France’s political impasse reflects an economic conundrum that is insoluble under the present European construction. After four years of pandemic-induced fiscal laxity, the eurozone’s rules are back in force, demanding of Paris a wave of severe austerity that no political party, including French President Emmanuel Macron’s, can or would want to implement. This is the main reason Macron called a parliamentary election he knew he would lose.
That the European Commission, with the tacit support of the European Central Bank (ECB), would impose painful austerity on France is indisputable for one simple reason: Germany is already doing the same to itself, even though its budget and debt are far smaller than France’s.
Pushed by the German Federal Constitutional Court’s strict adherence to the so-called debt brake, which caps annual deficits at 0.35 percent of GDP, German Chancellor Olaf Scholz and German Minister of Finance Christian Lindner have set Germany on a harsh austerity course that would most likely end their political careers. They have done so to eliminate a modest deficit of 2.5 percent of GDP at a time when their country desperately needs major infrastructure investment. How can they explain to their own parties that they would tolerate a French deficit of 5.5 percent and rising? They cannot, so they would not.
France can expect a form of pressure straight out of the European Commission and ECB’s euro crisis playbook. Negative comments from Brussels would begin to worry holders of French bonds. The interest rate that France must pay to roll over its 3.1 trillion euros (US$3.4 trillion) public debt would rise slowly, as would anxieties about whether the ECB would come to its assistance.
Already, in a comment that met with a chorus of denunciations in France, Lindner warned the ECB not to make use of the recently announced “transmission protection instrument” (TPI) to bail out the French. It is highly unlikely that the German minister did not understand his comment to be anything but the start of a self-fulfilling prophecy.
The TPI bailout scheme was announced by the ECB to settle post-COVID-19 nerves. It is designed to apply to countries, such as France, with excess deficits, but only if they accept austerity measures dictated by Brussels. What makes it politically toxic in France is the fact that even if a new government were to go along with the new austerity drive, it is not clear that France’s fiscal balance would follow a smooth path back to the EU-specified limits. In other words, any compliant French government faces a terrible prospect: political chaos (since austerity is vehemently opposed by two-thirds of the National Assembly) with no guarantee of a return to fiscal probity (since austerity depresses growth).
The writing was on the wall well before the European Parliament elections in June. Their outcome convinced Macron that only two political paths are consistent with the EU’s current institutional setting, which he previously tried, but failed, to change. One path would be to do to his main rival, National Rally leader Marine Le Pen, what was done in 2015 to former Syriza leader Alexis Tsipras in Greece: allow her to form a government that would then be forced to choose between clashing with the EU or acquiescing — with Macron edging Le Pen toward the latter.
The second path was the one that the electorate opted for: A four-way split parliament that, under the burgeoning fiscal pressures, would eventually yield a grand coalition comprising Macron’s party, the rump Republicans, and anyone from within the left-wing New Popular Front who is willing to part from Jean-Luc Melenchon’s France Unbowed party. (Another, worse option is a technocratic government whose budget would be imposed by presidential decrees.)
Even if all this works out for Macron, he would be blamed for austerity-induced discontent. Le Pen would claim that an undemocratic president stole her victory, and her own presidential campaign would gain momentum. The success of Macron’s best-laid plan might transform his legacy from that of a populist slayer to that of an arrogant president who paved the way for the ultra-right to storm the Elysee.
Why are France’s elites so short of decent options? The answer was delivered on March 23, 1964, by then-German minister of economy Kurt Schmucker to his French counterpart Valery Giscard d’Estaing when the latter proposed an immediate monetary union between France and Germany. Shocked, Schmucker tried to warn d’Estaing that he was, unwittingly, proposing that France forfeit its sovereignty over the French budget. He was right. Why would Canada ever share a currency with the US — or New Zealand with Australia — despite the two countries’ deep economic and cultural ties?
However hard Europe’s elites try to dismiss this reality, they cannot. A monetary union is only sustainable between economies with similar trade balances and levels of capital utilization. A monetary union between Germany and the Netherlands would be sustainable — although not necessarily useful — because both have large trade surpluses and economies where capital use is large and uniformly distributed across sectors. However, Germany and France are like chalk and cheese.
Last May, a typical month, France’s trade balance was 8 billion euros in the red, whereas Germany had a surplus of 25 billion euros. Similarly, while France has some highly advanced industries, its economy remains divided between cities and rural areas, with the latter typified by high labor and low capital intensity.
There are three ways that such dissimilar economies can remain within a single market.
The first is through a proper federation built on a fiscal union — the path that Macron invited the Germans to take, to no avail.
The second option is a gradual currency devaluation for France — a path that Macron and the rest of the political center have sworn not to take.
That leaves the third option: permanent austerity, which is the root cause of today’s political impasse.
It is a grim irony that by refusing to bargain for a federal solution, using the second-best option of a return to the franc as his backup plan, Macron has pushed the political center toward its worst option, substantially increasing the likelihood of a Le Pen presidency in the near future.
Yanis Varoufakis, a former Greek minister of finance, is leader of the MeRA25 party and a professor of economics at the University of Athens.
Copyright: Project Syndicate
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