Does inequality hurt economic performance?

By Francesco Saraceno

Economic theory has long neglected the effects of income distribution on the performance of the economy. Students were taught right from Introduction to Economics 101 that the subject of efficiency had to be separated from considerations of equity. The idea is that the size of the cake had to be expanded to the maximum before it is shared. It was implicit in this dichotomy that economists should address the issue of efficiency and leave the question of distribution (or redistribution) to the politicians. In this framework, the economist’s role is simply to ensure that choices about the channels for redistribution through taxation and public spending do not affect growth by interfering with the incentives of economic agents. Echoes of this view can be found both in the debate about the taxation of very large incomes envisaged by the French Government as well as in authors like Raghuram Rajan who justify inequality with references to technical progress and international trade, a view refuted by Paul Krugman. Continue reading “Does inequality hurt economic performance?”

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The crisis and market sentiment

By Anne-Laure Delatte

Fundamental factors alone cannot explain the European crisis. A new OFCE working document shows the impact of market beliefs during this crisis. In this study, we search for where market sentiments are formed and through what channels they are transmitted. What is it that tipped market optimism over into pessimism? Our results indicate that: 1) there is a strong self-fulfilling dynamic in the European crisis: fear of default is precisely what leads to default, and 2) the small market for credit derivatives, credit default swaps (CDS), insurance instruments that were designed to protect against the risk of a borrower’s default, is the leading catalyst of market sentiment. This result should be of great concern to the politicians in charge of financial regulation, since the CDS market is opaque and concentrated, two characteristics that are conducive to abusive behaviour. Continue reading “The crisis and market sentiment”

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How France can improve its trade balance*

By Eric Heyer

Prime Minister Jean-Marc Ayrault has made a commitment to restoring France’s balance of trade, excluding energy, by the end of his five-year term. Without addressing the curious anomaly of leaving the energy deficit out of the analysis of the country’s trade position, as if it did not count in France’s dependence on the rest of the world, we will examine the various solutions that the government could use to achieve this goal. Continue reading “How France can improve its trade balance*”

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Who will pay the bill in Sicily?

by Augusto Hasman and Maurizio Iacopetta


Rumors of a Sicily’s possible default are in the air again. The employees of the Sicilian parliament did not receive their checks at the end of September.  Another possible default of Sicily made already the international headlines in July (see the New York Times 22/07/12) due to the contagion effects it could have had on other regions.  But in that occasion, the central Italian government prevented Sicily’s default by providing an immediate injection of liquidity in the order of 400 million euros. Continue reading “Who will pay the bill in Sicily?”

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France-Germany: The big demographic gap

By Gérard Cornilleau

The divergence in the demographic trajectories of Germany and France will have a major impact on social spending, labour markets, productive capacity and the sustainability of public debt in the two countries. The implications are crucial in particular for understanding Germany’s concern about its debt. These demographic differences will require the implementation of heterogeneous policies in the two countries, meaning that the days of a “one-size-fits-all” approach are over. Continue reading “France-Germany: The big demographic gap”

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Must we choose between saving the planet and exiting the crisis?

By Xavier Timbeau

It is up to our generation and those that follow to find a way for 10 billion people to live decently and sustainably on a planet with finite resources and capacities. As a decent standard of living requires a mode of consumption closer to that of our Western societies than the deprivation that afflicts a large part of the world’s inhabitants, the task is immense – but failure is unacceptable. All this requires us to curb climate change, to anticipate falling agricultural yields, to prepare for the impact of rising sea levels, to adapt, and to halt the destruction of biomass and biodiversity while taking into account the depletion of natural resources, whether renewable or not. The list of constraints is long, and unfortunately it does not stop with these few examples (the interested reader can profit from reading the OFCE’s previous work on this subject). Continue reading “Must we choose between saving the planet and exiting the crisis?”

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Friends of acronyms, here comes the OMT

By Jérôme Creel and Xavier Timbeau

We had the OMD with its Orchestral Manœuvres in the Dark, and now the OMT with its Orchestral Manœuvres in the [liquidity] Trap, or more precisely, “Outright Monetary Transactions”, which is undoubtedly clearer. The OMT is a potentially effective mechanism that gives the European Central Bank (ECB) the means to intervene massively in the euro zone debt crisis so as to limit the differences between interest rates on euro zone government bonds. The possibility that a country that comes into conflict with its peers might leave the euro zone still exists, but if there is a common desire to preserve the euro then the ECB can intervene and play a role comparable to that of the central banks of other major states. Opening this door towards an escape route from the euro zone’s sovereign debt crisis has given rise to great hope. Nevertheless, certain elements, such as conditionality, could quickly pose problems. Continue reading “Friends of acronyms, here comes the OMT”

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The crisis in the automobile industry: strategic shortcomings shouldn’t conceal the impact of fiscal austerity

By Jean-Luc Gaffard

The crisis in the automobile industry, illustrated by the closure of the PSA site in Aulnay, reveals not only structural difficulties but also strategic errors made by the manufacturers with respect to their industrial organization and range positioning. The industry’s need to restructure cannot, however, obscure the very real macroeconomic dimensions of the crisis in the short term. Continue reading “The crisis in the automobile industry: strategic shortcomings shouldn’t conceal the impact of fiscal austerity”

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The situation on the labour market in France*

By Eric Heyer

The French economy is facing a number of imbalances, with the two main ones being:

– a public deficit that at end 2012 is likely to come to about 4.5 GDP points, or close to 100 billion euros;

– a lack of jobs, which is leading to mass unemployment. Continue reading “The situation on the labour market in France*”

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Youth “jobs of the future”: What impact on employment and government finances?

Éric Heyer and Mathieu Plane

The bill aimed at creating 150,000 “jobs for the future” [emplois d’avenir] for unemployed youth will be submitted to Parliament in October 2012. These 150,000 “jobs for the future” are to be reserved primarily for young people from deprived areas. What will be the net impact on employment and public finances? Continue reading “Youth “jobs of the future”: What impact on employment and government finances?”

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