Tumbling dollar and stronger euro raise impetus for Sarkozy’s G20 plans
French president’s activism could help his potential challenger
by David Marsh
Mon 18 Oct 2010
As France prepares to takes over the G20 presidency following the next big summit meeting in Seoul next month, President Nicolas Sarkozy faces pressure on several fronts. The French leader must weather protest and street action from trade unions as France embarks towards German-style fiscal and monetary discipline as part of a shake-up of governance in economic and monetary union.
The tumbling dollar - at a 15-year low against the yen and an eight-month low against the euro - adds impetus to the French search calls for a new form of international foreign exchange consensus.
Yet as he tries to draw China into a multilateral dialogue on currency stability, Sarkozy has to confront the uncomfortable truth that successful action to persuade the Chinese to revalue the renminbi will probably result in a further unpalatable rise in the euro – a further dampener on Europe’s economic recovery hopes.
Sarkozy hopes an active French presidency of the G20 economic leadership group from next month – and of the G8 forum from January – will raise his international standing and bring rewards at home ahead of the 2012 presidential election.
But it is a strategy fraught with risks. By placing international monetary reform and tighter financial regulation squarely on to the G20 agenda, Sarkozy is involuntarily mapping out a higher profile platform for Dominique Strauss-Kahn, the managing director of the International Monetary Fund and potential election challenger for France’s Opposition Socialists.
Strauss-Kahn, who has enjoyed an activist 2010 at the helm of international efforts to restore order to the euro area, has yet to decide whether to run for the Elysée Palace in 2012. Opinion polls suggest that, were he to do so, he would romp to victory over Sarkozy, who has been looking increasingly embattled in recent months. The problem for Strauss-Kahn is that he is relatively unpopular in his own Socialist party and cannot be sure of winning his grouping’s backing as the presidential candidate.
Fresh from presiding over the IMF’s annual meeting in Washington 10 days ago, if he decided to fight for the nomination, Strauss-Kahn would probably have to leave the IMF limelight as early as next month and return to Paris to embark on an uncertain domestic political struggle.
Faced with the competing demands of life in the IMF fast lane and potential strife with his own Socialist party colleagues, Strauss-Kahn is caught in an agonizing dilemma. This is made all the sharper by persistent rumors that Sarkozy and his right-wing allies are preparing some form of ‘dirty tricks’ campaign to add to the IMF managing director’s hurdles in any potential presidential battle.
Back on the monetary front, the French president has pledged ‘action and ambition’ in G20 leadership and has vowed to combat exchange rate instability as ‘a vital threat to global growth.’
Sarkozy has proposed a new framework for consultation on exchange rates with the Chinese leadership, and wants to use a forthcoming summit meeting with China in Paris next month to press home concerted action on the euro-dollar-renminbi relationship.
China has already had a hand in recent efforts to stabilize the euro area, with Greek bond prices rallying after Chinese Prime Minister Wen Jiabao offered a vote of confidence in Greek economic stewardship during his European tour earlier this month. By throwing its weight behind the euro as a stable currency to rival the dollar, Wen has played a subsidiary part – alongside widespread expectations of further quantitative easing by the Federal Reserve Board – in propelling the dollar down further on the international currency markets. This takes some of the wind out of the sails of the long-running American campaign for a stronger renminbi to lower world financial imbalances.
For Sarkozy, this brings good and bad news. On the positive side, the apparent success of international diplomacy on the euro strengthens Europe’s hand as an effective player in the premier league of economic leadership alongside China and the US. On the negative side, the renewed surge of the euro to beyond $1.40 - against levels of around $1.20 at the depths of the euro crisis in May – will bring fresh problems for euro area economies already beset by worries about waning competitiveness. Judged by past actions, if the euro rallies further on the foreign exchanges, Sarkozy will soon be attempting to put pressure on the European Central Bank to delay its much-trumpeted ‘exit’ from monetary easing. The French president will argue that the euro’s rise already amounts to effective tightening action and lowers the necessity for planned ECB withdrawal of liquidity support to European banks.
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