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Can France Save The Euro - Or Even Itself?

Politics / Eurozone Debt Crisis May 20, 2013 - 10:44 AM GMT

By: Andrew_McKillop

Politics

FRANCE'S CLAIMS ARE NOT ITS GAINS
French media, whether state-owned like 5 of its major TV channels and 2 major radio networks, or simply "government friendly" and entirely predictable, mindless repeater stations for government propaganda, have for several months applied the "ukase" (a French word borrowed from Russian, meaning autocratic law) which claims that France played a decisive role creating the euro system.       As an "official truth"it is debatable, but more important is why the propaganda is belted out 24/7.


France is in deep economic trouble, and will soon need "Eurosystem" bailout. Believing in the mostly virtual European project is therefore more important than ever, but the stark fact is that bailout is the kiss of economic death. The fantasist official history of France in Europe and "le couple Franco-Allemand", or supposed twin pillar role of France and Germany in the European project has enslaved French leaders to the single goal of preserving the euro - at all costs. Today, the French are getting an inkling of what those fateful final 3 words mean. Those costs, in fact, have become insupportable. French politicians know it but wont say it. French citizens know it and are saying it.

France straddles the frontier between Club Med Europe and Germanic North Europe - again a fairytale fault line, untrue when looked at instead of glanced at, but a heavily worked political and propaganda theme notably in Germany, in Scandinavia and non-euro-system member UK. As we know, the art of propagaganda is repeating the same lie so many times, that it become an "ukase". It becomes a pseudo-truth, supporting other and further fantasms and lies.

FRENCH DEBT AND DECLINE
The official myth is France sits on the fault line between the euro system’s deficit and surplus countries. It runs a large, costly and generous welfare system with high-quality public services, which French media calls "the French model" ignoring the details like France's estimated 200 000 homeless who sleep in the gutter. The official myth gives itself more legroom by claiming the French "welfare model" is founded on a deep, dearly held and fiercely defended national consensus.

French media, repeating what the entire French political class - except the extreme left and extreme right - tells them to repeat, claims that France unlike the Scandinavian countries or even the US, which have riotously expensive welfare systems (in the Scandinavian case well-organized), financed its system through punitive taxes on capital and employment. In Scandinavia, the US, and other developed countries, the explosion of their welfare systems was financed by debt, as well as high or rising taxes on income, profits and spending. The French ukase is therefore simple: France predatorily attacked capital  and labour, before they did anything. Elsewhere, governments waited for them to firstly budge, then predated them. Exactly like a large and increasing number of other developed countries, inside and outside Europe, French public debt surged to over 90 percent of GDP in early 2013 from about 64 percent of gross domestic product in 2007.

The "French model" put an emphasis on taxing capital and employment in the form of payroll taxes set by the number of persons employed by companies in each municipality or region, before adding turnover, value-added and profits taxes. As nearly all French businesses say, through the Union of Enterprises (the MEDEF) this is not double, but quadruple taxation, but its political advantage was to create the illusion of a welfare state financed by business, not by citizens, employed or not. The French model as a supposed "painless way" to finance welfare and public services, and for many years to also help finance the State when major funds like the family, retirement and housing funds were in surplus, only worked so long as there was fast economic growth and an optimal demographic structure. That in fact ended a long time ago - estimated by leading French politicians, such as Sarkozy's prime minister throughout his mandate, Francois Fillon, as ending at least 35 years ago in the late 1970s.

Certainly since 2008, in fact for at least 15 years, this "painless way" can only reap higher national debt, chronically high unemployment, eroding competitiveness, weak or zero economic growth, and a general decline in living standards. Social explosion is only a matter of time.

WHAT'S THE EURO GOT TO DO WITH IT?
The euro "merely" makes thing worse, probably a lot worse. For starters, there is no possibility of using national currency devaluation to "improve competitiveness", or in fact as France's devaluations against the German D-mark through the 1980s and 1990s showed, to raise the cost of living for the French by raising inflation and the cost of all imported goods and services. Henceforth, the only "allowable" devaluation is internal or domestic economy devaluation. Both these "strategies" reduced living standards, but only France's extreme left and extreme right parties say it.

Put another way, the euro's ability to anything constructive is close to zero. Its ability to do harm, however, is proven every day in the economic wreckage of Cyprus, Greece, Italy, Spain, Portugal, Slovenia, Hungary and Ireland, all of them in recession or near it.

Most surely and certainly another real but "occult" teason for France's political class being addicted to the shining euro, a reason neither media nor political class will admit, is that the twin concepts of the Eurozone and the euro money are a technocrat's delight. They mean European regulations added to national bureacratic regulations - which in France are a disease since Napoleon's times. The Parisian Ile-de-France region has the highest labor cost averages in Europe. Excessive regulation of labor, company operations, of markets for goods and services and local transport, professional services and any other facet of the economy, and society, all are more heavily controlled than anywhere else in France - where they are more heavily controlled than in most other developed countries. With no surprise at all, the result is higher prices, higher costs, economic stagnation and social conflict.

The Parti Socialiste government of president Hollande, in only the tiniest way differently from the preceding UMP of Sarkozy, has created a "red herring" trail of a supposed assault on Fat Cat high income earners, share options, big dividends, capital gains and wealth in general, but the MEDEF claim that this is making France’s share of export markets dwindle has to confront the facts - its share has been declining for at least 10 years. France's trade and current-account deficits are more than somewhat "so what" facets of its "liberal market capitalist" No Alternative postindustrial political and social endgame, like that of almost all other European countries.

Not only the French economy, but Europe needs a “supply-side shock.” In the French case, getting it has become a debate that even the French media now feels able to broadcast - for example in early morning and late evening time slots. The simplest ways are of course those of the extreme right and extreme left but even centrists are today forced to play revolutionary.

DUMP THE EURO, FIRST
A report for Hollande late last year by Louis Gallois, called a "left-leaning industrialist" recommended deep permanent cuts in taxes and social levies on all businesses. To be sure, Gallois did not breathe a word about the sacred euro, but his plan was far too bold for Parti Socialiste bureaucrats, that is Eurocrats. Their reaction was to announce a complicated system of temporary tax credits, conditional on rebated cash being used to invest in certain technologies - notably renewable energy and Internet access - and recruit certain types of new workers. In no conceivable case could or can this correct the French tax system’s gross, long-standing distortions. Under the best hypothesis, this windowdressing, called"major reform" would be up and running late in 2015.

In January, the sole other "allowable" solution for as long as France stays in the euro system was announced by the Parti Socialiste government. Employers and trade unions signed an accord that lightens labor regulations and gives businesses more flexibility. This "flexibility" has a special Newspeak meaning, because both working hours and wages will be reduced to preserve jobs. This is internal devaluation, furthered by the almost certain addition, this year or next, of a further shift from taxation of employment to taxing consumption, through raising VAT rates on everything. In Greece, for example, one spinoff from Greece staying in the euro system, and getting punished for it by a mixture of bail-out and bail-in, was an increase in VAT to rates as high as 22.5% on take-out meals.

Any action in France, or other euro system countries that leaves the euro in place will lead to weaker domestic demand, slower economic growth and higher unemployment. The theoretical option of compensating this by lower taxation on incomes and profits and tapping external demand through currency depreciation is not possible in the euro system. The hastily erected, in fact theoretical goal and regulation in the Eurozone of capping all national budget deficits at 3% of GDP can only set an iron hood on the economy, and then chuck it overboard.

Since nothing else can give way, the euro system will have to give way. For France and for the euro system, the best strategy is to dismantle the monetary union from the top. First, the exit of Germany and the few other "North European competitive" countries. Near-instant appreciation of the newly restored German deutschemark (possibly called the New German Euro) would rapidly reduce internal European trade deficits with Germany - improving the deficit countries’ trade balances, increasing their domestic economic activity, to be sure with inflation risks.

National debt write-offs would still be necessary, but the monetary dismantling would boost deficit countries’ growth and the bulge in bond rates for their debt might be short-haul. The main difference for the European Central Bank would be that recapitalizing their banks will be followed by the deficit countries getting on to a recovery path, while today's bailouts only lead to a dead end. The ECB would have to maintain credibility and trust during the dismantling of the euro system and would need a certain transitional period of life until all 17 member countries had replaced the euro.

France has nothing to gain from clinging onto the euro, and its so-called "primal role" in creating the euro system is at best debatable. Still today on government-friendly media, of course, the official fairy story is that in 1990, French president Francois Mitterrand won support from Chancellor Helmut Kohl for the single European currency in exchange for France accepting German reunification and the expansion of the European Union to the East. Both of these players are dead today - like the role, and utility of the euro single money. For France, the time to get out is now, in an orderly way.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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