No way to run a common currency

Michel Sapin says German criticisms could drive French voters into the arms of the National Front

The French Finance Minister, Michel Sapin, yesterday complained that commentators in Germany were being overly critical of France’s efforts to reform its economy.  He warned that the trenchant criticisms would drive more and more of the French into the arms of anti-Euro and anti-globalisation parties like the National Front.  He was referring to recent threats by the German government and the European Commission to penalise France for failing to reduce its budget deficit quickly enough.

The failure to co-operate in managing the Euro

I have considerable sympathy with Michel Sapin’s views.  I have supported the Euro project from the start, and I still wish that the UK had joined in at the beginning when it could have done.  However, the Euro is now at serious risk of failing because the Eurozone member states have not learned how to manage it in a co-operative fashion.  Each member of the Eurozone continues to behave as if it were a completely separate entity for Euro purposes, whereas the existence of a common currency requires them to work together to manage it.

Succession of failures to co-operate

In the early years, for example, both France and Germany flouted the 3% budget deficit limit without incurring penalties, because they found it too difficult to reduce government spending.  Then Greece, Ireland and Spain borrowed to excess as those states and their citizens alike found that they could borrow at much lower interest rates than during the pre-Euro period.  This eventually led to the successive crises which the Commission, ECB and IMF finally resolved (or at least deferred) through a combination of bailouts and massive expansion of the ECB’s balance sheet.

Having survived the earlier crises, the Eurozone is now suffering from a chronic lack of growth and incipient deflation, which is driving many citizens of Eurozone countries into the arms of extremist parties.  The most recent Swedish government has fallen as a result.  Opinion polls suggest that Marine Le Pen would be elected President of France in 2017 if Francois Hollande runs again (though that seems increasingly unlikely to happen).

Reinvigorating growth and heading off deflation

It should not be beyond the wit of Eurozone politicians and economists to reinvigorate the Eurozone economy.  There appears to be a consensus among “right thinking economists” that the recipe for sparking a return to growth and heading off outright deflation is a combination of structural reform in countries that need it (like France and Italy), with some loosening of fiscal strictures in countries that can afford it (in particular Germany, which is planning to run a balanced budget next year).  Michel Sapin made this very point yesterday, when he accepted that France needs to reform but said that Germany and other states with fiscal room to manoeuvre must do more to help.

The Eurozone vs. its individual member states

Implementing the necessary combination of structural reform and fiscal loosening will be impossible without genuine co-operation between Eurozone states, however.  Instead of co-operation, we have the opposite.  German government ministers and commentators criticise France for its failure to reform, but refuse to countenance the fiscal loosening they could well afford at a time when interest rates are close to zero.  They enjoy the full support of the German public for this stance, so it is impossible to argue that their policies are “undemocratic”.  The French government, by contrast, refuses to contemplate more than modest reforms to the most sclerotic parts of its economy (for example, the generous benefits and low retirement ages of public sector employees) while insisting on running a budget deficit in excess of Eurozone norms for what could be an indefinite period if economic growth does not resume.  The French government also enjoys public support in France for its policies, so just like Germany it is acting “democratically”.  The problem is aggravated by the insults publicly thrown by politicians and individuals in each country at their counterparts in the other.  I have actually been amazed at the restraint with which the French have responded to criticisms from other Eurozone states of the way in which they conduct their economy.

Management of the Euro and Dollar compared

French and German attitudes sum up the key problem of the Eurozone.  Imagine how another “common currency”, the US Dollar, would fare if individual US states failed to co-operate in managing the currency.  Imagine that California and New York have booming state economies and a local need for higher interest rates, while most of the other states are mired in depression and in desperate need of monetary stimulus.  Would California and New York be allowed to dictate Federal Reserve and US federal government economic policy?  Of course not, so why should it be different in the Eurozone?

I recently drew the comparison with the US in a comment on an FT article.  Another reader replied to my comment, saying it had taken the US 140 years to overcome similar problems.  Unfortunately the Eurozone does not have 140 years, as some states, whether or not at the behest of extremist governments, will inevitably leave the Eurozone long before that and destroy it.

Eurozone politicians must bring their publics on board

I do understand the difficulty that politicians have in securing support from their populations for policies that contradict long-standing national principles, such as the horror of debt in Germany.  However, can they not do more to explain to their voters why it is no longer possible to carry on exactly as before?  I consider Angela Merkel to be an extremely skilful politician, but she does seem to be better at reading voters’ minds than at trying to change or, as I would prefer to say, lead them.

I am not saying, by the way, that I “agree” with any particular approach to managing a common currency.  The Germans may be right that increasing debt year by year truly is the road to ruin.  The French may be right in implementing reforms very slowly.  The US Federal Reserve may have erred in expanding its balance sheet so massively.  But whatever the rights and wrongs, there must still be a co-operative approach to managing a currency.

…or the Euro will fail

I have been impressed by the efforts of European politicians and the ECB under Mario Draghi in particular, to keep the Euro alive until now.  The Euro has been far more successful than critics and commentators outside the Eurozone are prepared to admit.  However, if there is a continuing failure on the part of Eurozone leaders to understand the need to put in place a truly co-operative approach to managing the common currency, allied with assiduous efforts to bring national publics on board, the Euro will almost certainly fail within the next few years.  One or more Eurozone members will leave, their successor currencies will fall in value, and they will be forced to repudiate their Euro debt.  That could well bring the European Union toppling down as well.

Michael Ingle

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Categories: Economics, EU, France, Politics

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