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Analysis
In April, the cruellest month, France and euro may face crunch

In April, the cruellest month, France and euro may face crunch

Fatal political contradictions between Sarkozy and Merkel
French and German politics are moving in diametrically opposite directions

by David Marsh

Mon 9 Jan 2012

The lesson of history is that French elections early in the year often coincide with financial unrest. Spring 2012 may prove to be particularly bloody. For France and perhaps for the rest of Europe, April may in fact be ‘the cruellest month’. Of the three principal candidates heading to fight the French presidential elections, the first round of which is on 22 April, the most pro-euro contender appears to be, somewhat astoundingly, the incumbent, Nicolas Sarkozy.

Ahead of a fresh meeting today in Berlin between Sarkozy and Angela Merkel to discuss euro rescue issues, there is a fateful, self-fuelling contradiction between the political positions of the French president and German chancellor. French and German politics are moving in diametrically opposite directions. The more Sarkozy – himself a strong doubter regarding fundamental questions at the heart of economic and monetary union (EMU) – gives in to German pressure for stronger external controls over the French economy (such as in budgetary matters), the less popular he will be in the election battle.

Strong French action, urged by the Germans, to bear down on the budget deficit in the face of a rapidly weakening economy will add to Sarkozy’s problems with the voters. All of this will increase the likelihood that the whole of France will shift in coming months towards an overtly nationalistic, anti-euro stance.

On the other hand, the more that Merkel makes concessions towards Sarkozy’s electoral sensitivities, in the hope that he remains in power after the second round of the election on 6 May, the more pressure she will herself face at home from growing euroscepticism in her own country. It is a convoluted tussle from which neither politician can emerge as a clear victor – and where both may lose.

None of this will make EMU supporters sleep easily as April approaches. Five years ago, as finance minister under President Jacques Chirac, Sarkozy candidly revealed his views about the historical experience of the ‘hard franc’ which laid the groundwork for France’s entry into EMU in 1999. 'With its exorbitant interest rates and over-valued exchange rate, the monetary policy of the 1990s penalised investment, lowered the competitiveness of French products and French labour, led to an explosion in unemployment and provoked recession. If France had practised the same monetary policies as England at the beginning of the 1990s, then our public debt would not be much more than theirs.’

Sarkozy wrote these lines – in his campaigning book ‘Ensemble’ – at a time when the bitter memory of running the French budget ministry in 1993-95 (under Prime Minister Édouard Balladur) was still on his mind. After Britain and Italy left the exchange rate mechanism (ERM) of the European Monetary System in September 1992, and other countries such as Spain and Portugal devalued, France was left with no means of escaping from triple predicament of high interest rates, an over-
valued franc and an economic slowdown – prompting considerable budgetary strains that caused Sarkozy great political pain.

Sarkozy’s view in 2007 is unlikely to have changed over the past five years. If France had left the ERM and allowed the franc to float and interest rates to fall, then it would have been a great deal better off. Like many Frenchmen, Sarkozy saw EMU as the means for France to rescue itself from German domination after Germany’s reunification in 1990. Unfortunately, the sacrifice does not seem to have produced the desired results. While giving full rhetorical force in the past year or so to shoring up the edifice of the single currency, Sarkozy has been frustrated by EMU’s failure to allow France more leeway in its fraught relationship with an ever more economically potent Germany.

As campaigning gets under way, both François Hollande, the Socialist challenger, who is leading in the opinion polls, and Marine Le Pen, the National Front leader, have declared their hand as euro-sceptics. France’s economic vulnerability has been a central feature of the election campaign so far. Hollande has said he will renegotiate the euro rescue accord reached in Brussels as the pre-Christmas summit. He wants greater powers for the European Central Bank (ECB) and for member states to issue joint Eurobonds – measures to which Merkel is implacably opposed. Mme Le Pen, daughter of the populist National Front founder Jean-Marie Le Pen, and currently running No. 3 in the opinion polls after Hollande and Sarkozy, has said she would quit EMU altogether and return to the franc.

Beset by high unemployment and low growth, Sarkozy seems likely, based on current opinion polls, to become the first single-term president of France’s Fifth Republic since Valéry Giscard d’Estaing in the 1970s. There are already a number of potential flash points in the 2012 world economic calendar, with the Easter weekend earmarked by some as a potential time for Greece to leave the euro and bring back the drachma. The combination of Greek strains and French elections could prove particularly inflammable.

Beset by high unemployment and low growth, Sarkozy seems likely, based on current opinion polls, to become the first single-term president of France’s Fifth Republic since Valéry Giscard d’Estaing in the 1970s. There are already a number of potential flash points in the 2012 world economic calendar, with the Easter weekend earmarked by some as a potential time for Greece to leave the euro and bring back the drachma. The combination of Greek strains and French elections could prove inflammable.

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