Euro collapse

US Dollar





Stability Pact

Herb Stein's recently much quoted quip

News Home

"Some thougths about the future of the euro"
The real threat to the cohesion of the monetary union is not Italy, or even a post-property-crash Spain.
The real issue is the political gulf between France and Germany.

Susanne Mundschenk and Wolfgang Münchau, Eurointelligence 18/10 2007

When it comes to the exchange rate, the real conflict is not between central bankers and politicians, but between politicians.

The interesting and troubling aspect of this political confrontation is that the respective national positions are invariant to political change in member states.
No matter who is in power, the left or the right, the positions are unchanged. It makes absolutely no difference whether the Dutch finance minister is an ultra-liberal like the never-ending Gerrit Zalm or his Socialist successor Wouter Bos.
In Germany, there has been no real change in the position since the days of Theo Waigel, the 1990s finance minister, a Bavarian conservative, and his SPD successors.
Sarkozy may be a little louder than his predecessors, but he makes exactly the same points as the string of French Socialists in the 1990s.

This is not a fight between the left and the right, the liberals and the Socialists, the Keynesians versus the Monetarists, not even between the North and the South, the war mongers versus the peaceniks, or any other division you can think of - except one.
This is a very oldfashioned European clash between nation states, and a clash between unwritten norms.
This is not exactly what you want to have in a monetary union.

From a political economy perspective, they are about the least likely countries you would ever want to join in a monetary union.

The French establishment believes, rightly or wrongly, that exchange rates should be, and can be, managed; that monetary policy should serve the goal to stabilise economic growth and inflation simultaneously; that budget deficits are largely irrelevant, or to the extent that they are, this is a purely domestic issue.

Most importantly, France, unlike Germany, believes in the supremacy of politics over economics. In the French political system, there is no such thing as independence from the state, its institutions and elected representatives. The German system, by contrast, is full of independent quangos, not only the Bundesbank, but also the cartel office, the banking regulator, even the public broadcasting networks. The two countries have a totally different concept of the state.

The Germans accepted monetary union reluctantly, hoping, at least during the 1980s, that it would ultimately give rise to some form of political union. As we now all know, that turned out to have been an error of judgement.

But lack of political integration is not the worst bit. The worst bit is the lack of an integrated economic policy.

The stability and growth pact, mark I, collapsed in 2003. Its successor is currently in the process of collapsing as France and Italy have unilaterally exempted themselves from the agreed annual reductions in structural deficits.

And of course, we are still debating the remit of Article 111, formerly Article 109, of the European Treaties, and what it means for exchange rate policy.

Herb Stein's recently much quoted quip about lack of sustainability applies just as much to the future of a monetary union, as it does to global imbalances or financial bubbles.

If France and Germany continue this way, expect politicians to emerge in either country who will begin to question the merits of continued EMU membership.

There is no shortage of economic populism in either country, so this is not a totally unrealistic scenario. In fact, the euro would probably make an almost ideal target for a ruthless populist.

Full text

Början pċ sidan - Top of page