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November 18, 2019

Is Macron facing another uprise against elites?

The gilets jaunes may have lost strength over the past year, but this does not make them harmless. Celebrating their first anniversary, they gathered at roundabouts in cities across France with violent clashes breaking out in Paris. The turnout was only a tenth of what it used to be. Still, the concerted response from the government and the announcements of new measures for hospitals this week show that the executive is on high alert. After all, we are in the run-up to the December start of open-ended strikes organised by trade unions against the pension reform. The government has an interest to take the heat out of the air before this turns into another wave of publicly-supported rejection of the government, and ultimately of Emmanuel Macron.

What still unites the French public is rejection of the elites. How the government communicates and how far they will bend to meet various demands will define whether or not the anti-elite sentiment will gather momentum. The last thing the government can afford is to be perceived as arrogant in its public discourse. And, in terms of measures, finding the right balance between carrots and sticks will continue to be a challenge.

The battle will be won not on the streets but with those who stayed at home. The 1995 strikes showed that public opinion is the decisive factor for a strike to succeed or fail. Will Emmanuel Macron and his government convince the people that they have learned the lesson from the gilets jaunes last year? Several officials went on air to come out strongly against the violence on display at Place d'Italie last Saturday. At the same time the government is promising bold measures for hospitals and soft-pedalling on pension reform, saying everything is negotiable except the end of special pension regimes. 

Focusing too much on the violence rather than the low turnout the government fails to address the underlying mistrust, warns l'Opinion in an editorial. And, by giving in to the hospital staff, it can prompt new demands from police forces or train conductors. The battle for the public opinion is not over yet.

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November 18, 2019

Forget the inflation target: Lagarde’s job is much bigger.

Our lead story on Friday was the unfolding debate about the inflation target. We have since learned that Christine Lagarde is likely to play this long - engage in a debate but not push for any fast action.

Wolfgang Munchau argues in his FT column why any push for a softer inflation target is likely to backfire at this point, and why a wider debate is necessary. The issue is not whether the target should be a lower or higher number, or whether it should be fully symmetric or not. More important is whether the model behind the concept of inflation targeting is still intact. We believe the best strategy for Lagarde is to undertake a much deeper and longer review of the policy and its underlying assumptions. Such a review may well take several years to accomplish. 

The whole notion of a direct inflation target is reliant on a stable relationship between output, interest rates and prices - of the kind that was established in a new generation of economic models in the 1980s and since. These models have failed to grasp the main economic developments of our time: financial crises and the impact of austerity policies. We don’t think that forecasting errors are the big issue here. It is a much broader failure to understand what is happening in the economy. That failure may have been a contributing factor to the ECB’s current dilemma - that it is constrained by the lower bound of interest rates and limitations on assets purchases. We believe that this environment requires a conceptually different policy framework, one that is not ready for deployment yet.

This is one of the few situations where we think actually the best strategy is to delay. There is no need for immediate policy action. Mario Draghi’s legacy will constrain the eurozone’s monetary policy for several years. Lagarde is in the comparatively good position that she does not need to take any immediate action. Her job is to prepare the ground for the next big shifts to come.

Our working assumption is that the next phase will include closer co-ordination between monetary and fiscal policies - a reality that takes us away from the model-orthodoxy of the past thirty years, but also away from static inflation targets. With her background Lagarde is a unique position to lead such a shift, but we should be under no illusion that this is going to happen quickly, or easily.

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  • Forget the inflation target: Lagarde’s job is much bigger.