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The French Disconnection

PARIS – Dire conditions can permit what was once unthinkable to push its way into public debate. In France, the idea that now dares to speak its name is that the country will sink into an ever-deeper economic malaise unless it regains its monetary sovereignty.

Two striking statements on economic policy by France’s leaders in the first weeks of this year have highlighted the force of this logic. First, President François Hollande, worried about the euro’s appreciation against other major world currencies, called for an exchange-rate target. Then, Pierre Moscovici, the finance minister, said that Europe might grant France a delay in meeting the 3%-of-GDP budget-deficit target mandated from this year onward under the eurozone’s newly ratified fiscal compact.

These positions imply a desire to exercise sovereign power over the Economic and Monetary Union’s rules and decisions. Back in 1989-1991, exactly the same motive underlay President François Mitterrand’s imposition of the euro on Germany – that is, to harness the Bundesbank’s monetary power to a framework in which France could be confident of wielding decisive influence. Since the single currency was France’s condition for accepting German reunification, Germany played along. Two decades later, Germany may be in a different mood.

The sovereign-debt-and-banking crisis that has roiled the monetary union since 2010 has steadily exposed the realities at play here, as irrevocably fixed exchange rates lock in and deepen differences in eurozone members’ competitiveness. In France’s case, the loss of competitiveness and resulting sharp decline in export performance has been aggravated by relying on crushing taxation of labor to finance generous welfare programs and top-drawer public services (a practice exacerbated by stifling labor-market regulation).