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France battles to
reform the EMU
President Sarkozy must put his own house in order if he is to win
European hearts and minds
published in Financial News on 4th
August 2008
French President Nicolas
Sarkozy is learning a tough lesson about international influence
that all his predecessors have painfully absorbed since Charles de
Gaulle established the Fifth Republic 50 years ago. In policy
sparring with the country’s most important strategic partner,
Germany, France can only muster support when its economic
performance rivals or exceeds that of its powerful neighbour.
Sarkozy’s wide-ranging proposals for reforming the governance of
Economic and Monetary Union must pass that crucial test. In
principle, the President’s stance is commendable. The opacity of the
European Central Bank’s decision-making processes provides one of
the reasons why citizens in the eurozone are sceptical about the
single currency’s benefits nearly 10 years after it was introduced.
However, to gain credibility,
Sarkozy will have to put his own house in order. France’s
accomplishments in modernising its structures in recent decades,
seen in state-backed sectors such as nuclear energy,
telecommunications, aerospace and rail transport, will have to
achieve much more momentum if Sarkozy’s EMU campaign is to find
advocates.
Summer forecasts from the
International Monetary Fund underline France’s challenges as it
makes heavy weather of international economic turbulence. Gross
domestic product is expected to grow by just 1.6% this year against
2.2% last year. German growth will not be spectacular but, at 2% for
this year against 2.5% last year, it will outpace that of France.
This marks the third successive year that France has underperformed
Germany.
Sarkozy was elected in May last
year on a platform of improving France’s standing in an ever more
competitive world. He has had a busy summer, driving a series of
reforms through Parliament last month, including deregulating the
retail sector, shaking up competition and effectively ending the
statutory 35-hour working week.
These measures will equip
France with more effective tools to compete both within and outside
Europe.
Yet Sarkozy has to tread
carefully when dealing with the forces of globalisation. In
advancing his plans for reforming EMU, Sarkozy will have to show a
diplomatic touch that has sometimes eluded him in dealings with
Germany over the euro. He wants the Frankfurt-based ECB to
publish regular minutes of the
meetings of its rate-setting Governing Council, bringing it into
line with the US Federal Reserve and the Bank of England. He wants
the eurozone finance ministers who form a largely informal body
called The Euro Group to build their own secretariat
and to forge more formal
contacts with the ECB. Sarkozy said the proposals are necessary to
improve the ECB’s accountability without impairing its independence
from governments. The ECB’s freedom from political interference was
one of the conditions laid down by the Germans during preparations
for monetary union, reflecting Germany’s post-war, anti-inflation
record under the independent Bundesbank.
In expounding his
desire for more debate on European decision-making, Sarkozy has one
substantial handicap. His underlying agenda for the ECB is
transparency – and this puts him on a collision course with Germany.
Sarkozy has long
opposed the ECB’s entrenched independence. This is a policy line
that runs through the French political class, a distinguishing
feature compared with Germany, where all main political parties and
the economic, industrial and academic establishment provide solid
support for Bundesbank-style autonomy.
Sarkozy has a fraught
relationship with Jean-Claude Trichet, the ECB president and former
director of the French Treasury and Banque de France. Sarkozy claims
Trichet has taken on an exaggerated dose of the Bundesbank’s
single-minded, anti-inflation policies. The President criticised the
ECB’s 25 percentage point increase in interest rates last month,
although his complaints were largely made behind closed doors to
avoid open disagreement with German Chancellor Angela Merkel, a
strong public backer of the ECB.
Sarkozy is refraining from
advancing the euro governance agenda during France’s current
six-month presidency of the EU. In particular, Sarkozy wants to
avoid inflaming controversy over France’s inability to cut its
budget deficit as required under EMU procedures for fiscal
discipline.
Sarkozy’s most important
difficulty, however, is not tactical but strategic. The reason why
the ECB wishes to avoid openness over its decision-making is because
of the unique imbalances built into the framework of EMU. There is a
fear that national central bank governors who sit on the ECB
Governing Council would face criticism from domestic public opinion
if they were seen to be backing decisions perceived as harmful to
their country’s interests.
These risks are illustrated by
the economic problems of Spain and Ireland, which until now have
been among the best-performing members of the eurozone. As part of
the fallout from the US sub-prime mortgage crisis, the previous
overheating in these two countries’ housing and construction markets
has given way to a deep slowdown. Arguably, Spain and Ireland
require lower interest rates, and yet their two central bank
governors are acquiescing to higher rates at the Frankfurt Governing
Council.
There is little that Sarkozy or
anyone else can do about this basic flaw in EMU interest
rate-setting arrangements. The difficulties of the ECB’s
“one-size-fits-all” interest rate policy are inherent in the
fundamental nature of EMU, since it unites the monetary policies of
15 sovereign countries that otherwise run their own economic
policies for budgets, social security, employment and other areas.
Sarkozy’s reform proposals cannot change this awkward fact. This is
one of the many reasons why the President’s otherwise laudable ideas
for ECB openness are unlikely to meet with success.
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