Confidence in some countries’ ability to service debt has been weakened. The monetary union is under pressure. (Chart 1: Current account) The crisis has its roots in global trade imbalances, with high saving in emerging economies and comparably large deficits in many advanced countries. The imbalances drove down long-term interest rates to very low levels and the appetite for risk grew. Inadequate financial sector regulation led to a further deepening of the imbalances. (Chart 2: Yield on 10-year government bonds) Four years after the financial crisis engulfed the world, a European version has now emerged. Both market participants and the authorities failed in their assessments after the introduction of a single currency. Prior to the introduction of the Economic and Monetary Union, there were wide differences between interest rates facing different European countries, which primarily reflected different inflation expectations across countries. But through the 1990s, long-term interest rates drifted down to German levels. Over the next 10 years, sovereign interest rates were fairly similar – and very low – for all euro area countries despite wide differences in debt levels, budget deficits and growth rates. Market participants did not take into account differences in sovereign creditworthiness. Sovereign debt was treated as virtually risk-free, both in the markets and by the authorities. The period contrasts with the recent two to three years during which interest rates on sovereign debt have widened sharply. For many countries, interest rates have reached very high levels.
But in a country such as France, which already enjoys a high productivity level, there is still plenty of room for progress in the diffusion of ICTs, both in terms of the speed and quantity [slide]. The share of ICT capital stock in GDP is markedly lower in France than in the United States and the United Kingdom. Getting rid of this lag would deliver substantial gains in growth for France. 1. Third hypothesis, a dearth of investment? Catching up to the technological frontier will require investment in ICTs as well as in research and development. This investment is vital in order to incorporate innovation into production processes. Yet it is also a lot riskier than other types of investment, for example in construction. Indeed, it notably combines a low or non-existent resale value with uncertain future revenue flows. Like the rest of the innovation economy, therefore, it needs an appropriate form of financing – one that relies more on equity as opposed to debt. However, the cost of capital remains high despite the sharp drop in interest rates over the past 20 years. According to Banque de France calculations, the nominal cost of capital for France’s major listed companies is still between 8% and 9%, whereas the risk-free rate is currently around 0%. This particularly high cost places a drag on investment, and hence on innovation and productivity growth. 1. Are there any factors that are specific to France?