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« Gold Seasonality: Can We Profit From It? | Main | The State of US Surveillance »

French socialists’ Latin revolt against Germany


Every picture tells a story

The Carolingian union is all that anybody in French public life can really remember. It worked marvellously for two generations, levering French power on the global stage, and the euro was of course their own creation, intended to tie down a reunited Germany with “silken cords”. How can they now face the awful truth that this elegant strategy has blown up in their faces, enthroning Germany as undisputed hegemon?

Yet they can hardly ignore the evidence. While German unemployment has fallen to a post-Reunification low of 5.5pc, France’s jobless rate has crept up to a post-EMU high of 9.9pc and is certain to rise further as recession bites again.

While both countries had the same sorts of export surplus in the early 1990s, they have diverged massively since the D-Mark and franc were fixed in perpetuity. Germany has a current account surplus of 5pc of GDP: France has a deficit of 2.7pc, anathema for Colbertistes.

You can see from IMF data that the silent coup took place in the fat years of the global boom when Germany forced down unit labour costs; -1.7pc in 2003, -4.0pc in 2004, -3.3pc in 2005, -1.8pc in 2006.

France lost ground year after year due to wage creep and weaker productivity. Enough time has now gone by to leave it stuck inside EMU with a misaligned exchange rate, and talk of euro exit is at last starting to be heard.

“The single currency is condemned to an uncontrollable explosion sooner or later,” wrote 12 economists in a recent letter to Le Monde, calling for an orderly return to national currencies. “The obstinate determination of governments to take us by forced march deeper into the euro impasse can only lead to the general aggravation of the economic situation in Europe,” they said.

President Nicolas Sarkozy has no answer to this. He has clung to the fig leaf of Franco-German parity, staking all on ties to Chancellor Angela Merkel, rather than seizing leadership of the Latin bloc to force a radical change of policy.

His gamble on the status quo has failed. Mrs Merkel has not yielded an inch, and has now forced him to swallow a fiscal treaty that erodes French sovereignty without offering any remedy to the crisis at hand.

Her contradictory medicine for half of Europe has itself cost France its AAA rating, as Standard & Poor’s made clear when it unleashed its volley of downgrades last month. “Fiscal austerity alone risks becoming self-defeating,” it said.

So it has fallen to the Socialists – less compromised lately – to start the rebellion. “We cannot let the Germans alone appoint themselves experts and judges,” said party leader François Hollande. He called for “substantial modifications” to the fiscal compact if elected president in May, as he may well be since he is running six points ahead in the polls.

Pierre Moscovici, his campaign manager (and former Europe minister), has since upped the ante by threatening a referendum – mischievously noting the French voted ‘Non’ last time they had a chance in 2005.

“I am convinced that we will find allies for a renegotiation aimed at a policy change to pull out of its austerity spiral and recession. We don’t like the idea of a popular vote because we are pro-Europeans and we don’t want a “No”, but nor can we allow tensions to spill over.

It is a revolt against a 1930s policy that imposes all the burden of adjustment on the debtor states and fails to recognise that North-South imbalances must be closed from both ends, and ultimately condemns all EMU to ruinous slump.

It is revolt too against subservience to a Germany that has stopped listening and no longer pretends to mask its power. “French diplomacy must rediscover its nobility and regroup with partners who feel deceived or humiliated by Mr Sarkozy and Mrs Merkel, and build an alternative with them,” said Najat Vallaud-Belkacem, the Socialist spokesman.

My own view is that Germany has overplayed its hand badly and will face a whirlwind diplomatic retribution. Its narrative of the EMU crisis – virtuous Northerners rescuing profligate Greco-Latins – was oppressively dominant for two years but has at last been discredited and is now repeated only by pub bores.

The Soros-Roubini narrative has replaced it – a tale of self-feeding contraction as austerity cuts into the muscle and the bone itself, a “German taskmaster” bent on deranged policies that will destroy the EU itself. As Portugal’s elder statesman Mario Soares put it, the strategy is leading nowhere and everybody knows it.

Only France has the heft and credibility to lead the Latin revolt. Its shifting loyalties mark a revolution in EU affairs. For a year or more, we euro-watchers have been hanging on every word from Berlin. We may soon have to pay even closer attention to Paris.

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