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The Big Lure

During the lockdown period, Nicolas Sarkozy, the 2007-2012 French president, wrote his memoires entitled ‘Le temps de tempêtes’ (part I). In it, he openly bemoans the French government’s structural inability to get things done as intended: ‘I knew that of the 100% of the energy and voluntarism that came out of my office, barely 10% would make it to the field [...]. It is impossible to imagine the immense capacity of civil servants […] to delay, modify or weaken a project that does not seem to be in line with their political idea.’ Although it ranks right next to the U.S. in the top 20 countries in terms of government effectiveness according to the World Bank (2018), France appears to be barely manageable. This assessment applies by extension to many other democratic countries and, beyond them, to large institutions: administrations tend to take on a life of their own.

Market participants’ increased nervousness about the shape of the economic recovery has translated in a noticeable rise in stock market volatility in recent days. Based on Nicolas Sarkozy’s reflections about governments’ failings, the financial markets are not wrong to dread the coming months: the future macroeconomic environment currently relies to an extraordinary extent on national governments’ ability to get the right things done.

First, there is some uncertainty about the adequacy of the response to the new wave of COVID-19 cases. Vaccines will not provide a solution in the foreseeable future because they will come either too early to be trusted or too late to be useful over the winter months. In that context, national governments are compelled to implement new social and mobility restrictions. Unfortunately, as Nicolas Sarkozy notes in his epilogue, a ‘pensée unique’ i.e. a dominant political doctrine tends to emerge during crisis times. While there are six months of global data on the pandemic available across all countries with many valuable lessons learned, they will unlikely be considered by most governments because each one of them is emotionally locked in its own doxa. It would thus not be wise for investors to anticipate rational, proportionate and coherent health protection policies around the world – but then, what to expect?

Second, there is the urge to avoid a fiscal cliff in 2021 as expansionary, COVID-19-related measures launched this year could prematurely lead to a call for austerity, thereby triggering a double-dip recession as experienced in Europe over 2011-13. Writing and executing a balanced fiscal choreography carries some material macro and market risk, particularly given the polarized political dynamics in many countries, including in the U.S.

The good news, from a financial market perspective, is that Western governments have found the cookie jar and that central banks are telling them that the biscuits are calorie-free. Inspired from the Bank of Japan’s playbook, Jay-san and Christine-san are committed to supporting government spending. The unhappy byproduct, from a liberalism point of view, is that governmental institutions around the world are embracing a significantly larger role in the economy than before COVID-19. This is not particularly comforting when considering Nicolas Sarkozy’s frustration with governments’ effectiveness.

The assessment of the current trends further worsens when the health and budgetary crisis is put in a broader perspective. For COVID-19 is a big lure. It is diverting governments’ attention and massive financial resources away from an issue with ultimately direr consequences for society, namely climate change (see ‘Pascal’s Wager’).

The young generation seems to understand this best. It has lost trust in governments. It may next lose its patience. Nicolas Sarkoky’s book title is appropriate: it is the time of tempests. The cold months ahead could well bring with them growing socio-political dissent.

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