July 2022

Accuracy Talks Straight #5

For our fifth edition of the Accuracy Talks Straight, Jean-François Partiot presents the editorial, before letting Romain Proglio introduce us to Rnest, a piece of software that helps to resolve problems using internet data. We then analyse the residential property prices in Paris with Nicolas Paillot de Montabert and Justine Schmit.
Sophie Chassat, Philosopher and partner at Wemean, explores how to learn simplicity. And finally, we look closer at the dynamics of corporate credit spreads with Philippe Raimbourg, Director of the Ecole de Management de la Sorbonne and Affiliate professor at ESCP Business School, as well as the liberal revolution with Hervé Goulletquer, our senior economic adviser.


SUMMARY


Editorial

Jean-François Partiot
Partner, Accuracy

My pen must be wiser.

For this editorial in summer 2022, I would have liked nothing more than to wish you a lovely, light, magical summer.

Unfortunately, war has taken hold at Europe’s door, prices are exploding and the planet is suffocating.

My pen must be wiser.

Summer is a time to step back and reflect; let us take advantage of it to relearn…

– to relearn simplicity to find the taste for simple and efficient action again. The complexity dogma paralyses us; let us unburden ourselves of it! (The Cultural Corner with Sophie Chassat)

– to relearn to live together around the concept of the common good and aim for reasonable economic development in the long term. (Economic point of view with Hervé Goulletquer)

– to relearn to invest for the long term with limited resources, whether:

In technologies of the future:

• In Start-up Stories with Romain Proglio, you will discover Rnest, software that helps to resolve problems using the Web – how to dive into the depth and complexity of the Web to surface again with simple and understandable answers!

Via major corporate groups:

• In a context of the sudden rise in interest rates and tightening macroeconomic conditions, we must relearn the link between financing conditions and the financial structure of a group. The equity and debt markets are closely linked and their developments are interdependent, meaning that managers must carefully assess the cross-impacts of changes in their funding. (The Academic Insight with Philippe Raimbourg).

In real estate:
• Real estate is an asset class considered highly safe and predictable, particularly in population and activity pools as rich and dense as Greater Paris. But to what extent is this still true post-2020 after the unfolding of the public health crisis and the wave of capital injected into the economy at negative real interest rates? (Industry Insight with Justine Schmit and Nicolas Paillot de Montabert).

This summer, let us take inspiration from Erasmus and his humane wisdom.

‘It is the greatest of folly to wish to be wise in a world of madmen.’

‘The whole world is home to us all.’

So, let us be wise; let us be mad; but let us be respectful of one another and to the generations to come!


Romain Proglio
Partner, Accuracy

Rnest

Rnest is a piece of software that helps to resolve problems using internet data. Philippe Charlot, its founder, started with a simple fact: 90% of information useful for deci s ion-making i s avai l able on the internet. Yet finding the right information is particularly complicated: sources are innumerable, traditional searches refer to only a limited number of results and the time necessary to read, understand and summarise the web pages presents a significant obstacle. When faced with an issue, a user will typically ask a question on a major search engine (Google, Bing, Quant or Yahoo to name only the largest of them) or, for the more enlightened, on monitoring software (Quid, Palantir, Digimind or Amplyfi). These search engines and pieces of software search for keywords in web pages, on predefined sources and for almost zero productivity.

However, thanks to Rnest, the user can make a request for which the software will undertake a precise exploration of the internet in a URL, in hypertext or even in nearby text and will proceed to validate the pages visited precisely at phrase level (not just page level). This gives a result that is much more precise and relevant. Rnest is capable of exploring almost 250,000 web pages in a few hours. The software is also capable of proposing of a problematised summary note in response to the initial request.

‘Find out what nobody knows yet, just with what you know’, Rnest promises. After formulating his or her question, no matter how complicated, the user initiates the search, and Rnest explores the web in real time to extract the most relevant content.

This artificial intelligence, made in France, navigates the web fully independently, is inspired by human behaviour and fulfils extremely varied needs across all sectors of activity. For example, based on the question ‘what are the innovation strategies of the top 200 French companies?’, Rnest will visit one million web pages, effectively saving the equivalent of 833 days of reading.

Among its first clients are BNP Paribas, Bouygues Télécom, Total, EDF and now Accuracy. Indeed, Accuracy will benefit from Rnest’s power in Open Source to enrich its advisory services to its clients.


Justine Schmit
Senior Manager,
Accuracy

Is real estate at the peak of its cycle? The Paris example.

What should we think of the stability in Parisian residential property prices, despite the public health crisis?

Since March 2020, the Covid-19 pandemic has shaken up the global economy, bringing about changes in numerous sectors, including residential property, in particular.

This public health crisis is behind a change in economic paradigms that have been in place since the 2010s. The eurozone is currently facing a significant increase in inflation, which reached 5.2% in May 2022, a level unseen since 1985. Access to mortgages for individuals is gradually becoming more difficult.

However, despite this context and in contrast to previous crises, the price per square metre of existing housing in Paris has not experienced any significant decrease; in fact, it has remained relatively stable.

In this situation, two opposing theories have come to light: one the one hand, some consider that the consistent rise of existing housing prices in Paris is justified by its unique nature, the City of Lights, which shelters it from economic cycles; on the other hand, some worry about a property bubble in the capital that is on the verge of bursting.

WHAT DO THE FIGURES SAY?

According to the Parisian notary database, the price per square metre of existing housing rose from €3,463 to €10,760 between 1991 and April 2022, an increase of around 3.6% per annum on average. Inflation over the same period stood at around 1.8% per annum on average, according to Insee. In short, the value of a square metre in Paris grew on average twice as quickly as inflation. In the graph below, we can observe the curve representing the actual increase in property prices per square metre in Paris versus a curve representing the 1991 price per square metre subsequently inflated each year using the Insee inflation rate.

This graph highlights two observable phases:

• In the period from 1991 to 2004, the actual price per square metre remained below the 1991 Insee-inflated price. Property prices grew significantly in the period prior to 1991 then underwent a major correction of around 35% between 1991 and 1997. Only in 2004 did the actual Parisian property price curve exceed the Insee-inflated curve.

As a reminder, 1991 marked a high point in the cycle, completing an upward phase of speculation by property dealers in Paris, and the beginning of what certain experts would call ‘the property crisis of the century’.

• In the period from 2004 to 2022, the actual price per square metre grew massively, much more quickly than economic inflation: +5.0% per annum on average for the actual price versus only +1.8% for inflation. There is therefore major disparity between the development of residential property prices in Paris and the average increase in standard of living.

Moreover, it is worth noting that between 2020 and 2022, the price per square metre in Paris did not experience any major fluctuation, in contrast to previous crises (1991 or 2008).

The first quarter of 2022, however, sees the return of significant inflation, with no repercussions on the actual property prices at this stage.

Is this due to increasing demand?

Many defend the following theory: demand for Paris is growing, whilst supply is limited, which has resulted in the constant rise in prices per square metre, no matter what stage of the economic cycle is prevailing.

The demographic reality is not quite so categorical. In 1990, Paris had a population of 2.15 million; this grew to 2.19 million in 2020, with a peak of 2.24 million in 2010. Further, since 2021, the city’s population has been falling to reach 2.14 million in 2022. Indeed, some Parisians, finding the health restrictions rather trying, decided to leave inner Paris for the inner and outer suburbs or other regions of France altogether.

The trend to leave inner Paris can also be seen among the households that returned from London following Brexit.

This declining trend comes hand in hand with an increase in demographic pressure in the rest of the Ile-de-France region (excluding Paris). The departments in the inner and outer suburbs have seen their population grow from 8.5 million to 10.3 million people between 1990 and 2022.

Therefore, since 1990, Paris has experienced a relatively stable demographic dynamic, even starting to decline from 2021. We can conclude then that demand does not seem to be behind the significant rise in the actual prices of residential property in Paris.

Is this due to decreasing supply?

In Paris, transaction volumes are higher during periods of increased prices (between 35,000 and 40,000 transactions per annum), whilst these volumes fall significantly during periods of decreased prices (25,000 to 30,000 transactions).

It seems high time to put an end to a common misconception: a fall in the volume of properties for sale does not automatically increase prices.

The economic reality is different: when prices are high, property owners are more inclined to sell their property, either to crystallise a capital gain or to undertake a buy–sell transaction (incidentally, often in the reverse order) because they have confidence in the market. Conversely, when prices are shrinking, the market seizes up. Property owners delay as much as possible their potential sales waiting for better days.

This leads to the following conclusion: the classic economic mechanisms of supply and demand simply cannot explain the historical growth in residential property prices per square metre in Paris.

These price dynamics should really be considered as ‘contra-economic’: supply grows in volume when prices increase; supply falls in volume when prices decrease.

When concentrating our analysis on the recent public health crisis, we can observe that transaction volumes decreased in the Parisian market. Indeed, the residential property market in Paris experienced a dip from the first lockdown, falling from 35,100 transactions per annum to 31,200 in 2020 to return to 34,900 in 2021. This change can be explained in particular by the specific structure of the lockdown, with investors unable to complete the purchasing process for residential property (visits, meeting with the notary, move, etc.).

When the strict public health measures were lifted, the property market was able to recover quickly.

WHAT ARE THE CONSEQUENCES OF THE COVID-19 CRISIS ON THE RESIDENTIAL PROPERTY MARKET IN PARIS?

For some investors, the change to our way of life due to the public health measures – remote working and leaving Paris – was to lead to a fall in Parisian property prices, or even to a bursting of the property bubble comparable to that of 1991.

Marked by the successive lockdowns and discouraged by the more difficult conditions to obtain a mortgage, people could have started a mass exodus from Paris, resulting in a fall in residential property prices in the city.

We can see in the graph below that the public health crisis appears to have had little impact on the price per square metre in Paris. Prices have flattened, or slightly decreased, but have not fallen below the bar of €10,000 per square metre on average.

WHAT ARE THE REAL DRIVERS EXPLAINING THE INCREASE IN RESIDENTIAL PROPERTY PRICES PER SQUARE METRE IN PARIS?

As we cannot use demography and standard economics to explain the long-term increase in prices observed, what are the variables that really can explain this sharp increase?

To answer this question, we have built a multi-variable regression model using a long historical series (1990–2022), which comes to the following conclusion:

Since 1990, the development of residential property prices per square metre in Paris can be explained ‘entirely’ and ‘mathematically’ by two financial variables.

To put it simply, this means that it is possible to explain—and potentially predict—the price per square metre of residential property in Paris with an extremely high degree of accuracy using only two financial variables.

– For those familiar with such techniques, our multi-variable regression model reached a correlation index (R2 ) level of 94%1.

The first variable involved is the following:

– Variable 1: the spread between the French 10-year OAT rate and Insee’s inflation rate.

As shown in the graph below, taken in isolation, this variable

In simple terms, this variable represents a borrower’s interest rate adjusted for economic inflation, that is, the net real interest rate for the borrower.

This variable thus makes it possible to take into account the attractiveness of the resources available to the borrower to acquire a residential property.

The spread highlights the impact of French 10-year OAT rates in the development of property prices per square metre. Indeed, when the French 10-year OAT rates fall, the borrowing capacity of an individual borrower rises significantly. For example, if an individual borrower’s rate decreases by one point (100 basis points), his or her borrowing capacity increases by approximately 10%. But the Parisian property market incorporates this component in the development of prices per square metre. The fall in rates enables a rise in borrowing capacity for buyers but not in terms of the number of square metres that they can buy. The market absorbs any increase in borrowing capacity in the price per square metre.

Furthermore, this variable takes into account the effect of inflation on the property market. The year 2017 marks the beginning of a scissor effect between the French 10-year OAT rate and inflation. Interest rates remained stable whilst inflation picked up significantly. For the first time, the spread (10-year OAT – inflation) became negative, meaning that for the first time, individual borrowers could borrow at negative net real rates.

The scissor effect has intensified since 2018, bringing about the continued rise in residential property prices per square metre in Paris between 2018 and 2020.

But since 2021, the striking rise in inflation coupled with the stable low base rates have been behind a financially untenable spread. This spread has developed from (0.6)% in 2020 to (3.6)% in 2022. Over the same period, prices per square metre have started to decline just as the rise in the cost of living has accelerated.

The current intention of the European Central Bank (ECB) to increase base rates in order to curb inflation should gradually attenuate this historic scissor effect. But prices per square metre of residential property in Paris appear to have begun a noteworthy decline.

The fall in spread is not the only or even the best driver explaining the historical increase in prices per square metre in Paris.

The second historical variable is the following:

– Variable 2: the size of the ECB’s balance sheet.

– Taken in isolation, this variable explains the price per square metre with an R2 of approximately 94%. It itself is highly correlated with the first variable, owing to the coordination of decisions on the development of the ECB’s monetary policy for these two variables.

This variable highlights the consequences of the quantitative easing policy implemented by the ECB on the valuation of financial asset classes, including Parisian property.

To enable the members of the Eurogroup to face various economic crises (including the public health crisis), the ECB put in place in 2009 an ambitious quantitative easing policy, similarly to the Fed, with the aim of ensuring the stability of the euro by injecting a vast quantity of currency into the market.

The supply of this monetary mass to banks and the maintenance of low base rates are behind the historical rise of residential property prices in Paris.

Based on our analyses, it is possible to correlate the historical development of prices per square metre in Paris with the size of the ECB’s balance sheet at 94%.

The graph below presents the development of the ECB’s balance sheet, showing its consistent growth since 2009. This strong growth is the fruit of the implementation of unconventional monetary policies to respond to the crises felt by the Euro-system in 2009, 2011 and 2020. By massively acquiring public and private debt on the European market to serve the refinancing demands of banks, the ECB has created favourable financing conditions in the eurozone in a context of crisis and very low interest rates.

Since 2009, the ECB has implemented two ambitious net asset purchase programmes: the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP). These programmes are behind an unprecedented increase in the size of the ECB’s balance sheet.

However, though we can observe another doubling of the ECB’s balance sheet between 2020 and 2022, the price per square metre of property in Paris has slightly fallen, compared with a considerable increase over the period from 2011 to 2021.

This is a major break in the trend.

CONCLUSION

Over the long-term historical period, we have observed that the development of prices per square metre in Paris is highly correlated with the monetary policy of the European regulator, in particular via two variables: the spread (10-year OAT – inflation) and the size of the ECB’s balance sheet.

Between 1999 and 2020, a mathematical formula makes it possible to predict with a high degree of relevance the development of prices per square metre in Paris. In short, it suffices to listen to the European Central Bank and to anticipate and model its decisions.

But the years 2021 and 2022 have been marked by a drastic change in macroeconomic indicators.

Inflation has returned to levels not experienced since the 1970s (5.2% in May 2022), which disrupts the spread rate.

Similarly, the ECB’s decision to put in place a massive debt purchasing plan in the context of the public health crisis led to the doubling of its monetary balance sheet, with no particular effect on the price per square metre in Paris.

The two variables that were the drivers of the rise in prices since 1999 can no longer explain the development of the price per square metre of residential property in Paris from 2020 onwards.

The model is broken.

This likely marks the beginning of a wait-andsee period that could lead to a fall in both volumes and prices per square metre (versus inflation).

What remains to be seen is how long the property investor of 2020 will have to endure this market correction and whether Parisian property will play its role of a safe haven investment as it did during the inflationist period of 1970.


Sophie Chassat
Philosopher, Partner at Wemean

Learning simplicity again

To stop seeing everything through the prism of complexity: that is without doubt the most difficult thing that we must learn to do again. It is the most difficult because the paradigm of ‘complex thought’ (Edgar Morin1) has taken over. Our everyday semantics is evidence enough of this: all is ‘systemic’, ‘hybrid’, holistic’ or ‘fluid’. No matter where we look, the ‘VUCA’ world (for volatile, uncertain, complex and ambiguous2) stretches as far as the eye can see.

Yet, applied to every situation, this complexity dogma actually makes us lose understanding, potential for action and responsibility. First, we lose understanding because it forces on us a baroque representation of the world where everything is entangled, where the part is in the whole but the whole is also in the part3, and where the causes of an event are indeterminable and subject to the retroactive effects of their own consequences4. Referring the search for truth to a reductive and mutilating approach to reality, it also encourages the equivalence of opinions and accentuates the shortcomings of the post-truth era5.

Second, we lose potential for action because from the moment everything becomes complex, how can we not be consumed with panic and paralysis? Where should we start if, as soon as we touch just one thread of the fabric of reality, the whole spool risks becoming even more entangled? Our inaction in the face of climate change derives in part from this representation of the problem as something of endless complexity and from the idea that the slightest attempt to do something about it would raise other issues that are even worse. The fable of the butterfly’s wings in Brazil that generates a hurricane at the other end of the world leads to our inertia and impuissance. Yet ‘the secret to action is to get started’6, as the philosopher Alain put it.

‘It’s complicated’ therefore becomes an excuse not to act. Whilst the state of the world requires us to commit to action now more than ever, today we are seeing a great disengagement, visible in both the civic and corporate worlds. Referring to effects of the system, the complexity dogma takes away individual responsibility. Learning to think, act and live with simplicity appears more urgent than ever. But the path is not easy. As the minimalist architect John Pawson put it: ‘Simplicity is actually very difficult to achieve. It depends on care, thought, knowledge and patience.’7 Let us add ‘courage’ to this list of ingredients, the courage to question a triumphant representation of reality that may well be one of our great contemporary ideologies.

____________

1 Published in 1990, the book Introduction à la pensée complexe [Introduction to complex
thought] by Edgar Morin presents the main principles of complex thought.

2 The acronym VUCA was created by the US army in the 1990s.

3 Edgar Morin call this idea the ‘holographic principle’.

4 This is what Morin calls the ‘recursive principle’.

5 This is a possible interpretation of another principle of complex thought, the ‘dialogical principle’.

6 Alain, translated from the French ‘Le secret de l’action, c’est de s’y mettre.’

7 The book Minimum by John Pawson was first published in 2006.


Philippe Raimbourg
Director of the Ecole de Management de la Sorbonne (Université Panthéon-Sorbonne)
Affiliate professor at ESCP Business School

La dynamique des spreads de credit corporate

The analysis of credit spread dynamics largely relates to
the analysis of financial ratings and their impact on the
quoted prices of debt securities.

This issue has been documented regularly for over 50 years and has led to numerous statistical studies. For the most part, these studies are consistent and highlight the different reactions of investors to cases of downgrading and upgrading. Observing the quoted prices of debt securities highlights the financial market’s expectation for downgrading, with quoted prices trending significantly downwards several trading days before the downgrade itself. On the agency’s announcement date, the market’s reactions are small in scale. By contrast, upgrades are hardly ever anticipated, with debt security holders particularly vigilant so as not to incur capital losses as a result of a downgrade. It is worth noting that because of the limited maturity of the debt securities, buying orders are structurally higher than selling orders; as a result, the latter are more easily seen as signals of mistrust by the market.

More recent studies have focused on the impact of rating changes on the volatility and liquidity of securities. Downgrades are preceded by an increase in volatility and a wider bid-ask spread, demonstrating a fall in liquidity; uncertainty as to the credit risk of the security in question leads to different reactions from investors and disparate valuations. Publishing the rating effectively homogenises investor perceptions, reduces volatility and increases liquidity. The effects are not so clear-cut when upgrading because, with the change to the rating being unanticipated, the effect of perception homogenisation is weaker and counterbalanced by the desire of some investors to profit from the improved credit quality to make speculative gains.

These studies shed new light on the question of the utility of rating agencies. The agencies effectively send information to investors, but perhaps not to all of them. Indeed, informed investors may outpace the agencies in the monitoring of the issuers’ credit quality. However, less informed investors need the opinion of the agency to be certain that the observed decrease in prices effectively corresponds to a downgrade in credit quality. The agency’s announcement removes all disparity of perception between investors and highlights the utility of the agency, which stabilises prices and increases liquidity. The dynamics of credit spreads cannot be studied separately from those of other marketable securities. After all, the debt world is not cut off from the equity world, something that we can easily understand through intuition alone. A fall in share prices is generally the result of operational difficulties leading to a reduction in operating cash flows and lower coverage of remuneration expenses and debt repayments. In parallel, this lower share value means an increase in financial leverage and, at a given volatility of the rate of return on assets, an increase in the volatility of the rate of return on equity. A reduction in the share price, an increase in financial leverage and a rise in the share price volatility and credit risk therefore all combine. From a theoretical point of view, Robert Merton was the first to express the credit spread as a function of the share price. We will not cover his work here. We will instead look into the credit-equity relationship as it is frequently used in the finance industry. Indeed, typically a power function denominated on growth rates is used for this purpose.

CDSt / CDSREF = [ SREF / St ] α

The credit spread growth rate, measured by the CDS, is therefore a function of the rate of decline of the share price modulo a power α that we assume to be positive, where REF serves as a basis for calculating the rate of change of the CDS and the share.

Knowledge of the parameter α makes it possible to specify this relationship fully. We first note that, as defined by the preceding equation, α is the opposite of the elasticity of the CDS value compared with the share value. By taking the logarithm of this equation, we get:

Ln [CDSt / CDSREF] = – α Ln [ St / SREF ]

α = – Ln [CDSt / CDSREF] / Ln [ St / SREF ]

A ratio of two relative growth rates, the α parameter is indeed, to the nearest sign, the elasticity of the CDS value compared with the share value that we can also write as:

α = – [S/CDS] [δCDS / δS]

By expressing the derivative of the CDS value in relation to the share value [δCDS / δS], we are led to the following value of the α parameter:

α = 1 + l avec l = D/(S+D)

The debt and equity worlds are therefore closely related: an inverse relationship links credit spreads and share prices; this relationship is heavily dependent on the financial structure of the company and its leverage calculated in relation to the balance sheet total (S+D). The higher this leverage, the more any potential underperformance in share price will lead to significant increases in the credit spread.

From an empirical perspective, though this correlation appears relatively low when the markets are calm, it is very high when the markets are volatile. When the leverage is low, the graph representing the development of credit spreads (in ordinates) in relation to share prices highlights a relatively linear relationship close to horizontal; however, when leverage is much higher, a highly convex line appears.

With this relationship established, we can now question the sense behind it, or, if we prefer, ask what the lead market is. To do so, it is necessary to undertake credit market and equity market co-integration tests, and that the arbitrageurs will be responsible for making the long-term equilibrium in these two markets consistent.

To this end, two series of econometric tests are conducted symmetrically. The first series aims to explain the changes in share prices by those in CDS, whether delayed or not by several periods, and vice versa as regards changes in the value of CDS, in the latter case incorporating changes in financial leverage. These relationships, tested over the period 2008–2020 for 220 listed securities on the S&P 500 index, bring to light the following results:

– There are information channels between the listed equity segment and the CDS market. These information channels concern all businesses, no matter their sector or their level of debt: ‘informed’ traders, because of the existence of financial leverage, make decisions just as much on the equity market as on the credit market.

– In the majority of cases (two thirds of companies reviewed), the lead market is the equity market whose developments determine around 70% of the developments in the CDS market.

– However, in the case of companies with significant leverage, the price discovery process starts with the CDS market, which explains more than 50% of price variations. This empirical work is evidence, if any were needed, of the importance of the structural credit risk model proposed by the Nobel laureate Robert Merton in 1974.

References

Lovo, S., Raimbourg Ph., Salvadè F. (2022), ‘Credit Rating Agencies, Information Asymmetry, and US Bond Liquidity’, Journal of Business, Finance and Accounting, https://doi. org/10.1111/jbfa.12610

Zimmermann, P. (2015), ‘Revisiting the Credit-Equity Power Relationship’, The Journal of Fixed Income, 24, 3, 77-87.

Zimmermann, P. (2021), ‘The Role of the Leverage Effect in the Price Discovery Process of Credit Markets’, Journal of Economic Dynamics and Control, 122, 104033.


Hervé Goulletquer
Senior Economic Advisor, Accuracy

Révolution libérale et évolution raisonnable

The recent legislative elections in France highlighted once again the discontent of the electorate in numerous countries with the development of their environment. Almost 60% of French voters listed on the electoral register made their choice… not to choose (non-voters, blank votes and spoilt votes) and almost 40% of those who did cast a ballot did so in favour of political organisations (parties or alliances) that are traditionally anti-establishment (the Rassemblement National and the Nouvelle Union Populaire, Ecologique et Sociale).

If we take a short-term focus, finding the reasons for this mix of pessimism and ill-humour—confirmed as it happens by a stark contraction of household confidence—proves to be quite simple. The net acceleration of consumer prices and the war at the European Union’s border, both phenomena being inherently linked, are obvious reasons. These upheavals, the gravity of which should not be underestimated (as we shall see), combine and indeed amplify a general disquiet that has been solidly in
place for some time.

Without needlessly going too far back, we cannot fail to recognise that over the past 15 years the world has experienced an entire series of events that have contributed if not to a loss of our bearings, then to the questioning of the way we perceive the environment in which we are evolving.

Let us list some of these events, without looking to be exhaustive:

• the financial crisis (2008)

• the swing between the USA tending to retreat from global affairs and China, up to now, being more and more present (the new silk roads in 2015), with Europe in the middle trying to find itself (Brexit in 2016)

• the change in direction of US policy towards China (distrust and distance from 2017)

• Russia’s challenging of its neighbours’ borders (2008, 2014 and of course very recently in February this year)

• societies becoming more fragile (the Arab Spring in 2010–2011, the French Yellow Jackets in 2018, the assault on Congress in the USA in 2021, the Black Lives Matter movement in 2013, the refugee crisis in 2015, the Paris attacks in 2015)

• the rise of the environmental question (from the Fukushima accident in Japan in 2011 to a more complete realisation of climate change from 2018, with Greta Thunberg, among others)

• an economy that does not work for the benefit of all (the Panama Papers in 2016 on tax avoidance processes), against a contrasting backdrop of only passable, if not mediocre, performance at the macroeconomic scale but more dazzling performance at the microeconomic level (cf. GDP, and therefore revenues, vs the profits of listed companies)

• a pandemic crisis (COVID-19) highlighting the fragility of production chains that are too long and too complex (‘just in case’ taking over from ‘just in time’ but with what economic consequences?), not to mention the crisis linked to humanity’s abuse of Mother Nature

• the political and social question (the need to protect and share wealth)

It is on these already weakened foundations that the most recent events (inflation and the war, to put it simply) are being felt as potential vectors of rupture, similarly to potential catalysts of change that were until now latent. This rupture could take two forms.

First, and based on a deductive approach, there is the risk that geopolitical tectonic plates, to quote Pierre-Olivier Gourinchas, the new chief economist of the IMF, take shape, ‘fragmenting the global economy into distinct economic blocs with different ideologies, political systems, technology standards, cross border payment and trade systems, and reserve currencies’. The political landscape of the world would be drastically transformed, with the economic destabilisation that would result from it, at least in the beginning.

Then, and based on an empirical approach drawn from Applied History (the use of history to help benefit people in current and future times), there is the tempting parallel between the current situation and the situation that prevailed in the second half of the 1970s. At the time, the ingredients were episodes of war or regime change in the Middle East and a striking rise in oil prices. The consequence was twofold: the onset of spiralling inflation and a change of regulation, at the same time less interventionist and Keynesian and more liberal and ‘Friedmanian’: less systematic drive for budgetary activism, less regulation of the labour market, privatisation of public companies and more openness to external exchanges.

Let us delve into this second topic – or at least try. In the same way that correlation does not mean causation, parallel might mean trivial! By what path would comparable causes produce a change in the conduct of the economy, but in the opposite direction?

Is it not time to foresee a return to more voluntarist economic policies instead of prioritising laissez-faire economics? Yes, of course, but we must understand that this
aspiration derives more from a reaction to a general context considered dysfunctional rather than from the search for an appropriate response to the beginning of snowballing prices.

Public opinion (or those who influence it) seems to show dissatisfaction, with the source
of the problem behind it lying in the regulation in place today. This leads to an emphasis
on an attitude that favours the alternative to the current logic: goodbye Friedman and hello Keynes, nice to see you again!

Nevertheless, beyond the causalities and their occasional loose ends to be tied up, the aspiration for a change in the administrat ion of the economy remains. The keywords might be the following: energy transition and inclusion. That means cooperation between countries (yes to competition in an open world, but not to strategic rivalry); reconciliation between public decision-makers, but also private ones, and the various other actors of economic and social life (the stakeholding); and the return to a ‘normal’ redistribution of wealth from the most to the least privileged.

To paraphrase Harvard University Professor Dani Rodrik, a globalised economic system cannot be the end and the political and social balances of each country the means; the logic must be put in the right order (a return in a way to the spirit of Bretton Woods).

In this way, at least we can hope, the global economic system will not fragment and inflation will be contained.

At least in the West, citizens and political leaders should align their aspirations and their efforts in this quest. Will businesses follow them? Will they not have something to lose, at least the largest of them?

We must of course raise the difficulty that may exist in reconciling the economic globalisation experienced over the past 30 years or so and the values that now prevail in society.

This requires adaptation, but without opposing the behaviour of the past and the aspirations—most certainly lasting—that have emerged. In the future (far ahead!), there will be no economic success in a world made inhospitable by the climate or by politics.

It is possible to ‘make some money’ occasionally by optimising customer, supplier and employee relationships, but taking a more long-term view, a ‘functional’ planet and ‘calm’ societ y are prerequisites.

Maybe we too easily tend to oppose market logic head-on to state and societal logic. Doubtless, it is more a question of positioning the cursor in the right place based on the changes observed or foreseen. That is where we are today; it is more about evolution than revolution!


Read the fourth edition of Accuracy Talks Straight >

More accuracy news

August 2022

Accuracy conseille le Groupe Casino

Accuracy a réalisé la due diligence financière pour le Groupe Casino dans le cadre de la vente de la majorité de ses parts dans GreenYellow à Ardian. ...

August 2022

Accuracy advises Casino Group

Accuracy conducted financial vendor due diligence in the context of the disposal of Casino Group’s majority stake in GreenYellow to Ardian. ...

July 2022

Accuracy Eco Podcast

Dans la continuité de son Economic Brief, Accuracy a le plaisir de vous présenter Accuracy Eco Podcast.Retrouvez Hervé Goulletquer et David Chollet pour déchiffrer ensemble les dernières actualités économiques.En 10 minutes, comprenez mieux le monde qui vous entoure et...