Monday 22 April 2019

Future of the euro in grave doubt as Franco-German core crumbles

France is finding it increasingly hard to live in a German-dominated currency union

Commemoration: French president Francoise Hollande at a second world war memorial event last weekend
Commemoration: French president Francoise Hollande at a second world war memorial event last weekend
Dan O'Brien

Dan O'Brien

How different would things be in Ireland and Europe today if the euro had never come into being? Given the enormity - politically, economically and financially - of sovereign countries sharing a currency it is difficult even to speculate on how the world might look if euro countries had kept their pounds, francs, marks, liras and pesetas. But it can be said with a great deal of certainty that a very significant happening, which took place last weekend, would not have happened.

That happening was the extraordinary public criticism of Germany by a senior minister in the French government. The economy minister, Arnaud Montebourg said this at a Socialist Party meeting: "France is the eurozone's second-biggest economy, the world's fifth-greatest power, and it does not intend to align itself with the excessive obsessions of Germany's conservatives".

He went on to call for "just and sane resistance" to the austerity policies he accused the German government (which, as it happens, is a left-right coalition of both conservatives and social democrats) of imposing on the rest of Europe.

Regardless of whether he is right or wrong about the policy stance, it is hard to think of a member of a European government openly attacking another in this way. It is impossible to think of anyone in a party as historically committed to Franco-German rapprochement of doing so. That Montebourg alluded to the second world war by talking of "resistance" was even more astonishing - over the past half century overcoming the two countries' bloody history of three wars between the 1870s and 1940s has been an imperative for both nations.

The attack illustrates the dire state of Franco-German relations, which have been the most important single relationship between any two European countries in the post second world war era. That spells serious trouble for Ireland - and all other countries in the Eurozone - if Paris and Berlin cannot get along, the single currency and the entire European integration project are in peril.

But here is the great irony of all this - a currency that was designed to bring Europe together and contain the power of the united Germany is doing exactly the opposite. The unavoidable need to have shared rules in the currency area is leading to a blame game that is poisoning relations among its members. That has long been obvious in the European periphery, but it has now spread to the Franco-German core.

It could be that these recrimination will fade if the European economy picks up of its own accord or if policy changes are implemented that all countries support. But if neither happens, the Franco-German core of the Eurozone will weaken further and support in both countries for those advocating abandoning the euro - including the French National Front, which already has the backing of one in four voters - will likely rise further.

An even more fundamental reason to be pessimistic about the future of the euro is the difficulty of finding an agreed way to run the euro project given how differently the two countries view most economic issues. While there are things that both sides of the political spectrum in the two countries have in common, such as a belief in extensive public provision of health services, education and welfare, there are far more differences than similarities.

While Germans have always seen competition in the marketplace as a means of driving efficiency and prosperity, the French are famously sceptical of the invisible hand of the market and have long instinctively preferred the guiding hand of a strong state.

This has not only manifested in domestic affairs but in international economic relations too. While France is always among the EU countries most resistant to freeing trade with other countries (including, currently, with the US), Germany has traditionally been in the pro-liberalisation camp.

Their different views on the relative importance of the market and the state in economic life is also reflected in views on macroeconomic management. No French government, as is frequently pointed out, has balanced its books in almost 40 years and proposals to cut public spending almost inevitably lead to street protests.

The Germans, by contrast, have a near obsession with fiscal discipline and an aversion to living beyond their means - Germany is a rarity in that politicians promising cuts can expect plaudits rather than protests.

Attitudes to monetary policy are as different as they are to fiscal policy. The French political class frequently calls on the European Central Bank to take this action and that action, while their counterparts east of the Rhine hold as sacrosanct the independence of the monetary authority and believe that even trying to influence it undermines that independence.

Even if the euro had been a club of just two - France and Germany - a detailed set of rules would have had to have been agreed, sooner or later, along the lines of the "two pack" and "six pack" rules that now govern the Eurozone. Such rules are underpinned by views and assumptions about economic management. Because Germany is stronger than France economically and politically, its economic philosophy is dominant. That is particularly hard to swallow for the French.

Montegourg's comments last week underscore not only the extent to which many in France feel that policies are being imposed on them, but that having this happen is little less than a humiliation for a country that is not inclined to understate its own grandeur. This sense of humiliation has played a considerable part in propelling to prominence the reactionary Jean-Marie Le Pen - whose anti-Brussels rhetoric is more extreme than that of even most UKIP members in Britain.

Last weekend's outburst led to Montebourg being fired, along with two other hard left members of the cabinet who joined his revolt. That, in turn, forced a second cabinet reshuffle in just four months.

"Crisis" does not begin to describe the condition of the two-year-old presidency of Francoise Hollande, who, even by the standards of the permanently disgruntled French electorate, is derided. No French president has ever experienced the lows Hollande is currently registering in satisfaction ratings.

Although the state of the French economy is not as bad as many Anglophone commentators claim, it is stagnating.

As modern democracies have become dependent on constant economic growth, the absence of growth is exacerbating the underlying political strains that have come about because of the euro.

None of this is to say that the single currency has not brought benefits - we trade more because of it and are more prosperous as a result and Europeans have saved countless billions on foreign exchange fees when they travel.

It also has ended the tensions caused by countries devaluing their national currencies to steal a competitive march on their neighbours.

But for a currency union to work, freedom of manoeuvre in many aspects of economic management, including the freedom to learn from mistakes (as France did under Francois Mitterand in the early 1980s), must be given up.

It is not clear that the political elite across the euro zone have fully internalised the magnitude of the change that came with joining the euro. It is very clear that the French political elite has not. That, along with a range of other factors, points to a break up of the Eurozone - sooner or later.

Twitter: @danobrien20

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