Will France regain Monetory Sovereignity?

PARIS – Dire conditions can permit what was once unthinkable to push its way into public debate. In France, the idea that now dares to speak its name is that the country will sink into an ever-deeper economic malaise unless it regains its monetary sovereignty.Two striking statements on economic policy by France’s leaders in the first weeks of this year have highlighted the force of this logic. First, President François Hollande, worried about the euro’s appreciation against other major world currencies, called for an exchange-rate target. Then, Pierre Moscovici, the finance minister, said that Europe might grant France a delay in meeting the 3%-of-GDP budget-deficit target mandated from this year onward under the eurozone’s newly ratified fiscal compact.These positions imply a desire to exercise sovereign power over the Economic and Monetary Union’s rules and decisions. Back in 1989-1991, exactly the same motive underlay President François Mitterrand’s imposition of the euro on Germany – that is, to harness the Bundesbank’s monetary power to a framework in which France could be confident of wielding decisive influence. Since the single currency was France’s condition for accepting German reunification, Germany played along. Two decades later, Germany may be in a different mood.The sovereign-debt-and-banking crisis that has roiled the monetary union since 2010 has steadily exposed the realities at play here, as irrevocably fixed exchange rates lock in and deepen differences in eurozone members’ competitiveness. In France’s case, the loss of competitiveness and resulting sharp decline in export performance has been aggravated by relying on crushing taxation of labor to finance generous welfare programs and top-drawer public services (a practice exacerbated by stifling labor-market regulation).In a monetary union, there are only two ways to close a competitiveness gap between countries: transfers from the more competitive to the less competitive, or internal devaluation, which means real wage cuts.Not surprisingly, the preference has been for transfers, which, until the 2008 financial crash, took the form of cross-border private-sector lending to governments and banks. Following the credit-bubble burst in 2008, fiscal transfers replaced these private financial flows, causing budget deficits to balloon. And now, with the German government, as chief creditor, calling the shots on cross-border transfers to weaker eurozone countries, all such transfers are conditional on austerity (that is, internal devaluation).Bailouts from the European Stability Mechanism represent the clearest example of this, with the fiscal compact now committing signatories to tight deficit targets and structural adjustment. And more austerity is a vital, if less well remarked on, condition of the European Central Bank’s declared willingness to buy unlimited quantities of troubled countries’ short-term government debt.So far, the “bazooka” represented by the ECB’s “outright monetary transactions” program has had the desired effect – without having to be used. Eurozone financial markets have stabilized, and the euro has appreciated against the dollar and the yen. But, as Hollande’s recent declarations indicate, currency appreciation is the last thing that an uncompetitive country like France needs.Although the French government, unlike its Spanish and Italian counterparts, has not yet had any difficulty financing itself at low interest rates, currency appreciation as the economy slides into recession is like fuel poured onto an unlit bonfire. Unless growth is restored, France’s already large public debt will expand unsustainably, heightening the risk that investors will shun French government bonds.From this predicament stems the fashionable idea that the bond market would actually welcome less fiscal austerity, because this would boost economic growth, in turn making the level of public debt appear more sustainable in the long run. It is no surprise that Moscovici is beginning to push for a “collective European decision” to relax the fiscal treaty’s terms, given that French compliance would require massive new spending cuts.Will Germany agree to such a relaxation – or, for that matter, to Hollande’s implicit demand that the ECB follow Japan’s example and loosen monetary policy to drive the exchange rate back down?Unlike Japan (and, of course, the United States), France, as a member of a monetary union, cannot pursue domestic goals unilaterally. To avoid disaster, France has only two options: somehow force a change in German policy or go it alone.There are two reasons why, until now, the second option – leaving the monetary union – has been unthinkable. The first has to do with economic and financial risks. Ditching the euro might trigger a banking crisis, capital flight, inflation, and perhaps even sovereign default.Brigitte Granville is Professor of International Economics and Economic Policy at the School of Business and Management, Queen Mary, University of London. Copyright: Project Syndicate