The French Disconnection

It’s been suggested by several commentators that one of the potential solutions to the eurozone crisis is for the ‘creditor’ countries of the north, led by Germany, to form a ‘nord-euro’ group, and the debtor countries of the Latin south to gather around a ‘sud-euro’ currency.  That way, the euro would be preserved and the millions of contracts written in euros would still be valid.  Better still, the fundamental problem of the lack of competitivity in the peripheral states would be solved because the nord-euro would harden and sud-euro weaken, probably dramatically, bringing immediate benefits to the balance of payment problems that are at the root of the crisis.

It’s a neat solution and one that I suspect will be increasingly debated as the financial world  looks urgently for an answer to the deepening crisis in the eurozone.  However, here’s the big question:  would France be in the nord-euro or sud-euro group?  They would of course  say the nord, but that might be pulling the wool over their own eyes. Today, it was announced in France that a large Peugeot factory would be shut and that this and other cuts elsewhere would result in the loss of 6,500 jobs.  The state has spent the not inconsiderable sum of Eur 4 billion supporting Peugeot in recent years, money which will now see no return, a situation which the French Social Affairs minister described today as ‘unacceptable’.  It’s classic French state-support gone wrong and the reason other countries stopped doing this sort of thing a long time ago.

The reality is that large parts of French industry are increasingly uncompetitive and they need to cut costs, but cost-cutting is socially unacceptable (state expenditure is 56% of GDP, easily the highest in Europe).  Indeed, the new Socialist government is moving in precisely the opposite direction, adding enormously to costs by lowering the pension age to 62 (as against 67 in Germany to whom, extraordinarily, the new French President is looking for support of his idea of eurobond-based mutualisation of sovereign debt).

The French situation is thus a particularly acute case of a disease that has for some time been infecting much of the western world – ‘we like our pensions and welfare and other entitlements but we don’t know how to pay for them’.  The Chinese, the Malaysians, the Brazilians and all the rest of the emerging world have no such costs, and they are the competitors with whom we are now competing.  However, a nice bit of currency devaluation would cure the problem for now and could even give the French government a chance to get the house in order and reduce the cost base.  But that would require an admission that the economic problems in France are specific to France – not, as the newly elected politicians argue, created by the casino traders in London and perfidious Anglo-Saxon capitalism.

So, if nord and sud-euros are ever put on the table to cure the eurozone crisis, you can expect the French to apply for hard, nord-euro membership – but that will only massively exacerbate the existing problem of lack of competitivity, increasingly exposed as at Peugeot today.  So, Club Mediterrainee, s’il vous plait?  It’s the right way to go, but it’s not the path they’ll choose, which is why one of the few plausible solutions to the disastrous eurozone crisis will never see the light of day.

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