The Euro as parable about “What Ails France?”: Brigitte Granville Guest Blog

As evidenced by the yellow vests protest movement that began in France in 2018, the state of the French nation inspires gloom among many of its citizens. MQUP author Brigitte Granville views this malaise as a peculiarly French symptom of the difficulties experienced by many advanced industrial democracies in the face of globalization, technology, and mass immigration.

For this week’s blog post, Brigitte Granville explores the history and French origins of the Euro in relation to contemporary French political economy and her insightful new book What Ails France?. In doing so, she reveals the ways in which the monetary union has directly impaired the performance of the French economy and damaged living standards.

What Ails France? offers a provocative but constructive critique of the French model of technocratic, elite leadership, applying an economist’s vision to the monetary and fiscal pathologies flowing from this ideologically motivated technocratic rule, reflected in Europe’s flawed monetary union, runaway indebtedness, and chronically high structural unemployment. Through refreshing, ideologically freewheeling discussion, Granville provides a positive take on the innovations of our digital age, exploring their potential to bring about a more representative democracy and a fairer society.

Round-number anniversaries are two-a-penny, but one such in France this month grabbed my attention – touching as it does on many themes explored in my new book What Ails France? just published by McGill-Queen’s University Press. The anniversary in question is the exact forty years that have passed since the election of the socialist leader François Mitterrand as president of the Republic. There was dancing in the streets in that heady political moment of spring 1981; and I myself was among the majority of young people who joined in the cheering. We were greeting change: since the end of the Second World War, France had been governed from the centre right without interruption (give or take some of the unstable governing coalitions under the Fourth Republic in the 1950s). Mitterrand’s election victory therefore signified the first clean political break in most French people’s adult lifetimes; and with it came the associated hope of renewal.

I tell in the book how my father – usually taciturn, and particularly reticent when it came to voicing political opinions – quickly put me right about Mitterrand. I won’t dwell here on the discreditable aspects of Mitterrand’s character and episodes in his long career. Such debates usually meander into an unproductive impasse (e.g. “was such-and-such political leader really any worse than all the others?”); and, in any case, my focus as an economist is on what, in hindsight, now seems the most consequential of Mitterrand’s policy decisions. This was his decision on how to use the leverage that France enjoyed during the process of German reunification that began with the fall of the Berlin Wall in 1989.

That leverage had both legal and political aspects. Under the post-war settlement, a reunited Germany could only come into being with the formal consent of France and the other victorious wartime powers (the US, UK, and USSR). More important, and regardless of these formalities, the German government would in any case have been highly attentive at such a pivotal moment to the wishes of its main international counterparties – and above all to its closest neighbour and ally, France. It was this confluence of circumstances that enabled Mitterrand to obtain the consent of the German government under Helmut Kohl to the creation of a monetary union in Europe. The new single currency – the Euro – was legally mandated by the Treaty of Maastricht signed in December 1991 (making for another, and related, round-number anniversary this year).

Germany’s initial response to the French monetary union proposal was that it would only work if combined with a political union. The same view had been taken decades earlier by the first adepts of the European movement that emerged after World War II. As early as 1947, Maurice Allais, a French economist who would later win the Nobel Memorial Prize in Economics, envisaged the introduction of a single European currency as long as it was preceded by a political union (Union Européenne des Fédéralistes 1947). Jacques Rueff, the economist and civil servant who advised de Gaulle on monetary affairs, came up with the lapidary pronouncement that the construction of Europe would be achieved through a monetary union or not at all.

Rueff shared with de Gaulle a fear of inflation and a vision of France remaining the political leader of Europe with a single currency, which would eventually come to rival the US dollar (Rueff 1950). This agenda of fixed exchange rates and sound money as the cornerstones of stability and confidence had deep roots that may be traced back at least to the hyperinflationary episode that stemmed from the printing of paper money (assignats) during the tumultuous revolutionary decade of the 1790s. While more historically remote than the hyperinflation of the early Weimar Republic that underlies Germany’s commitment to price stability, this French collective memory has had persistent practical consequences in the sense of the resulting aversion to inflation being routinely prioritized over employment and growth. In the post-WW1 period, for example, France not only returned to the cherished gold standard, but stuck to it through the 1930s even after the US and UK had reversed similar decisions in response to the Great Depression.

After the break-up in 1971 of the post-WW2 ‘Bretton Woods’ monetary system (a quasi-gold standard regime anchored by the US dollar), increased inflationary pressures led to the introduction of the European Monetary System (EMS). This evolved by the end of that decade into an Exchange Rate Mechanism negotiated by the French President Giscard d’Estaing and German Chancellor Helmut Schmidt that was designed to constrain fluctuations of the relative value of the franc and the Deutschmark (DM) within tightly defined boundaries. Keeping the franc inside that corridor would mean prioritizing price stability and cost competitiveness over expansionary measures to boost job and wage growth.

Mitterrand himself moved away from this agenda during the first two years of his presidency when he experimented with full-blooded socialist policies of nationalization and benefits for workers. The resulting run on the franc and crisis of confidence forced an about turn in 1983, when policy reverted to trying to keep up with the Germans. That meant re-pegging the franc to the DM, and the resulting overvalued currency caused a decade of high unemployment in France. The architect of this ‘austerity’ (as it would be labelled nowadays) was Mitterrand’s Finance Minister Jacques Delors, who, in 1985, went on to become President of the European Commission in Brussels – where he was ideally positioned to promote and facilitate Mitterrand’s monetary union project.

As seen from Paris, this project of a shared currency with Germany would enable France to graduate from remaining passively on the receiving end of Bundesbank monetary policy to gaining a powerful handle on the Bundesbank. After all, despite the economic superiority of Germany, France had always politically outgunned Germany in the European arena and exercised strong if not decisive influence in European institutions. The planned new European Central Bank (ECB) would thus reduce the need for austerity policies in France or, to the extent that some austerity was unavoidable (since the price France had to pay in the Maastricht bargaining for rejecting Germany’s political union condition was to accept that the ECB should at least have an uncompromising price stability mandate just like the Bundesbank), this could be attributed to the cause of European integration. After Mitterrand had been forced to give up on socialism, this European cause became a substitute inspiration, or ‘Big Idea’.

The Euro is not a prominent issue in the fraught new election season upon which France is now entering. This contrasts with the previous national elections in 2017, when Marine Le Pen – then as now the main anti-establishment challenger – included leaving the monetary union in her platform, a position which she has since abandoned. French politics are now dominated instead by escalating ‘culture wars’ fuelled by the breakdown of law and order in and around the immigrant ‘ghetto-suburbs’ and the associated serial incidents of murderous Islamist violence. A central chapter in my book discusses the background and origins of such problems.

Yet this story of the French origins of the Euro nevertheless has plentiful lessons relevant to my subject of “what ails France?” There are two lessons in particular that go well beyond the ways in which the monetary union has directly impaired the performance of the French economy and damaged living standards.

The first lesson concerns the decisive role of the ingrained reflexes of the caste of elite technocrats that have maintained control over the country’s destiny despite changes of regime – such as the passage from the Fourth Republic to the Fifth Republic under de Gaulle – or changes of ostensible ideological orientation as in Mitterrand’s election victory forty years ago. As I have described, Mitterrand and his advisers did not conjure their vision of European monetary union out of thin air. This had all along been on the agenda of the country’s ruling class. For this reason, I downplay the importance of changes of president. Although my book contains much criticism of Macron, who seems like an inept neophyte compared to Mitterrand’s formidable skills as a political operator, I do not hold Macron responsible for failing to solve in a few years the structural problems deepened over many decades by the (in)action of the entrenched, entitled, and intellectually hidebound bureaucratic oligarchy. At least on the question of the Euro, Macron himself has at times displayed more intellectual honesty – albeit of a somewhat unrealistic not to say quixotic kind – by stating that political union is required to make the monetary union viable.

The other lesson revolves around power and ideology. The drive to create the Euro was shot through with a mixture of cynicism and arrogant, deluded voluntarism. This seemingly improbable combination is all-too-typical of the French ruling caste. The taste for Big Ideas – in this case, ‘Europe’ – makes no concession to competing claims. In particular, French rulers readily assume that the economy should and will adapt to their political will. Their own status will be enhanced by projecting decisive French power – in this case by harnessing Germany’s monetary and economic prowess – onto a ‘Europe’ capable of becoming a peer of the United States rather than just a junior ally. Again, the possibility that the living standards of millions of people might suffer as a result of such schemes and ambitions – in France itself, and even more as it has proved in southern Europe – is dismissed.

A perfect vignette of such attitudes was on display in a debate marking the Mitterrand anniversary that was aired by the French cabal channel CNews a couple of weeks ago (21st May).  This pitted Eric Zemmour, the political journalist of a nationalist bent, against Hubert Védrine, who was one of the Mitterrand’s longest-serving aides (before becoming Foreign Minister in a later socialist government after Mitterrand’s death). Zemmour found much to admire in Mitterrand’s resistance to German unification but regretted his choice of monetary union as the way to counter the “demotion” for France entailed by a united Germany. Zemmour cited the views of Nobel prize winning economists (such as the left-wing American economist Joseph Stiglitz) about the economic damage caused by the present construct of a monetary union unaccompanied by a fiscal and political union. In response, Védrine said that “the reason American Nobel Prize economists were opposed to the euro was because they could see that the euro will act as a rival to the dollar!”

This remark exemplifies the arrogance and economic ignorance of Védrine’s generation of French technocrats. Locking France – and, even more, Italy – into a monetary union with Germany has led to a vicious cycle of declining competitiveness and productivity. This has led the ECB to try to boost the Euro Area’s external competitiveness by weakening the Euro. It has done that by setting negative interest rates, encouraging the flight of capital out of Euro assets and into higher-yielding foreign assets. So much for rivalling the dollar!

An empirical study published in February 2019 analysed the winners and losers of the single currency over the twenty years since the Euro, after a period of preparations following the ratification of the Treaty of Maastricht, was launched in 1999 (Gasparotti and Kullas 2019). The authors’ model estimated what the GDP of each Eurozone member would have been at the end of that twenty-year period had the euro never existed. Their findings are striking: as of 2017, output worth €3.6 billion in current prices had been foregone by France since the creation of the euro, which is €55,996 per person over the period 1999–2017. The equivalent numbers for Italy, a country that comes out of this study even worse than France, are €4.3 billion (€73,605 per Italian). For Germany, by contrast, these two numbers were positive: €1.9 billion in incremental GDP or €23,116 per inhabitant (with a similar result for the Netherlands).

I have noticed that while there will always be critics who will pick holes in such modelling (and no model is perfect of course), committed supporters of the Euro increasingly respond to such evidence of the damage caused by the French Euro project by taking a different tack. Yes, they say, the monetary union in its present form has design flaws (tacitly admitting that economic reality has not submitted to the arrogant political will of the French architects of the Euro); but, they go on, dismantling the Euro now would cause unconscionable economic damage and financial risks. Such rhetoric of irrevocability is repeated in an infinite loop on French media supported by the Euro clerisy – which might do well to recall that when President Roosevelt wanted to leave the gold standard in 1933, he was warned that such a move would spell the end of Western civilisation.

Brigitte Granville is Professor of International Economics and Economic Policy at Queen Mary, University of London, and the author of What Ails France?