The struggle in this administration to somehow come out politically alive is in full swing.
On the far right, Marine Le Pen, head of the National Front, has been clamoring for years to “let the euro die its natural death.” Getting France out of the Eurozone is part of her solution to the economic quagmire. But since it’s her idea, the political elite that have taken turns governing France for decades have to brush it off.
Suddenly, there’s the next solution. This one is attractively presented with graphs and in simple economic terms that even a politician might understand. It’s seemingly well-reasoned and has no visible partisanship attached to it. And it came from one of the largest megabanks in France, Groupe BPCE, that hardly anyone knows.
It was established in 2009 through a government bailout and a near-simultaneous merger between the Caisse Nationale des Caisses d’Épargne and the Banque Fédérale des Banques Populaires. These vast cooperative bank networks continue to exist with their separate brands. And that’s what consumers see. BPCE has €1.15 trillion in assets and owns about 20% of the retail banking market. It’s huge.
And now, its asset management and investment banking subsidiary, Natixis, released a zinger of a study designed to influence policy. It's titled, “On a purely macroeconomic basis, Germany should leave the Eurozone.”
Germany should get out of the way so that the remaining countries can devalue in a big way what would remain of the euro. France, Italy, Spain, Greece, etc. have always done that, one way or the other, before the euro took that nifty tool of sudden money destruction away from them. It would be the ideal solution for France.
After conceding that there may be non-economic reasons to form a monetary union, the report lays out five reasons why Germany needs to exit. But it offers an alternate solution: if Germany wants to stay, it needs to pay.
1. Asymmetries in the economic cycles.
While Germany was stagnating between 2002 and 2005, the rest of the Eurozone was growing. Since the financial crisis, the opposite has been happening. Same with unemployment. Between 2002 and 2005, it shot up in Germany but declined in the rest of the Eurozone. Since 2008, it dropped in Germany while it skyrocketed in the rest of the Eurozone to a record high of nearly 15%.
This asymmetry is based on credit. In Germany, growth or lack thereof is largely independent of credit. But in the rest of the Eurozone, growth is predicated on massive credit expansion, so when credit ballooned before the financial crisis, the economies grew. When credit collapsed afterwards, the economy sank into a quagmire. Due to this asymmetry, the report argues, a common monetary policy is not appropriate for the Eurozone.
2. Weakening economic ties between Germany and the rest of the Eurozone.
After the financial crisis, German exports to the rest of the Eurozone dropped. But Germany didn’t just throw in the towel and sink into a long recession. Instead, it pushed hard to export to other parts of the world. So 2012 was a record year for German exports, but the share of exports to the rest of the Eurozone dropped from around 45% before the financial crisis to about 35%. These weakening trade ties indicate apparently that Germany is more attached to the rest of the world than the Eurozone.
3. Structural asymmetries.
There are a number of them. For example, 35% of GDP in Germany is associated with manufacturing and industrial services, compared to 20% for the rest of the Eurozone. The labor market in Germany is more flexible than in some of the rigid situations elsewhere. The poverty rate in Germany is rising faster than in the rest of the Eurozone – from 11% in 1999 to 16.1% in 2012, as opposed to the rest of the Eurozone, where it rose “only” from 15.7% to 17.6%. And the savings rate in Germany, with its rapidly aging population, is higher than in the rest of the Eurozone. (This is a particularly spurious argument: with the exception of France, most Eurozone countries have rapidly aging populations, Italy faster than any other.)
4. Different needs in exchange rates.
Germany “prefers” a strong euro, the report finds, and the rest of the Eurozone needs a week euro to become competitive in the export markets.
5. Incapacity in the rest of the Eurozone to impose “internal devaluation.”
“Internal devaluation” has been the hallmark of efforts to get the southern European economies off the ground: slash wages to make production more competitive. Cutting household income was supposed to resolve the crisis. This happened in Spain in a huge way, to the detriment of Spanish workers, and with at best mixed results for the economy. But this cannot happen in France, where the cost of labor, mostly due to taxes on labor, has reached extremes. The people won’t sit still and allow their wages to be slashed, and the government can’t live without the cash flow it siphons off from payrolls. So for France, the only solution forward would be a massive devaluation.
But it’s not hopeless, the report concludes. To save the Euro as it is, with Germany in it, three things must happen: accept the growing concentration of industries and services in Germany; accept the migration of workers from other countries to Germany (already in full swing); and impose transfer payments – “correcting transfers,” the report calls them – from Germany to other Eurozone countries to keep them afloat. Taxpayers in Germany would subsidize governments elsewhere. The French would love that.
The report seems to have two goals: get the French political establishment to give serious thought to the euro, and give the German political and business establishment, where the euro remains unquestioned, a choice: either accept to subsidize the rest of the Eurozone or get out.
Surely, this will go over very well in Germany.
If Germany were to leave, Austria, economically joined at the hip, would form a currency union with Germany. Other countries might join. This would be the northern euro, drawn up by France!
But the French government is desperate. Hopes that the economy would miraculously turn around have evaporated. Pressures are mounting. Unemployment keeps rising. Businesses are bailing out. No one has any other solutions. And someday, this idea, proposed by a non-partisan entity, the largest retail bank in France, might gain some traction within the political establishment, and when it does, the results will be unpredictable and very messy.
“Insurrection” is showing up in the French media, though it’s still more an exaggeration than a description. “Fiscal discontent” is better, but not broad enough. Now President Hollande is going to turn this debacle around.
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