The pressures of being part of the euro zone are telling on France. But lashing out at Britain will not help
Martin Feldstein / Jan 03, 2012, 00:57 IST
The French government just doesn’t seem to understand the real implications of the euro, the currency that France shares with 16 other European Union (EU) countries. French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.
French officials apparently don’t recognise the importance of the fact that Britain is outside the euro zone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.
If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8 per cent of its gross domestic product (GDP), whereas Britain’s budget deficit is 8.8 per cent of GDP.
There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.
The euro zone fiscal deficits and current-account deficits are now the most obvious symptoms of the euro’s failure. But the credit crisis in Europe, and the weakness of euro zone banks, may be even more important. The persistent unemployment differentials within the euro zone are yet another reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.
President Nicolas Sarkozy and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration. It was French officials Jean Monnet and Robert Schuman who launched the initiative for European political union just after World War II with the call for a United States of Europe. The French regarded the creation of the euro as an important symbol of progress toward that goal. In the 1960s, Jacques Delors, then the French finance minister, pressed for a single currency with a report, “One Market, One Money,” which implied that the European free-trade agreement would work only if its members used a single currency.
For the French, achieving a European political union is a way to increase Europe’s role in the world and France’s role within Europe. But that goal looks harder to reach now than it did before the beginning of the European crisis. By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.
Looking ahead, stopping the euro zone financial crisis does not require political union or a commitment of German financial support. It depends on individual euro zone countries – especially Italy, Spain and France – making the changes in their domestic spending and taxation that will convince global financial investors that they are moving towards budget surpluses and putting their debt-to-GDP ratios on a downward path.
France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.
The writer, an economics professor at Harvard, is a former president of the National Bureau of Economic Research.
Copyright: Project Syndicate, 2011
I don't know how to consider the writings of someone who can't even spell correctly the name of the french prime minister, that's not really reassuring on the actual level of knowledge over the subject... The UK is in far worse economical situation than France, that's a fact, and I am sure that the french officials are well aware of the single currency implications compared to those of the British pound. Now France have always payed its debts over at least the past two centuries, its economy is solid, so the markets fear-mongering delirium is mostly just that: irrational and Pavlovian, and most certainly ridden of manipulations. One could also compare the discrepancies among the Europeans nations with those among the US States, now that could be interesting.
"French officials apparently don't recognise the importance of the fact that Britain is outside the euro zone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros."
I can't believe I just read that.
Being able to print its money does not protect you from default, printing money to pay debt is defaulting! By printing to pay back all your debts you create so much money that very soon the hyperinflation would make the currency so worthless that investors will find themselves with a bond that worth nothing anymore.
That's why nowadays it is only the BoE that buys UK bonds. Who would buy a 2% 10 years bond with an inflation of 5% (more likely 7-8%)?
Each nation for itself, not in a callous, devil take the hindmost sense but, as the columnist suggests, by taking individual responsibility for reform, balancing budgets, austerity and responsibility may be the best way forward for Europe. Anglo-French concorde goes back centuries.
Posted by: GO2
January 03 , 2012, 18:19 IST
"Anglo-French concorde" ??
This is a true Oxymoron.
Content Guide
For the French, achieving a European political union is a way to increase Europe’s role in the world and France’s role within Europe. But that goal looks harder to reach now than it did before the beginning of the European crisis. By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.
