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Analysis
The Governor speaks: France’s EMU nerves on display

The Governor speaks: France’s EMU nerves on display

by David Marsh

Fri 16 Dec 2011

Rattled nerves in Paris over what appears to be an imminent downgrade of France's sovereign credit rating indicates the endgame of economic and monetary union (EMU) may shortly come upon us.

A series of nervous statements from leading policy-makers demonstrates that the full horror of France's position in EMU is now starting to dawn in the salons and chambers of Paris. Membership of the euro has not made France stronger and Germany weaker, which was the initial calculation behind the French drive to implement a single currency after the fall of the Berlin wall in 1989.

Instead, it has been the other way around.

Because France no longer has control over its own currency, it can no longer bluff or bludgeon others to get its way, as was often the case during the 1980s and 1990s. Because France does not run the European Central Bank, as it hoped it would earlier on, it cannot inaugurate the kind of quantitative easing to protect local bond markets that has been enacted in the US and UK. Because France is shackled together with Germany and 15 other countries in EMU, its credit rating and the performance of its bond markets are linked to the prowess not of the strongest but the most feeble in the euro. To paraphrase President Richard Nixon's remark about Keynesianism, 'We are all Greeks now.'

Finally, because the Germans have rediscovered the seemingly lost art of Bundesbankism under the central bank's young and surprisingly hard-headed president Jens Weidmann, France finds itself trapped in the same vice of German orthodoxy and obduracy from which it thought it had escaped with the establishment of the euro in 1999.

Some people of course saw this coming. President François Mitterrand, who was responsible for driving the Germans towards monetary union after the fall of the wall, confessed when he was close to death in January 1996 that he had made a mistake by granting full independence to the European Central Bank - because the Germans would ultimately get their way. The admission, made to Miitterrand's old confidant and Socialist comrade-in-arms Jean-Pierre Chevénement, was all the more revealing because Mitterrand had shown great prescience in the early 1980s by predicting to successive German chancellors that Soviet weakness would bring about German reunification before the end of the 20th century.

The focus of the latest outpouring of French Angst about the country's financial position has been a statement from the mild-mannered but highly experienced Governor of the Banque de France Christian Noyer. He told the somewhat obscure Le Télégramme newspaper in Brittany that not France but the UK should be downgraded because Britain had bigger deficits, more debt, higher inflation, lower growth and shrinking credit.

Noyer - a pleasant and erudite man who makes a splendid dinner-time conversant and is now one of the only two members of the European Central Bank Council to have sat on that body since it started 13 years ago - revealed much more about France's frustrations and fragility than Britain's. In his plaintive querying of Britain's credit status, Noyer is in an unenviable position - somewhat akin to that of the glamorous bride-in-waiting whom good-looking consorts pass over in favour of a dowdy no-hoper. The short answer to his poignant question: 'Why her and not me?' is that Britain still has its own money whereas France has effectively adopted a foreign currency. The longer answer would take longer to elaborate: it would lie in an explanation of how France sought to break the mould of European money, and instead became trapped in it.

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