Deconstructing the Euro

PARIS – In January, Chris Williamson, Chief Economist at the economics research firm Markit, called France “the new sick man of Europe.” With near-zero GDP growth, rising unemployment, and mounting public debt – not to mention counter-productive austerity policies – it is difficult to argue otherwise. Given France’s profound importance to Europe’s economic and political stability, this poses a major threat to the entire European project.

Recent developments confirm Williamson’s diagnosis. French business activity sank to a seven-month low in December. While tax revenues increased by €32 billion ($44 billion) last year, the government deficit fell by a mere €8 billion and public debt increased from 89% of GDP to more than 93%. Meanwhile, unemployment rose from 9.5% to 10.5%.

The obvious conclusion is that austerity is not the answer. Indeed, France must abandon its current policies, for its own – and the rest of Europe’s – sake.

France’s problems, like those of the eurozone’s other troubled economies, stem from the fact that the euro’s exchange rate does not align with member countries’ economic positions. As a result, these countries’ virtual exchange rates vis-à-vis Germany are critically overvalued, inasmuch as wages in these countries have risen more quickly, and labor productivity more slowly, than in Germany. Given that the implicit nominal exchange rates are fixed “forever” within the euro, these countries have accumulated major deficits relative to Germany.