 0.50 points instead of 0.75 points, but with a target rate of 5.1% in 2023, given inflation primarily driven by excessive demand and a price-wage spiral that is not yet under control. The ECB is also expected to raise its rates further, constrained by inflation still too high despite the risks of recession in Europe in 2023. In reality, markets have been hanging on for months to decisions and statements from central bankers. They still bet on the timely benevolence of central banks to prevent rates from rising too quickly. Do we not tend to push the system's limits further with each crisis to keep it functioning? From the saver's perspective, it would be legitimate for bond rates to adjust more upward so they can receive fair compensation for inflation. These constrained rates, to say the least, continue to flout the logic of economic common sense. At what point can we rid ourselves of the nearly permanent and endogenous control exerted by central banks? The British example has shown us that a crisis can trigger very quickly if a state's credibility is compromised. This is certainly a lesson for states or regions where the objective situation demands greater rationality in managing public finances.
What is the message for the Belgian authorities in this context ?
In the current crisis, we must, of course, avoid a social catastrophe. But on the other hand, we do not have the means to distribute large-scale aid through energy vouchers or widespread reductions in fuel taxes. Ultimately, this only has a real social effect if the aid is well-targeted. Beyond that, it increases public deficits without real rationale and often in a populist manner, thereby adding to the debt.
In France, President Macron created a price shield to limit energy price hikes, allowing the French to consume almost as before while later asking them to save. Result? Even Luxembourgers filled their tanks in France—a historical first. Today, fuel is again more expensive in France than in Belgium or Luxembourg, proving the price shield to be too costly for the country. Moreover, fuel expenditures flow toward oil-exporting countries with almost no return effect on the French economy. Any measure concerning energy prices, particularly for fuels, must primarily be reserved for those who genuinely need it based on criteria such as income or professional activity. Belgium is one country among others where, given the accumulated federal and regional debt and deficits, we need to be particularly vigilant regarding well-contained and targeted expenditures to ensure our societal spending remains sustainable. Europe currently classifies us among the poor performers, which should concern us. Europe wants a more sustainable budgetary trajectory, and it is right to do so. The increase in deficits and debt could one day deprive the state of sufficient capacity to respond to a crisis, particularly due to rising interest rates.
Is there room to raise taxes ?
The maneuverability to increase taxes seems relatively limited. Especially since such increases most often primarily affect the middle class, which is already heavily taxed and suffering significantly from the current context. Eliminating tax loopholes is a good idea in terms of simplification and transparency, unless it ends up disguising a tax increase on the middle class. Moreover, it is not very motivating if the goal is to bolster entrepreneurship and private initiative. Some advocate for taxing the wealthy, those with the broadest shoulders. This view is rather logical and repetitive in times of crisis. I am eager to see the measures that are ultimately adopted along with their anticipated amounts and direct and indirect effects.
Personally, I believe that VAT on luxury goods could move from 21% to 22%, which would not be shocking. This could be partially offset by a decrease in VAT on essential goods, potentially lowering it from 6% to 5.5%. Beyond that, what is being discussed are various measures that yield little and often result in increased taxation on capital, particularly risk capital. It is thus unfortunate, both in timing and spirit, to abolish the system of notional interest at a time when Europe has just indicated it is considering a similar measure aimed at increasing the proportion of equity within companies. Anything that results in higher taxes on entrepreneurship and private initiative is not moving in the right direction. Today, we need courageous individuals who invest their money in projects, particularly in young companies. Finally, opening the tax shelter benefits to those who are the creators and primary stakeholders of their SMEs or start-ups would constitute an excellent lever in this sense. I look forward to the decisions that will be made.
Pierre Wunsch, the governor of the National Bank of Belgium, has said in the past that public spending in Belgium is very high compared to GDP, that there are not enough private sector jobs, and that there are thus too many public jobs, especially in Wallonia.
I think he is right. There is significant “overstaffing” in our country, coupled with institutional overload. Many agencies and administrations are redundant, costing us dearly. In this context, the merger of economic and financial tools at the Walloon level—namely SRIW, Sogepa, and Sowalfin—is a rational decision. Appointing a figure from the business world, such as Pierre Rion, to head the new merged entity sends a strong signal.
Find the interview with Roland Gillet on the L'Echo website
Or download it here (original version)