Political Realities Threaten To Split The Eurozone

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Nicolas Sarkozy will be the only French president since World War II with two recessions under his watch, if the forecast by the National Institute of Statistics and Economics (Insee) turns out to be correct. Recessions are rare in France: between the end of the war and the beginning of the financial crisis, there were two. Then came the four negative quarters of 2008/2009. Now, Insee forecasts another contraction: -0.2% in the fourth quarter of 2011 and -0.1% in the first quarter of 2012.

After an uptick over the summer, economic indicators have gone south. Business confidence has declined. Corporate demand is slowing. Unemployment has risen to 9.3%. Insee expects it to rise to 9.6% through the first half of 2012. Purchasing power will decline by -0.1% in the first quarter of 2012, the sixth quarter of declines since the crisis. But even when Insee’s purchasing power indicators were rising, the French complained that their actual purchasing power was declining. The bitter irony: Sarkozy, who’d made purchasing power part of his platform during the last election, is now haunted by his old slogans. France will likely loose its AAA rating, which Sarkozy’s most prominent opponent, socialist François Hollande, sees as “a terrible admission of failure.”

This is the backdrop to Sarkozy’s reelection campaign. New polls, released on December 16, show just how tough it will be. According to Ifop, during the first round on April 22, Hollande would lead the pack with 27.5% of the vote. Sarkozy would get 24%, Marine Le Pen, president of the right-wing National Front, 20%, and François Bayrou 11%. Everyone else would score in the low single digits. If Hollande faces Sarkozy in the second round, he’d win with 56% of the vote against Sarkozy’s 44%. But as president, Hollande would not follow in Sarkozy’s footsteps regarding the debt crisis and the Eurozone.

“Another Way for Europe,” is the headline of Hollande’s editorial in Le Monde on December 16. In it, he outlined his dissatisfaction with the Brussels agreement, which he considered “narrow, vague, and punitive” and vowed to “renegotiate it in order to rebalance and add to the future treaty.”

German Chancellor Angela Merkel and Sarkozy are pushing hard to get the text finalized and agreed to by March—before the French election. But it won’t be binding at that stage, and Hollande could do what he vowed in writing he’d do.

Growth is his mantra. Not austerity. While he considers reducing deficits an imperative, “nothing serious will be possible without growth; it’s the big missing element in the agreement.”

Democracy is “the other big missing element.” Going around the European Parliament as well as national parliaments and granting the European Court of Justice final say over national budgets, as the agreement calls for, “would be unacceptable.”

And this: “The Eurozone must arm itself with a veritable financial force de frappe“—the term for France’s land-, sea-, and air-based nuclear strike force. Out: the bazooka. In: maximum force. Specifically, he wants effective means to impact the financial markets:

  • A much more aggressive ECB (while “respecting its independence”).
  • Much more powerful bailout funds to “discourage speculation.”
  • Eurobonds to spread the risk “of at least part of our debt.”
  • Interventions by the European Investment Bank (owned by member states, it lends out €50 billion a year to support weaker regions and various projects).
  • A larger European budget with new sources of revenues, particularly a financial transaction tax, to drive industrial policy.

Practically every point of his plan (except for the financial transactions tax) violates Merkel’s dictate. Barring a miracle, Germany is unlikely to fall in line with his desires. A handful of other countries might side with Germany and form a bloc.

Britain, on the sidelines after last week’s debacle, vehemently opposes any kind of financial transactions tax, as well as other points on his list. Already, David Cameron seems to be trying to form alliances with other countries that support his views.

And the war of words between France and Britain is heating up. Finance Minister François Barois shot the latest salvo today when he said on Europe 1, a nationwide radio network, that “one prefers to be French rather than British,” and then he went on to disparage Britain’s economy.

If this scenario were to play out, the Eurozone could crack into groups of countries: one clustered around Germany, another around France, with a few countries perhaps falling by the wayside. The EU too might fissure as Britain and a few other countries drift away. But Hollande is on the campaign trail, and a lot of rhetoric gets bandied about. If indeed he wins the presidency, it is possible that he will back off a confrontation with Germany, as Sarkozy has largely done. It is also possible that he will try to bring Britain back into the fold, though that seems unlikely.

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