"The designers of the euro put the cart before the horse"

A former student of the École normale supérieure, Jean-Loup Bonnamy is a graduate in philosophy and a specialist in political philosophy.

The European summit has just been held in Brussels, where a 750 billion euro recovery plan was decided. The aim of this summit was above all to subsidize Italy - the third power of the EU - in order to prevent it from leaving the Union. During the negotiations, France wanted to open the floodgates while the so-called "frugal" countries (Denmark and Sweden which are in the EU without being in the euro, the Netherlands, Austria, Finland, which are in the euro) were much less generous and succeeded in obtaining a clear reduction in their contribution. Here we find a deep divide that dates back to the euro and public debt crisis in 2010. On the one hand, there are the countries of southern Europe (Portugal, Spain, Italy, Greece, can add Ireland ...), that is to say Latin and Mediterranean countries, of Catholic tradition, in economic difficulty, and, on the other side, the countries of northern Europe (where we finds the club of "frugal" and especially Germany), that is to say countries of Germanic culture, in good economic health and which have no desire to spend to pay off the debts of the South. France is an intermediate country between these two blocks. It is neither really from the north nor really from the south. But the more time passes, the more our country deindustrializes and becomes third world, the more it accumulates the unemployed, the more it widens its deficits (budgetary and commercial) and the more it approaches the sad fate of the countries of the South, as revealed our destitution during the Covid-19 crisis.

The great strategic error of our country is to persist in the obsolete pattern of Franco-German dialogue. Indeed, if we still stick to this diagram, which was relevant until 1991, the Germans, for their part, have abandoned it since Reunification shifted their center of gravity to the east. And with the single currency, our interests diverge: in the game of the euro, France, like the countries of the South, loses while Germany, like the frugal countries, is the winner. On the contrary, we should free ourselves from this German neurosis and ally ourselves with the countries of the south, which are close to us culturally and have the same difficulties and the same economic interests as us. Like the countries of the south, we see the euro zone as a union of free and equal nations, while the Germanic countries have a much more authoritarian, hierarchical and moralizing vision. By taking the head of such a Latin union, hostile to Germanic austerity, France could regain a great historical role.

But above all, this breaking of Europe in two brings to light the flaws and flaws in the design of the single European currency. How to keep a currency alive when the member states are so divided?

The main problem is that the euro is a monetary union without a political union. Behind every major currency stands a state, with a government: the United States supports the dollar, China the yuan, Japan the yen, Russia the ruble, the United Kingdom the pound sterling. Yesterday, France supported the franc and Germany the mark. Nothing like the euro, which is the only major currency in the world that does not correspond to any united, sovereign and coherent state.

This poses a serious problem of sovereignty. The United States controls its currency. When the White House wants to make a decision concerning the dollar, it does so sovereignly and without consultation. So in 1971, when he decided to take down the dollar for gold, Nixon didn't need to negotiate with Virginia, New Jersey, Texas or Alabama. Obama or Trump can make stimulus packages without dealing with Oklahoma or California. Likewise, the United Kingdom, China, Japan, Korea, Norway, Sweden, Switzerland or Russia have their currency. France, it no longer has control over its currency. Our country must take time to carry out long and tedious negotiations, often disappointing, with its European partners (foremost among which is Germany) and the ECB. By losing its sovereignty over this major strategic instrument that is currency, France has tied its hands and greatly reduced its responsiveness, independence and efficiency. In these times of crisis, we are paying dearly for it. If France was not in the euro, Emmanuel Macron and Bruno Le Maire would spend quieter nights, without needing to exhaust themselves in endless European summits.

To remedy this problem, we would have to build a true European state. However, this is not likely to happen. The cultural and linguistic differences within the Union are enormous. People are more and more skeptical about the European project, as the massive French and Dutch No votes in the referendum on the TEC in 2005 or the success of Brexit in 2016 prove. In the European elections of 2014 and 2018, the Front National arrived. at the head of the French parties. In Germany, the AfD (populist, sovereignist, anti-immigration and anti-euro party) continues to progress. In Italy, during the lockdown, after Russia announced the dispatch of medical equipment, many Italians took down the European flag to replace it with the Russian flag, believing that the EU had abandoned them. Gruppo Colle, a world leader in textile dyeing, has also withdrawn the EU flag from its head office. In April, 55% of Italians said they were in favor of leaving the EU. And the "frugal" refuse to pay for others. In short, we are far from federalism.

And, of course, no state is willing to give up its existence. Indeed, with a European state, there would no longer be a French, German or Italian embassy abroad, but only a European embassy, ​​which means a complete dissolution of Nations. Germany, the economic leader of the EU, has also made it clear its opposition to any federalist project.

In addition to this lack of political unity, there is a total lack of fiscal, budgetary and social harmony, which further weakens the euro. Each country has different types and rates of taxation, which gives rise to fiscal dumping even within a Union that is supposed to be united. Portugal is lowering its taxes to attract individuals (especially retirees), Luxembourg and Ireland are tax havens for companies, all to the detriment of other Member States. On the social level, some countries of the euro zone do not have a minimum wage. The Irish welfare state is far from having the same generosity as the French social security. Budgetary, public spending in France (56.4% of GDP) has nothing to do with that of the Netherlands (43%).

We often hear it said that states must converge to adapt to the euro, but this cannot be decided with a magic wand. And why would they agree to carry out this famous convergence and give up what they consider to be their traditions and their fiscal, social and budgetary interests, all this to adapt to a currency?

In short, the designers of the euro put the cart before the horse and skipped the steps to artificially build a monetary union without first building the prior foundations. The problem is that the euro has always been, in the minds of its designers, a political project. However, a currency is an economic tool. To want to impose a political project on economic reality is to go to disaster, as the example of communism shows. Today, the euro political project feeds imbalances and stifles Spanish, Italian and French entrepreneurs. You should read on this subject the text of the entrepreneur Stéphane Kélian and entitled How the euro "killed me" .

The ECB further complicates the equation. Indeed, unlike the central banks of the United States and Japan, full employment and support for activity are not part of the missions of the ECB, whose official objective is only price stability. Very influenced by the German doctrine of ordoliberalism, the ECB does not have the right to lend money directly to states.

In addition, the overvaluation of the euro on the international exchange market only worsens the situation. The euro is structurally too high against the dollar. This is causing deindustrialisation, unemployment and trade deficits for many European countries, including France. The euro, and before it the strong franc, deprived us of any monetary competitiveness. Let us just remember that, as its former CEO Louis Gallois pointed out, our giant Airbus loses a billion each time the euro revalues ​​by 10 cents against the dollar.

Certainly, the collapse of the value of the euro on the international market would be excellent news for us. But that would not solve everything, the Euro is like a Procrustes bed: this brigand from Greek mythology, killed by Theseus, forced his victims to lie down in a bed that was either too big or too small. He would then tear apart those who were in the too large bed and cut off the limbs of those who were in the too small bed. Likewise, the euro is a badly cut rib that is never the right size. Whatever its level in the forex market, this level can never be the right one for all countries at the same time, because each one has different needs. Today, a euro is exchanged for 1.14 dollars. In order not to suffocate, Greece would need an exchange rate divided by three at 0.40 dollars to 1 euro and France a parity of one euro to the dollar, while the German power would imply an exchange rate of 1.70 dollar for one euro. The euro is therefore overvalued for the countries of the south and France (which stifles them) and undervalued for the countries of the north (which boosts their economy). The same goes for interest rates. ECB rates are not differentiated. However, each country has its own economic needs. Before the 2008 crisis, the euro and low interest rates facilitated the over-indebtedness of southern European countries. Today, northern countries would need high rates to grow their savings while southern states need low rates to revive.

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We often denounce - and rightly - this problem of overvaluation of the euro, but we often miss an even more serious problem: the very existence of the euro prevents the compensation of internal productivity differences in the euro zone by exchange differences. Germany is more productive than France or Italy. But previously, there was a monetary difference between, on the one hand, Italy and France (which had the lira and the franc) and, on the other hand, Germany (which had the mark). The weakness of the lira and the franc against the mark made it possible to rebalance things by reducing and compensating for part of the German advantage. German products made it more difficult for France and Italy. French and Italian products were exported better to Germany. But with the euro, this exchange difference (which nevertheless reflected a very real economic difference) no longer exists since Germany, Italy and France now share the same currency. German products (especially cars) can now flow to us without a hitch, while our French products, which are less competitive, have much more difficulty selling in Germany. By removing the protective barrier of the exchange rate difference, the euro functions as a hoarder of wealth for the benefit of Germany. And the result is edifying: in twenty-five years, France has lost 1.5 million industrial jobs. Industry now only represents 12% of our GDP, compared to 26% in Germany. There is talk of reindustrializing France, but that is totally impossible as long as we remain in the euro as it exists today.

France and Italy are particularly handicapped by this phenomenon. Indeed, their industries are very sensitive to the issue of exchange (much more than German industry) and the devaluation of their currency was, until the adoption of the euro, one of their main economic tactics. Since Poincaré in 1928, France has devalued the franc 17 times. In March 1993, the lira lost more than 50% of its value, which allowed the Italian economy to regain competitiveness and rebalance its trade balance. But the euro has put an end to this practice of devaluation. A study by the Center for European Policy (a very serious German think-tank, yet pro-European) estimates that France and Italy are the two big losers from the euro and that on average each French person has lost 56,000 euros because of the single European currency. The same study claims that the Germans and the Dutch were the big winners from the euro.

Unable to devalue any longer, some southern European countries were imposed terrible austerity and internal deflation policies intended to replace devaluation. The purpose of these policies is twofold: on the one hand, to reassure the financial markets and lenders so that countries can continue to get into debt (austerity is therefore not aimed at reducing debts but at maintaining a capacity to debt), on the other hand, to reduce public spending, wages and pensions to restore competitiveness, as would a devaluation. But this deflationary policy, because of its recessive effects, is much more painful socially and less economically efficient than the traditional devaluation.

And things are not likely to improve, because the absence of transfer spending and the weakness of the European budget (1% of the EU's GDP) prevent any solution. Indeed, a monetary union always has economically depressing effects on the weakest areas of the union. It enriches and boosts the strongest areas, making them even stronger, and further weakens the poorest areas. This economic mechanism is at the heart of the history of the United States. Thanks to the dollar, the North - more industrial - dominated and impoverished the South - rural and slavery. The desire to get out of the dollar was one of the most important causes of the Civil War (1861-1865). During this civil war, the South continued to denounce the dictatorship of the "dollar king", opting for a separatist line and printing its own currency. This conflict cost 520,000 deaths in the United States. This is more than the cumulative number of deaths from all the other wars in which the country participated (War of Independence, the two World Wars, Korean and Vietnam Wars, Lebanon, Somalia, Wars of Afghanistan and Iraq ... ). This monetary phenomenon also occurred in Italy at the time of the country's unification: the North - more developed and industrialized - dominated the South - more agricultural - and emptied it of its wealth thanks to the lira. Today, the euro enriches Germany and the "frugal" countries of the north to the detriment of the countries of the south. Normally, such depressing effects must be offset by massive budgetary and social transfers: the richest pay taxes to subsidize the poorest, now condemned to assistantship. In the United States, the northern states have long supported the southern states at arm's length. In Italy, the North has been paying for the Mezzorgiono (Southern Italy) for 150 years, which has never had the economic dynamism sufficient to fend for itself in the context of the lira and then the euro. In Germany. since the 1991 reunification, the Länders of the former FRG, located to the west and to the south, pay for those of the former GDR, located to the east and too weak to withstand the shock of the mark and then of the euro. In France, the richest areas (such as Île de France) have been financing Creuse and Corrèze, Corsica and even the overseas departments and territories for a long time. But precisely - and this is where the problem lies - such transfer spending does not exist in the euro zone between member countries. For the euro to be functional, the Germans would have to agree to massively relaunch the European economy (well beyond the amounts decided at the European summit) and to work to pay the pensions of the French. For the euro zone to be functional, Germany would have to agree to sacrifice between 10 and 30% of its GDP each year in transfer spending. The Austrians would also have to agree to finance the social aid distributed in Guadeloupe and Martinique and that the Dutch and Finns agree not only to a total cancellation of the Greek debt, but also to a renovation of Greek infrastructure and public services financed by their own. taxes. And these transfers should be constant and not simply take place during a one-off stimulus plan.

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To remedy the current situation, some are proposing precisely to develop transfer and solidarity mechanisms on the model of the United States. This federalist idea (quite correct in theory) will never materialize in practice. Indeed, the wealth gaps within the EU are colossal. On average, in the euro zone, the gap between the poorest zones (Portugal, Southern Italy, Greece, French overseas departments and territories, etc.) and the richest zones is four times greater than it is in the United States (where it is already considered high). And the rich countries will never agree to pay for the poorest countries. In Italy, the North is already tired of paying for the South. It is this resentment that gave birth to the Northern League. In Germany, many taxpayers from the former FRG feel robbed by the "Ossies", those Germans from the former GDR, who are considered backward, unproductive, lazy and profiteering zombies. Why should German taxpayers, already scalded by reunification, pay for southern Europeans, perceived as even more lazy than the "Ossies" and with whom they do not share a feeling of common belonging since they have neither the same nationality, not the same history, or the same language?

In addition, the EU has made the choice of free trade and globalization. However, the choice of free trade is incompatible with the choice of the euro. We cannot impose on European peoples both the shock of free trade and competition from emerging countries and the shock of monetary union. All successful currency unions required a protectionist framework during their first decades of existence. The dollar was thus erected in the shadow of strong customs barriers, just like the mark (with the Zollverein customs union). European protectionism protecting the European market from external competition is therefore essential for the success of the euro, but nothing of the sort exists for the moment. The countries of the south and France therefore continue to go into debt to buy German and Chinese products.

If criticizing the euro is a little atypical in France, it is not the same with American economists. Milton Friedman (Nobel 76 and champion of liberalism) already thought that the euro would harm the weakest states. Joseph Stiglitz (Nobel 2001, Keynesian) considers that the euro, a structurally deflationary currency, is a danger for the European Union, fueling resentment and hatred between European peoples, a thesis he sets out in his bestseller entitled The euro: how the single currency threatens the future of Europe. And Paul Krugman (Nobel 2008), a very moderate centrist, pro-business and pro-globalization economist, much appreciated by Emmanuel Macron, writes that "many of Europe's problems stem from the disastrous decision to adopt the euro . "

Should we leave the euro for all that? Admittedly, the outright exit from the euro is preferable to maintaining the current situation. However, this output has several drawbacks. The main one is political. As the failure of Marine Le Pen in 2017 proved, it will be difficult to bring together a majority of French people on the theme of an outright exit.

But there is another solution, which has the same advantages as leaving the euro without having the disadvantages. It would mean dividing the euro zone into two: a stronger northern euro and a weaker southern euro. Of course, France will have to decouple from Germany and join the southern euro.

Such a solution is less radical, constitutes less of an economic and financial shock and is much less fraught with uncertainties than an outright exit. It is also much less detrimental to the future of the European project. Above all, since it does not constitute a leap into the unknown, it is much easier to get a large part of the population to join it.

France would be the leader of this southern euro while Germany would be the leader of the northern euro. For the south, henceforth, the French would be the new Germans, that is to say the new leaders. The northern euro ECB would be the current ECB, still in Frankfurt, with the same statutes. The southern euro ECB could very well be in Paris, with more flexible statutes. Freed from Germanic ordoliberalism, it could support activity and aim for full employment (like the FED) and lend directly to States at zero rate (as the Banque de France did until 1992). As the different southern states and France have the same cultural roots, are faced with the same economic issues and have the same interests, reaching an agreement on the essential issues will be much less difficult than now. Each of the two groups will gain in unity, coherence, solidarity and efficiency. And of course, these two groups will be able to coexist within the same European Union and continue to develop joint projects.

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In such a system, the southern euro would be much weaker on the foreign exchange market than the current euro: so we would finally have the devaluation we need. In addition, the southern euro will be weaker than the northern euro, which will automatically increase our competitiveness vis-à-vis the countries of the northern euro. A devaluation of 30% would immediately and automatically boost our competitiveness by 30% (without lowering wages). Here is a simple method to solve our labor cost problem ...

Such a southern euro would find its roots in our history. It would resuscitate the Latin Union created in 1865 by Napoleon III and which brought together France, Switzerland, Belgium, Spain, Italy and Greece… Adopt the two-euro solution rather than stubbornly in the current euro, here is a simple way not to persevere in the error and to break the deadlock thanks to an innovative solution.