“I’m happy to have a small side bet on France at the moment.”
Sir Howard Davies, director of the London School of Economics from 2003 to 2011, now has a day job as chairman of the Royal Bank of Scotland, but his other main professional activity is teaching two master’s courses, on global financial regulation and on central banking, at the Paris School of International Affairs (PSIA) – part of the LSE’s French cousin, the Paris School of Political Studies, generally known as Sciences Po.
It is easy to understand the appeal of France at the moment. Only two years ago, Davies reflects, “it had a lame-duck president, [National Front leader] Marine Le Pen was racing forward, the best candidate on the right [François Fillon] seemed to be a Sarkozy retread, Sarkozy was still careering round trying to reinsert himself into the debate…the socialists had not decided who was going to be their candidate…And we in the UK had just re-elected David Cameron…All he had to do was get this little referendum out of the way and he was set fair to have a proper majority government for the next five years.”
Things, of course, didn’t turn out quite like that. Politics in the UK is in turmoil, while the election of Emmanuel Macron – whose presidential candidacy was initially “widely regarded as a bit of a joke”, according to Davies – has seen France regain something of its elan.
Although he presents himself as a break with French tradition, Macron had an education, at Sciences Po, that is very much the standard for occupants of the Élysée Palace: the past five presidents all studied there (although Sarkozy never graduated). Yet Macron’s international popularity has benefited his alma mater in a way that none of his predecessors did. The institution recently reported a 60 per cent increase in international applications for next year – something its director, Frédéric Mion, attributed to “the Macron effect”. Furthermore, as Davies points out, “Sciences Po has been quite lucky because the previous French government decided that the concentration of higher education in the centre of Paris was unreasonable, so they decided to push quite a few of the institutions out of Paris. [Sciences Po] has been the great winner as several attractive premises have become free. It was previously dotted around [the city, but] will now have a proper central campus.”
And then there is Brexit. While he notes that “people at Sciences Po are careful in how they put it”, Davies strongly suspects that “Brexit will be an opportunity for them, because there will inevitably be less interest [among students] in going to the UK”.
When the LSE was established in 1895, it was partly inspired by the example of Sciences Po, which had been founded 23 years earlier to create a new class of politicians after France’s defeat in the Franco-Prussian War. The two institutions remain broadly similar, and, while at the LSE, Davies worked closely with his opposite number at Sciences Po, Richard Descoings, to develop joint master’s degrees that give students an experience of both institutions.
The one on European studies, which is largely designed for people hoping to find work in major European institutions, proved highly successful partly because graduates emerged with what Davies calls “a blended British and French view of Europe”.
“UK academics typically praise Europe for expanding competition, and so improving productivity,” he explains. “The single market enables concentration of expertise and comparative advantage across the whole market. In France, you typically hear that Europe means having a strong euro, which has its place in the world’s financial system and rivals the dollar. We can be strong in trade policy, deal with the Russians and the Chinese with our chins out. And both perspectives are true in their way.”
But while Sciences Po remains “very well positioned” as “an international school teaching substantially in English in a big city where the debates about the future of Europe are taking place”, Brexit means that “London is no longer an obvious place to go and study [those debates]”. Davies believes that Sciences Po’s advantage is underlined by the fact that a former Italian prime minister, Enrico Letta, recently became dean of the PSIA.
There is one area, however, in which Davies is less convinced by the direction of travel in France.
In his view, “the French get a lot more worried about [university] league tables than they should”. This is because of a “structural problem”: namely, that many university-based researchers, including at Sciences Po, are technically employed by the National Centre for Scientific Research (CNRS), while league tables require that “you have to be mainly employed by a university for your research to count”. Hence the recent creation of larger groupings of universities, grandes écoles and research institutes, known as ComUEs. One example is the Sorbonne Paris Cité University, which brings Sciences Po together with 13 other institutions – although Davies’ struggles to remember its name suggest that a new overarching institutional identity is still far from being instilled.
Rather than amalgamate, Davies thinks the French should just “relax” about their higher education institutions’ relatively low international rankings, content in the knowledge that institutions such as Sciences Po, which sits in the 401-500 range in Times Higher Education’s most recent World University Rankings, are “very good”. Students on his courses, for example, “typically want to go into central banks, the Organisation for Economic Cooperation and Development, the International Monetary Fund, the European Central Bank or regulatory bodies”, and he doesn’t think that rankings are relevant to such aspirations, given that these organisations pay little attention to them. Besides, “university league tables are like sausages: the more you know about how they are made, the less you want to [do with] them”.
Davies is no career academic. Prior to his appointment at the LSE, he worked in management consultancy and in government – including a stint as private secretary to the British ambassador in Paris – before moving on to spells as deputy governor of the Bank of England and chair of financial watchdog the Financial Services Authority.
His time at the LSE came to a very high-profile end when he resigned in 2011 over the institution’s links with Libya, including its acceptance of a £1.5 million donation from the Gaddafi regime and a plagiarism scandal involving the PhD thesis of the dictator’s son Saif.
Asked for his reflections on this now, Davies merely comments that “in fundraising, you have to have a very good process about what to accept and what not [to accept]. I thought we had. It turned out the council didn’t feel they’d been told enough about it.
“The only other thing [I would say] is that you have to make a very quick decision about whether you think you can survive [such a controversy], whether it is going to die away. I decided it wasn’t worth staying to fight.”
But his experience of running the LSE taught Davies important lessons about university funding – and about the challenges of communicating those lessons to academics.
“Research was structurally unprofitable even if you scored really well in the research excellence framework,” he claims. “It’s being financed by surpluses on taught master’s. I think that’s fine because part of the reason people came on the taught programmes was because the place was very highly ranked in research, and they thought they were going to be sitting at the feet of the best economists around. Academics had to understand the dynamic and deliver the teaching because that was what was paying for the research. Yet because of the history of underfunding [undergraduate] students [before the introduction of £9,000 tuition fees in 2012], a kind of mood gained ground in British universities that [all] students were an unprofitable activity.”
At Sciences Po, Davies has since 2011 been responsible for two courses that he designed, delivers and marks himself. (He even uses his own books as core texts.) In offering what he calls “a political economy view of regulation and central banking”, he draws extensively on his previous experiences of academia, finance, regulation and government. And he has some sharp comments on the relations between these sectors.
His time at the FSA between 1997 and 2003, as well as his involvement in the Basel Committee on Banking Supervision and with French committees on financial regulation, exposed Davies to the games that politicians and commentators play with regulators. “In the run-up to the  financial crisis, every time I went to Parliament – every time! – I was criticised for being over-intrusive, over-burdensome, costly, box-ticking, getting in the way of the wealth-creating instincts of the financial sector. [Since the crash, all we hear is that] the regulators are useless, toothless, hand in glove with bankers and so on.”
When he moved to the LSE, however, Davies found “only a few economists who really understood the regulatory environment. I used to meet loads of people who could tell me how the regulatory system could be changed – yet none of them really knew how it worked…What was missing in the way the academics thought was an understanding of the institutional framework. I don’t think academics are instinctively good at that. When you’ve been in the policymaking machine, or at the other end of it as a bank, you [know] the structure of regulation, the objectives, the accountability, the degree of independence regulators have, the degree of political influence on them and so on. It’s absolutely core to what is done…How safe you want your banks to be is a kind of political choice.”
Such perspectives are central to the courses that Davies teaches at Sciences Po. He also believes that, since the crash, dialogue between UK academics and the City has become notably more productive.
There is a view, he admits, well set out in the 2010 US documentary Inside Job, that, before the crash, “large parts of the academy had been captured” by the banking industry. Although he believes that this portrayal is “overstated” and cannot recall “many unthinking boosters of the City in the [British] academic world”, mainstream economists would often assume that a large financial sector was “a sign of sophisticated economic development”. In recent years there has been much more research that is “very critical of some dimensions of what the City has done…You’ve now got some interesting research saying that maybe, beyond a certain point, the weight of the financial sector in an economy can be a disadvantage.
“This is for two reasons: very elaborate trading strategies, such as sub-prime mortgages, that are actually fragile may cause genuine economic damage when they come crashing to the ground; or the financial sector may suck into it highly qualified people such as engineers who would be more productive in other parts of the economy. There are some plausible arguments that there can be a negative correlation between the size of the financial sector and productivity growth.”
These are arguments, according to Davies, that “most smart, enlightened people in the City say we have to engage with. We [at RBS] would now accept that our bank was significantly too highly leveraged before the crisis. Some of that academic work is on the button…There’s a real engagement between academic institutions and financial firms about stuff that is really hard-edged in the management of those firms.”
Brexit has brought to the fore another area where the City and the academy share a common interest. Davies regularly meets with ministers as part of a group of “bank chairs trying to coordinate City views about what an appropriate [Brexit] deal would be”. When it comes to the UK’s post-Brexit immigration policy, the financiers’ aspirations for a liberal regime largely overlap with those of universities, Davies notes.
“The [current arrangement] of really smart people coming to the UK for master’s programmes and then going into the City for two or three years on their work visas has been great all round. The universities say that such people fill our coffers and help us keep going. The financial institutions can recruit people of all nationalities, even if we then send them back to their national offices – that kind of funnel and channel has been fantastic.”
It remains to be seen whether this arrangement can be maintained, he notes – or whether the UK’s loss of international talent might be France’s gain.