PRINCETON – Over the past two years, financial markets have turned the spotlight on a succession of countries – Greece, Ireland, Portugal, Spain, and Italy – turning each into the epicenter of a seemingly perpetual European financial earthquake. But politicians always recognized that the heart of the European project was the relationship between France and Germany. Is that relationship now in jeopardy?
There is a falling-domino argument that suggests that the crises on Europe’s periphery will have a knock-on effect on the Franco-German core. France, in the aftermath of a property and asset-price bubble, is vulnerable to some of the same combination of banking and public-finance problems. Indeed, now France’s presidential election has politicized the link between peripheral dominos and Europe’s French heart.
In his final campaign rally before the first round of the presidential election, Nicolas Sarkozy stood in front of a banner proclaiming “la France forte,” or strong France. For much of his audience, Sarkozy’s head obscured the “e” in France, so that the slogan looked more like “franc fort,” or strong French franc – which sounds like nothing if not “Frankfurt,” the German financial center that is the seat of the European Central Bank.
Sarkozy’s speech reinforced that message. Only reelecting the president could save a strong currency that guaranteed French wealth and incomes. The left would trigger a currency collapse and a run on French securities that would bring the euro crisis from Greece, Spain, or Italy to the heart of the European process, France’s relationship with Germany.
The French presidential campaign has reopened an old theme of French politics. Left-wing politicians see themselves as the victims of financial conspiracies. In 1924, a socialist and center-left coalition, the cartel des gauches, was met by a flight of money and a run on the franc, which the left believed was organized and facilitated by the Banque de France (the central bank).
In 1936, when communists allied with socialists in Léon Blum’s Popular Front, and pushed through wage increases and reductions in working hours, another franc crisis erupted, and, within two years, the center right was back in power. In the meantime, though, the left had nationalized the central bank.
The most recent episode in this long-standing drama came with François Mitterrand’s victory in 1981. As President, for the next two years he ran an experiment in socialist economics, designed to woo communist supporters. Banks were nationalized and wages were raised, causing repeated runs on the franc. The government was forced to impose harsh capital controls, including restrictions on what citizens could spend abroad as tourists.
After two years, Mitterrand faced a dramatic question: should France continue on the path of “socialism in one country,” or did European integration require a U-turn? As Finance Minister, the moderate and Europhile Jacques Delors executed the U-turn that brought France back to Europe and to the “franc fort.”
The parallels between now and 1981 are very close. In 1981, there was a European framework for currency stability, the European Monetary System, which Mitterrand regarded as the personal project of his right-wing opponent, the incumbent President Valéry Giscard d’Estaing. It seemed obvious for him to attack the stable currency as a conservative project for holding down working-class wages. In the middle of a recession, it also looked like the cause of unemployment in France.
In 2012, rescuing the euro was personalized as a tango between Sarkozy and German Chancellor Angela Merkel, a duo derided as “Merkozy.” They made the crucial decisions. They insisted on budgetary stability and the “six-pack” that the left dislikes.
Both the far-left candidate, Jean-Luc Mélenchon, and the right-wing populist, Marine Le Pen, have put anti-German rhetoric at the center of their campaigns. But so did the mainstream left candidate, François Hollande, who now seems poised to win the election. He repeatedly contrasts the ECB’s rigor and orthodoxy with the flexibility – a euphemism for willingness to print money – of the British and American central banks. His case seems strengthened by the collapse of the Dutch government as a result of the populist Geert Wilders’ objection to German-imposed austerity, as well as by the strength of Le Pen’s support in France.
Bringing France to Mitterrand’s U-turn required a profound change in the European approach. The European Commission worried that the left under Mitterrand would reject the European Monetary System. Something needed to be done in order to appeal to French socialists, and France needed to be given a greater say over German monetary policy.
Germans, and particularly the powerful central bankers at the Frankfurt-based Bundesbank, were appalled. A leading Commission official was dispatched to confront the central bankers. He explained that Germany’s monetary stewardship had been too successful in the fight for stability, with the result that it had become politically vulnerable.
France’s U-turn generated the set of arguments that would justify the creation of the euro. German-imposed austerity required some Europeanized mechanism to soften it, and to make it politically acceptable. France’s side of the pact was to think about budgetary rules. The 3%-of-GDP cap on budget deficit, established somewhat arbitrarily in the 1990’s, also originated from the traumas of the Mitterrand experiment. Three percent of GDP was the figure that Delors calculated as the maximum deficit compatible with monetary stability in the circumstances of 1983. It then simply hardened into a general European rule in the 1990’s.
Financial markets nowadays are much more aggressive than they were in 1981. There is no possibility of a two-year period of experimentation. The result will be very intense pressure for a rapid redesign of European institutions, with the risk that the outcome will lack credibility – less a U-turn than a dead end.