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Analysis
As concern over Athens eases, Paris comes to the fore

As concern over Athens eases, Paris comes to the fore

Whether or not Sarkozy wins, France faces new decision on European treaty

by David Marsh

Mon 20 Feb 2012

European Central Bank action to extend euro liquidity ahead of today’s expected finance ministers’ decision on a new Athens bail-out has eased some pressure on economic and monetary union (EMU) by lowering alarm over a banking collapse or Greek exit. But, at the same time, concern about a third threat – the outcome of the French presidential elections on 22 April and 6 May – has risen palpably among senior European officials.

Attention has focused on the promise of François Hollande, the French Socialist leader currently ahead in the opinion polls, to renegotiate the planned new fiscal rules for EMU if he wins power. However, in a relatively little-noticed move last week, President Nicolas Sarkozy, who made a strong start to his campaign with a tub-thumping rally in Marseille yesterday, has said that, if he wins, he will put to a referendum the planned new European treaty on fiscal discipline that Germany sees as the lynchpin of a revitalised EMU. Enshrining into the French constitution the greater control over the budget that Germany wants would require a strong majority in both the French Senate and the National Assembly that is not presently on offer. Hence, Sarkozy, says, the decision has to go before the people.

Thus, even if Sarkozy overcomes his difficulties and is re-elected in the second round on 6 May, France faces a potential re-run of the nail-biting Maastricht treaty referendum in September 1992 at the highpoint of the currency crisis that year. That treaty was passed by a wafer-thin majority. In a revealing opinion poll after the September 1992 referendum, 21% of French people who voted for the treaty change did so because they believed it was the best way of countering German domination. Somewhat perversely, a greater proportion believed that the treaty would actually give Germany more power. Reflecting anxiety that EMU would increase the sway of the Germans, 40% of voters who turned down Maastricht said they believed it would increase rather than reduce Germany’s hold over the rest of Europe.

Twenty years later, similar ambiguity is on show in France, seen by mixed feelings over Chancellor Angela Merkel’s promise to campaign for Sarkozy in the poll. Yesterday in Marseille, Sarkozy proclaimed that he had saved France from ‘catastrophe’ during the financial crisis and the only way to save the country from economic meltdown was to give him a second term.

Sarkozy said Hollande had played down the crisis and was giving mixed messages about how he would react if made president in two months. ‘A weak France cannot protect French people,’ he said. ‘France has resisted, France has held out!’

Against this background, there is general agreement that the ECB’s three year liquidity measures - with another money auction due on 29 February– has made the euro area somewhat safer from the spectre of a banking collapse. However, because of the greater plausibility of a ‘firewall’ between Greece and the rest of the euro area, the perception has grown that a relatively pain-free Greek exit could be an option.

One indication of this comes from the musings of Willem Buiter, the ex-member of the Bank of England monetary policy committee, who is now Citigroup’s chief economist. A fervent EMU supporter, he has doubled his forecast of the probability of a Greek exit – from 25% to 50% - in the past few weeks. In early December, before the ECB action, he wrote that, if Greece left, ‘exit contagion’ might sweep right through the rest of the EMU periphery and then begin to infect the ‘soft core’ of Belgium, Austria and France. Now he judges the creditor countries’ willingness to support Greece and the potential costs to the rest of EMU have both fallen.

Another indication of how the different players are clearing the decks has been the ECB’s action to convert its holdings of Greek bonds into new paper that will be protected from forced losses under the forthcoming default (whether orderly or disorderly remains to be seen) on privately-held Greek debt.

Yet the Bundesbank has voiced scepticism about the measure. By formally elevating the ECB and all the constituent central banks to the status of preferred creditor along with institutions like the IMF, the move makes any private sector lender to countries which have the ECB and IMF as creditors even more reticent to extend loans.

Stand by for more brinkmanship – in Germany and elsewhere – as the Greek debt drama moves further towards some form of denouement.

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