Is France in trouble?

“Temporarily, the countries that are in financial difficulties will be able to devalue their currencies without the need for transfers of funds from fiscally-disciplined states.”

I chose this title borrowing it from an August 10 entry on the blog of renowned American economist Paul Krugman. I will partially leave aside the blog readers’ comments in order to talk about the financial markets’ turbulence seen in the past week. Day after day increasingly alarming news about the investors’ behaviour have outlined the general picture of an apocalypse that is not just European, but global through its consequences. Everything was linked to the downgrading of America’s rating, the week starting with an article published in the official Chinese daily, an article warning the US that China might use the financial weapon against Washington if the latter continues to manipulate the markets.

In the days that followed at first Italy and then France were “seen” on the brink of financial collapse, only for the said news to almost instantaneously vanish from the mass media’s attention. Politicians everywhere, from US President Obama to other leaders of smaller geopolitical weight felt the need to make assuring statements in order to calm the financial markets. What happened?

It’s obvious that the story of this catastrophic news is not a simple whim having to do with who knows what conspiracy. A comment posted on P. Krugman’s blog reads: “It’s fair to say that nobody really knows what’s happening with the markets and that investors, media outlets, and commentators are quick to speculate on every nuggets of micro-data. One minute, Italy is about to collapse, the next minute all is saved, and vice versa. Let’s propose a law that media outlets are only allowed to comment on the economy once a month. On that basis, they might move beyond micro-second frenzy to a more calculated look at long-term trends and fundamentals… (!!!).” Maybe it’s true nobody knows what’s going on. But it’s just as true that on one hand the analyses that foresee the end of Europe have grown more numerous, and on the other hand, in close connection with what happened last week, French President N. Sarkozy met German Chancellor Angela Merkel on Tuesday, at his request.

What are the analyses that foresee the end of Europe in the midst of this global crisis saying? Referring to last week’s turbulences ‘Time’ wrote: “The market convulsions of the past week are clearly about short-term concerns, about the balance sheets of countries like Italy, Spain and even France. But they’re also about a problem with a more distant horizon: does the EU still make sense in its current form?” That question has an answer. In fact, the answer consists of three alternatives to the EU that the experts propose. The first is not the creation of a European superstate modelled on the US, as one might think, but an intermediary solution that would see the EU states ceding to Brussels control over their foreign policies, defence and borders, and most importantly the acceptance of a common Finance Ministry capable of transferring funds from the central government to the states that are in difficulty, when needed. The second alternative is to declare the end of the EU, at least temporarily. In this sense, the analysis cites the opinion of German expert Hans Werner Sinn: “It is better for all concerned, in particular for Greece, if the country leaves the Euro temporarily.”

Temporarily, the countries that are in financial difficulties will be able to devalue their currencies without the need for transfers of funds from fiscally-disciplined states.

Finally, the third possibility would be offered by the history of the organization itself. Before the introduction of the Euro, the EU created a mechanism for the reduction of exchange rate variability between member states. The mechanism began to show signs of jamming, and England pulled out in 1992, something that caused turbulences on financial markets. The other states learned the lesson and moved towards the single currency, the crisis pointing out the need for tighter integration. This seems to send us back to the first alternative.

Anyway, something has to be done and very fast. In the opinion of a Belgian expert, the fact that resorting to the emergency fund that the EU created in 2010 is subjected to the veto of member states is impracticable: “Can you imagine individual IMF members having veto power on its decisions? To act decisively, the Euro Zone needs to accept some transfer of sovereignty, like the IMF.” Weary that today’s European leaders lack the courage to act, he concludes: “This is a dangerous moment. One should be afraid for survival of the Euro Zone.”

Can the meeting between Sarkozy and Merkel show the signs of a reinvigoration of the European elites’ will to save the Euro and, implicitly, the European Union? (At the time this article went to print the details of the important European meeting in Paris were not known.)

After all, the states led by these two politicians are the engines of European integration. The birth of the organization itself and its entire subsequent evolution was possible thanks to the agreements between Bonn/Berlin and Paris. A credible theory claims that the Euro currency itself was the result of an agreement between the two capitals: in return for the reunification of the two German states, a reunification Paris consented to, Bonn took a commitment to accept the single European currency as a sign of its continental commitment. The announcement that N. Sarkozy made last week has caused agitation in Berlin. The German Chancellor’s press bureau had to announce that the visit had been planned a long time ago in order to put a relative end to the speculations. Is the Euro on the verge of breaking apart? That was the question that all commentators of the large German dailies put last Friday. For ‘Suddeutsche Zeitung’ the French demands for the creation of an economic government and for solidarity between rich and poor countries through the issuance of Eurobonds (that would lower general interest rates but that would hike them in the case of credits in rich countries like Germany) would be applicable “in order to stop the speculation and to preserve both the Euro and a semi-united Europe.” In other words, the creation of a “transfer union,” although “the phrase ‘transfer union’ is thoroughly disliked by Germans.” For ‘Handelsblatt,’ “what had previously only been discussed as a theoretical worst-case scenario has arrived: France has been sucked into the Euro crisis.” And ‘Die Welt’ is very clear when pointing out that it’s no longer possible to “treat” the crisis in Europe like it has been treated until now: “Either the Euro Zone – at least at the finance and economic policy level – will change into a kind of federal state with integrated policies in which, in exchange for financial aid, it is no longer possible for countries to live beyond their means. Or this young creation will break apart. That would be economically disastrous, and the continent would also lose global influence in the long run.”

Krugman’s answer to the question in the title is clear and based on figures and tables having to do with France’s financial situation: “Basically, non.” Inviting comments on his answer, the comment that received most appreciations from the readers was the one that argued that if the same European “treatment” of the crisis continues – meaning injecting huge amounts of money in order to avoid bailouts – then the crisis will continue “until Euro is broken up or until the ECB is willing to run a high inflation rate for the next decade.”

A solution to the crisis comes from the other side of the Atlantic – devaluing the Euro for a long period of time.


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