Inflation in energy and food prices, increasing poverty, the end of “whatever it takes,” rising interest rates… Our economy is facing tough challenges. But what role does the financial sector play in the current crisis? Is it a cause, and more importantly, can it be part of the solution?
A geopolitical crisis before a financial one
Some economic crises are primarily financial, closely linked to dysfunctions in international finance, as was the case in 2008 following the subprime crisis in the United States. This is not the case today.
The difficulties we are currently facing result from various factors. The geopolitical context of the last five years has significantly weakened global growth and trade fluidity.
Firstly, the Covid-19 pandemic slowed down economies worldwide and international trade, as well as national trade. Sectors such as air transportation, hospitality, real estate, and the oil industry experienced significant disruptions.
Brexit forced European countries to rethink their exchanges with the United Kingdom, which, let’s remember, is France’s fifth-largest trading partner.
In addition to this, there are difficulties in the supply of Taiwanese semiconductors and rare earths predominantly owned by China. This situation worsened with the trade war initiated by Donald Trump between the USA and China, which is now starting to affect Europe, particularly concerning electric vehicles, where the EU is attempting to protect its market against the Chinese offensive.
Finally, the invasion of Ukraine and sanctions against Russia have completely destabilized the global markets for oil, gas, and cereals.
Therefore, this crisis is not financial in terms of its causes, but it affects the trade and production of highly financialized goods, such as cereals, real estate, gas, and oil.
Finance has a role to play in the real estate crisis
In recent years, the real estate sector has been disrupted, both in the existing market and in new constructions. The Covid-19 pandemic was an initial shock, with initially frozen sales followed by an urban exodus, which remained contained but had an effect on property prices—declining in the capital and rising in mid-sized cities.
This disruption exacerbated an already latent crisis in the real estate sector, related to too few constructions compared to demand, new ecological standards (especially the removal of thermally inefficient properties from the rental market), and changes in household compositions (particularly the increase in single-parent families).
Housing constitutes an average of 31% of household expenses. This figure increased by 20% between 2005 and 2015, according to the OECD. Real estate prices in France have increased by 88%, excluding inflation.
Certainly, the housing issue is not solely financial; it is primarily political and demographic. However, the world of finance has a role to play by supporting construction projects for developers and facilitating access to credit for households. Since the rise in interest rates, many households are abandoning or postponing their purchase projects and relocations, thereby hindering real estate mobility, including in the rental market. Even local authorities are victims of this trend, as they are largely beneficiaries of notary fees, the amounts of which are plummeting.
A balancing act for financial and banking institutions that must both facilitate access to credit and ensure the solvency of their clients. Let’s keep in mind that the 2008 crisis was primarily triggered by a crisis in mortgage credit in the United States.
French savings, a formidable tool for recovery
Paradoxically, the French have never saved as much as they have since the Covid pandemic. Not only due to the impossibility of consuming because of lockdowns and other health measures but also out of fear for the future.
Result: regulated household savings (Livrets A, LDDS, LEP, PEL, etc.) represent a record level of 902 billion euros according to the French Banking Federation.
This savings arouses the interest of banks, which create new financial product offerings, but it is also coveted by the government, which sees it as a tremendous lever for long-term investment.
The Ministry of the Energy Transition, for example, does not rule out tapping into the 375 billion euros stored in French Livrets A to finance the renewal and strengthening of our nuclear power plant, a key sector to address the emerging energy crisis.
We are under a dual pressure, caught between financial difficulties and the climate crisis. A situation that was often summed up during the yellow vest crisis by the expression “end of the month versus end of the world.”
If a return to more frugality is essential to achieve our climate goals, innovation must also be at the heart of this transition. To develop cleaner energy, modes of transportation, or habitats, companies need to invest in research and development. Just as small Biotech companies were instrumental in fighting against Covid-19, startups that have not yet emerged may be the keystone of our ecological transition.
Photos : corporatefinanceinstitute.com – binus.ac.id