Perhaps 100,000 people swarmed over the Place de la Concorde in Paris on Sunday, one week before the first round of elections, to hear French President Nicolas Sarkozy beg for his job, and politicians were listening warily … in Germany. He’d already shocked them on March 11 when he’d declared that he wanted to renegotiate the Schengen Treaty—the foundation of the 26-country area where internal border controls have been abolished. Defending himself against attacks from the right, he’d wanted to show that he’d tamp down on the flow of immigrants. But the Schengen treaty has been a boon for export powerhouse Germany. And his declaration elicited gasps.
On Sunday, he went after monetary policy to defend himself against attacks from the left. “We will also open the debate over the role of the Central Bank in support of growth,” he said, thus picking up one of the planks in socialist François Hollande’s platform. The limits that the Maastricht Treaty imposes on the ECB—its single mandate being price stability—were “a major problem for the future of Europe,” he said. “If it chooses deflation, Europe will disappear; you have to remember the 1930s.”
A jab at Germany’s insistence on an independent Central Bank that fights inflation. The Germans are already worried. The ECB opened the spigot far and wide through bond purchases and two Long Term Refinancing Operations (LTRO) by which it lent banks €1 trillion at low interest rates so that they could buy sovereign bonds of troubled Eurozone countries. What else would Sarkozy push the ECB to do? Fund government deficits directly?
Bien sûr. The French government has a history of funding its budget deficits by borrowing directly from the Bank of France. Hence a history of inflation, devaluation, and “currency reform.” The franc was most recently “reformed” in 1960, when 100 francs were converted to 1 new franc. Then, in the 40 years until the euro took over, that new franc lost another 86% of its value. Italy, Spain, Greece, and other Eurozone countries had even softer currencies. Pushing the euro that way would induce Germany and a handful of other countries to leave the Eurozone.
Inflation fears have already infected those who should know: ECB employees. They see how priorities have changed from fighting inflation to keeping banks afloat and enabling governments to run outsized deficits. And it’s apparently scaring the bejesus out of them. Employee representatives are now demanding that ECB pensions be indexed to inflation. And they’re serious. A pensioner with support from the union is suing the ECB at the European Court of Justice in Luxembourg.
Sarkozy would promise anything to get a few votes. In the most recent poll, Hollande inched up to 28% in the first round, while Sarkozy dropped to 27% after having been ahead for the last three polls. A gaggle of candidates is attacking them from all sides, but none is likely to survive the first round. Closest are right-wing Marine Le Pen, who’d pull France out of the euro, and left-wing Jean-Luc Mélenchon, who’d impose a 100% income tax on those making over €350,000. They obtained 15.5% and 14.5% respectively. The remaining candidates were in the single digits. In the second round on May 6, Hollande would trounce Sarkozy with 55.5% to 44.5%.
So Sarkozy is sacrificing his relationship with German Chancellor Angela Merkel. To heck with the Merkozy couple. What a difference two months make. After the German-French council of ministers in Paris in early February, Merkel and Sarkozy gave a joint TV interview at the Elysée Palace, the official residence of the French president, during which Merkel berated Hollande for his campaign promise to renegotiate her oeuvre, the new fiscal-union pact. Never before had a German chancellor campaigned so hard on French soil for a French president.
But his intent on debating the role of the ECB wasn’t a U-turn. He’d long advocated that the ECB act more directly in the debt crisis, one of the many points of conflict between him and Merkel—all swept under the rug during their dog and pony shows last October and November when they tried to portray a unified front in dealing with Greece. But now he has re-found his very French voice.
Germany reacted swiftly. The answer was no. “The fundamental conviction of the Federal Government is that the ECB exercise its mandate and role independently from the words or actions of politics,” Steffen Seibert, spokesperson for the government told reporters on Monday, adding in a cold rebuke, “and this conviction is known in Paris.” The rift couldn’t be larger, regardless of who wins the election.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.