They have succeeded in carrying out wide-reaching reforms that are compatible with our common European social model, which combines high standards of public service and relatively low levels of inequality – much lower than in the American society. Progress has been made in all four key areas: Enterprise, Employment, Education and Expenditure reduction. And these reforms are delivering results today: in recent years, GDP and employment have grown much faster in those countries. Contrary to preconceptions, France has also demonstrated in the past its capacity to meet the challenge of economic and social reform. In the 1990s, to prepare for the introduction of the euro, France pursued a competitive disinflation policy that proved highly effective. Remember that in the late 1990s, France experienced the highest GDP growth and the weakest inflation rate among European countries, along with a significant fall in its unemployment rate. Today, French reforms are heading in the right direction, [Slide 5] in particular the Tax Credit for Competitiveness and Investment (CICE) and the Responsibility and Solidarity Pact (RSP) which are designed to foster an improvement in the competitiveness of the French economy. We should obviously persevere with more reforms. But progress has also been made with the recent labour law (‘Loi El Khomri’) which, among other things, clarifies the conditions under which firms can carry out dismissals for economic reasons.
The inter-bank market, traditionally the most liquid and efficient of all markets, has experienced serious dislocation, while equity markets were relatively unscathed. The spreading of defiant expectations from the subprime US market to other segments, other institutions and other regions has been unexpected, asymmetric and disconnected from the magnitude of the initial shock. It invites us to revisit our reading of globalisation and contagion in the light of current events. The ongoing financial globalisation is underpinned by three main drivers, each of them strengthening the two others. The first driver, and probably the strongest, is financial innovation. Supported by technological progress, financial innovation has fostered the emergence of new financial products and services, resulting in more complete financial markets. Thanks to advances in financial technology, it is now possible to break up the risk of an asset into its constituent parts and to recombine them as wished, to fit a specific investor’s risk profile. The emergence of derivatives, combined with the appropriate mathematical tools to price them, has greatly expanded the range of tradable risks, opening up new and vast horizons for hedging strategies. Financial institutions are able to actively manage their exposures and reallocate certain risks to those players that are most able to bear them. Overall, investors are more willing to invest across borders, knowing that they can reach an improved riskreturn trade-off. Simultaneously, economies are becoming more open financially, especially in the emerging world. The growth of international capital flows is the consequence both of domestic policies and global factors.