Euro Taking E.U. Down With It: France On The Way To Financial Self-Destruction

January 24, 2012

Media_httpwebcasteceu_cndte( Last Friday’s downgrading of France and Austria by credit rating agency Standard & Poor’s has left the eurozone, the group of 17 European countries using the euro as their currency, with just four countries with a triple A rating. Of these four Germany is the only one that was not given a negative outlook. Indeed, S&P thinks that the Netherlands, Finland and Luxemburg risk a further downgrade this year or next year.
This is bad news for the euro. The creditworthiness of the euro bailout fund, EFSF, depends on the ability of eurozone countries with the top rating to provide enough money to bail out eurozone countries in financial difficulties. With France, the eurozone’s second largest economy, out of the top league the pressure on the four remaining countries rises. This explains why the Netherlands, Finland and Luxemburg were given a negative outlook. If these countries lose their ratings as well, even Germany, Europe’s largest economy, risks losing its triple A rating. The euro is dragging all the eurozone countries down with it.
What Europe’s politicians should do is draw up a contingency plan for a eurozone break-up, providing a blueprint for an exit of countries such as Greece and Portugal that urgently need to devaluate to save their economies. In last Friday’s Financial Times, Nomura Bank’s strategist Jens Nordvig gives a second reason why the eurozone needs such a plan, which must also offer guidance on orderly redenomination of euro-denominated assets and obligations in a break-up scenario. It would alleviate investor worries about such assets and improve the capital flow situation and funding costs. “Ironically,” he points out, “spelling out guidelines for a eurozone break-up may -– at this stage in the crisis -– even help to reduce the risk of the break-up itself.”
Unfortunately, it does not look as if such a plan is being considered. Instead of drawing up contingency plans, Europe’s politicians continue their vain efforts to save the current European monetary union. When S&P announced the downgrading, angry European politicians, refusing to face economic reality, began to shoot the messenger. “It is not the rating agencies that dictate the policies of France,” François Baroin, France’s finance minister said defiantly. Austrian Chancellor Werner Faymann called S&P’s decision “incomprehensible.” German finance minister Wolfgang Schäuble warned against “overestimating the ratings agencies in their assessments.”
EU monetary affairs commissioner Olli Rehn, a Finn, called S&P’s decision “inconsistent” and said the agency had made mistakes in the past. Internal market commissioner Michel Barnier, a Frenchman, said S&P’s evaluation did “not take into account recent progress.”
Barnier is working on plans to establish a semi-official EU credit rating agency. Barnier has been castigating the three big agencies in the world -– S&P, Moody’s and Fitch -– since the European sovereign debt crisis began. He argues that these three American agencies do not grasp Europe’s economic realities.
The last thing Europe’s politicians want to do is acknowledge that their own centralizing policy of imposing a common currency on such widely diverging economies and cultures as Greece and Finland, has caused Europe’s current economic predicament. Instead, they blame capitalism, the financial sector and the “greed” of speculators and investors.
To “solve the debt crisis,” French president Nicolas Sarkozy has launched a plan to introduce a eurozone financial transaction tax. Sarkozy is in the middle of a reelection campaign and has to convey the message to French voters that the banks, not he, is responsible for the current crisis, and that he will punish them for it. While investors need to be reassured and have their worries laid to rest, Sarkozy proposes to tax them.
Last week, Sarkozy received the support of German Chancellor Angela Merkel. Schäuble and Baroin have been asked to draft proposals for a financial transaction tax by March. Last September, the European Commission proposed a financial transaction tax of 0.1% on bond and share trades, and 0.01% on derivatives. The Commission expects that such a tax could raise €57bn a year in the EU -– about €10bn of which would be Germany.
Economists warn, however, that the tax will leave a big hole in Europe’s public finances. France and Germany seem prepared to introduce the tax on their own. At best, the Franco-German alliance will be able to persuade the eurozone to go along, but Britain -– an EU member, although not a eurozone member -– will definitely not join. Hence, if the tax plans materialize, the financial centers of Frankfurt and Paris are likely to move their activities to London, as they did in the 1980s, after Sweden introduced the tax: over 90% of its traders in bonds, equities and derivatives moved from Stockholm to London.
The results could be devastating. Germany, whose economy slipped into reverse the last quarter of 2011, contracted by 0.25%. Prime Minister Mario Monti of Italy is prepared to support Sarkozy’s proposed tax on financial transactions, but said it should apply to the whole 27-nation EU and not just the 17 eurozone nations. Merkel and Sarkozy will also have to persuade governments in the Netherlands and Ireland.
The Dutch federation of employers has calculated that the introduction of a financial transaction tax would cost the Dutch economy between €7.5bn and €24bn. The Dutch pension funds have warned that the tax would diminish Dutch pensions by 10%, as the tax would cost them €3bn a year. Unlike many other European countries’ pension systems, which are pay-as-you-go — in which the benefits of the pensioners are paid by the current workforce — the Dutch pension system is largely financed from the contributions pensioners paid in the past and from the return on the investment of these contributions.
It remains to be seen whether the Dutch are willing to bring such a huge sacrifice. French President Sarkozy, however, has announced that France is willing to proceed unilaterally with the introduction of the tax.
Sarkozy’s motives, however, are political rather than economic. As François Hollande, his Socialist challenger in the presidential elections, said after last Friday’s downgrade: “It is not France that has been downgraded; it is Sarkozy’s government.” Sarkozy therefore feels compelled to levy a tax on the so-called greedy investors and capitalist speculators who, he claims, are responsible for the current crisis.
If Sarkozy loses the elections, Europe risks being saddled with a Socialist-governed France.
That is bad. If Sarkozy wins thanks to his financial transaction tax, that is bad, too. Either way, France will suffer. And with France, the euro and the whole European Union.
Brace yourselves: the eurocrisis has only just begun.

hey… I have an idea… let’s centralize some more! …they can always blame the banks and finance for it.


Sarkozy’s Worst Nightmare

October 27, 2011
(Hudson)Media_httpdisciplinea_mlauhIn less than six months from today, on 22 April 2012, France will hold the first round of its next presidential elections.

For Sarkozy, the birth of a daughter last week was a good PR moment, but it is doubtful whether she will celebrate her first birthday in the Elysée, the French presidential palace. France is going through the worst financial crises of the last fifty years. The country seems to be teetering on the brink of financial catastrophe. French banks have invested so heavily in government bonds from nearly bankrupt countries, such as Greece, that they are at risk of collapsing themselves. As a result of its exposure to Greek sovereign bonds, a Franco-Belgian bank, Dexia, has already collapsed.
Later this week, the countries of the eurozone, the group of 17 nations which use the euro as their common currency, are likely to decide that the banks will have to take a 50% loss on their Greek sovereign bonds. This could be devastating for a number of French banks, and devastating for the French government, which, under pressure to bail out or nationalize the French banks, risks losing its triple-A credit rating. If that happens, it will certainly be devastating for Nicolas Sarkozy and his chance of re-election next Spring.
French domestic politics and Sarkozy’s need to safeguard his re-election are the key to understanding European politics. First of all, Sarkozy needs the approval from the eurozone countries that the zone’s financial emergency fund, the EFSF, will assist banks which have run into difficulties. Without such assistance, France will have to help out its own banks.
Second, Sarkozy needs to ensure that the EFSF has a direct financial lifeline to the printing presses of the eurozone’s central bank, the ECB. ECB involvement is important for Sarkozy: the EFSF relies on guarantees provided by the stronger countries of the eurozone — the six eurozone countries with a triple-A credit rating: Germany, France, the Netherlands, Austria, Finland and tiny Luxemburg. International credit agencies have warned that they will likely downgrade France’s rating if the burden on the EFSF become too heavy.
Sarkozy needs some sort of ECB involvement in the bailout plans for weak countries and banks to relieve the pressure on the French state. Germany, however, is opposed to far-reaching ECB involvement in bailing out countries and banks. The tension between Sarkozy and German Chancellor Angela Merkel has increased. Merkel is under pressure from her own parliament on the one hand and from Sarkozy who is fighting for his own political survival on the other hand. His,survival depends on his ability to postpone a major European crisis until after May 6, 2012, the second and final round of the French presidential elections. But time seems to be running out — for the euro as well as for Nicolas Sarkozy.
Meanwhile, the major French opposition party, the Parti Socialiste, has appointed its presidential candidate. Until last May, Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, was generally expected to become the PS candidate. Strauss-Kahn was popular and as head of the IMF, the institution which is helping the eurozone to overcome its problems, many ordinary Frenchmen were confident that he would be able to do a better job than Sarkozy. A spirited episode with a New York hotel maid, however, ended Strauss-Kahn’s IMF career as well as his prospects in French politics.
The Socialists have now picked the 57-year old François Hollande as their candidate. In the second round of the Socialist primaries, Hollande defeated Martine Aubry, the Mayor of Lille and the daughter of former European Commission President Jacques Delors. The first round was a defeat for Ségolène Royal, the Socialist presidential candidate who lost the elections against Sarkozy in 2007. Royal and Hollande lived together for almost thirty years. Although they have four children, they separated one month after Royal’s 2007 presidential defeat when it emerged that, in more Gallic goings-on, Hollande had begun a relationship with a French journalist.
Hollande is barely known outside of France. He is an uncharismatic old-style Social-Democrat who began his political career in 1981 as an economic advisor to Socialist President François Mitterrand. As such, he was involved in the implementation of a plan to nationalize companies and banks. Hollande defends the Europeanization process as much as Sarkozy. According to a recent poll, 64% of the French expect François Hollande to win the second round of the elections against Nicolas Sarkozy.
The big question, however, is whether there will be a second round between Sarkozy and Hollande. In France, the President is chosen in two rounds. Only the top two candidates can make it to the second round. A poll last March found that Sarkozy would be beaten in the first round by Marine Le Pen, the leader of the far-right Front National. Should the poll prove accurate, the 43-year old Le Pen, a twice-divorced mother of three and the daughter of FN founder Jean-Marie Le Pen, would go on to the second round against Hollande. In 2002, Jean-Marie Le Pen knocked Lionel Jospin, the Socialist candidate, out of the presidential race. Le Pen was beaten, however, in the second round by Jacques Chirac.
With the eurocrisis continuing and anti-EU sentiments growing in France, the probability that Marine Le Pen would do well in next Spring’s elections increases. Unlike Sarkozy and Hollande, she is highly skeptical of the Europeanization process and has promised to pull France out of the euro and close French borders to cheap Chinese imports. She is also a less controversial figure than her father, and has the charisma Hollande so utterly lacks.
In 2002, the Socialist Party called on its voters to support Chirac in the second round against Jean-Marie Le Pen. Whether the middle-class voters of the right will be so easily persuaded to support Hollande in a second round against Marine Le Pen is less certain.
Marine Le Pen in the Elysée seems improbable, but with the eurocrisis deepening, Sarkozy’s fear that she could knock him out in the first round of the French Presidential elections next April is also deepening. If Europe fails to save the euro, anything is possible.