Wolf Richter: Political Realities Threaten To Split The Eurozone

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Nicolas Sarkozy will be the only French president since World War II with two recessions under his watch, if the forecast by the National Institute of Statistics and Economics (Insee) turns out to be correct. Recessions are rare in France: between the end of the war and the beginning of the financial crisis, there were two. Then came the four negative quarters of 2008/2009. Now, Insee forecasts another contraction: -0.2% in the fourth quarter of 2011 and -0.1% in the first quarter of 2012.

After an uptick over the summer, economic indicators have gone south. Business confidence has declined. Corporate demand is slowing. Unemployment has risen to 9.3%. Insee expects it to rise to 9.6% through the first half of 2012. Purchasing power will decline by -0.1% in the first quarter of 2012, the sixth quarter of declines since the crisis. But even when Insee’s purchasing power indicators were rising, the French complained that their actual purchasing power was declining. The bitter irony: Sarkozy, who’d made purchasing power part of his platform during the last election, is now haunted by his old slogans. France will likely loose its AAA rating, which Sarkozy’s most prominent opponent, socialist François Hollande, sees as “a terrible admission of failure.”

This is the backdrop to Sarkozy’s reelection campaign. New polls, released on December 16, show just how tough it will be. According to Ifop, during the first round on April 22, Hollande would lead the pack with 27.5% of the vote. Sarkozy would get 24%, Marine Le Pen, president of the right-wing National Front, 20%, and François Bayrou 11%. Everyone else would score in the low single digits. If Hollande faces Sarkozy in the second round, he’d win with 56% of the vote against Sarkozy’s 44%. But as president, Hollande would not follow in Sarkozy’s footsteps regarding the debt crisis and the Eurozone.

“Another Way for Europe,” is the headline of Hollande’s editorial in Le Monde on December 16. In it, he outlined his dissatisfaction with the Brussels agreement, which he considered “narrow, vague, and punitive” and vowed to “renegotiate it in order to rebalance and add to the future treaty.”

German Chancellor Angela Merkel and Sarkozy are pushing hard to get the text finalized and agreed to by March—before the French election. But it won’t be binding at that stage, and Hollande could do what he vowed in writing he’d do.

Growth is his mantra. Not austerity. While he considers reducing deficits an imperative, “nothing serious will be possible without growth; it’s the big missing element in the agreement.”

Democracy is “the other big missing element.” Going around the European Parliament as well as national parliaments and granting the European Court of Justice final say over national budgets, as the agreement calls for, “would be unacceptable.”

And this: “The Eurozone must arm itself with a veritable financial force de frappe”—the term for France’s land-, sea-, and air-based nuclear strike force. Out: the bazooka. In: maximum force. Specifically, he wants effective means to impact the financial markets:

• A much more aggressive ECB (while “respecting its independence”).
• Much more powerful bailout funds to “discourage speculation.”
• Eurobonds to spread the risk “of at least part of our debt.”
• Interventions by the European Investment Bank (owned by member states, it lends out €50 billion a year to support weaker regions and various projects).
• A larger European budget with new sources of revenues, particularly a financial transaction tax, to drive industrial policy.

Practically every point of his plan (except for the financial transactions tax) violates Merkel’s dictate. Barring a miracle, Germany is unlikely to fall in line with his desires. A handful of other countries might side with Germany and form a bloc.

Britain, on the sidelines after last week’s debacle, vehemently opposes any kind of financial transactions tax, as well as other points on his list. Already, David Cameron seems to be trying to form alliances with other countries that support his views.

And the war of words between France and Britain is heating up. Finance Minister François Barois shot the latest salvo today when he said on Europe 1, a nationwide radio network, that “one prefers to be French rather than British,” and then he went on to disparage Britain’s economy.

If this scenario were to play out, the Eurozone could crack into groups of countries: one clustered around Germany, another around France, with a few countries perhaps falling by the wayside. The EU too might fissure as Britain and a few other countries drift away. But Hollande is on the campaign trail, and a lot of rhetoric gets bandied about. If indeed he wins the presidency, it is possible that he will back off a confrontation with Germany, as Sarkozy has largely done. It is also possible that he will try to bring Britain back into the fold, though that seems unlikely.

And now, as if the French didn’t have enough to worry about, their signature industry—wines—got slapped in the face. By China…. Merde! Chinese Wines Did What to French Wines?

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  1. ebear

    Much more powerful bailout funds to “discourage speculation.”

    There’s my Laugh of the Day, unless something even weirder happens between now and midnight.

    1. Birch

      Yeah, I wanted to read that ‘more powerful’ as more willing to stand up to the banks and say ‘suck it up, you did it to yourself’ – but that’s probably just wishful thinking.

    2. Ray Phenicie

      Discouraging speculation would be to say, “Close down the financial markets as high risk, dangerous, nay even toxic speculation is the life giving food of a vampire squid system whose very survival depends on being a blood sucker to the rest of society. We’ve evolved into something as useless as lampreys and we can’t go backwards.”

  2. YankeeFrank

    The EU is doomed. They hate each other way more than the north/south or coastal/inland divides in the US. Foreign imposed austerity will last only so long, and then comes the break.

    1. Stephen Nightingale

      It looks like a case of French thumbing-the-nose at everything English-speaking. But John Cleese did it so much better as the French Taunter in “Monty Python and the Holy Grail”.

      Your mother was a hamster and your father smelled of elderberries.

      Levez la vache!

      1. readerOfTeaLeaves

        Yes, but we keep coming back to the dirty little laundry stench emitted by Londongrad’s role in the UK; the UK appears to have increasingly made itself economically (and therefore politically) dependent on tax havens, hedge funds, and general ‘laxity’ that appears to center around the City of London and it’s Mayfair adjunct. Emanating out toward the Jerseys, the Caymans, et cetera.

        France has its money laundering operations, but it appears that it’s not kept up with the UK in terms of developing a robust system of hedge funds and havens. So all those euros need to be run through a proverbial ‘wash cycle’ somewhere — and London is conveniently situated to ‘service’ the EU.

        The EU countries appear to be getting screwed by the neoclassical sort of tax havenry and hedging that the UK has sought to master. Cameron’s role is to defend the UKs right to rehypothecate, hedge, and leverage to the wildest desires of financiers. Understandably, France might be disgruntled.

        Nationalism is the least of it all; it appears to be about The Topic That Dare Not Be Spoken: capital controls.
        I plan to stay tuned with a full bowl of popcorn.

        1. Nathanael

          Krugman, as usual, has already called for capital controls (in 2009, I believe?) — although he said nobody was listening to him.

  3. Pragmatic Realist

    “If this scenario were to play out, the Eurozone could crack into groups of countries: one clustered around Germany, another around France, with a few countries perhaps falling by the wayside. The EU too might fissure as Britain and a few other countries drift away.”

    Hmmmm …. This reminds me of something, but I can’t quite put my finger on it … Something about brushing your sleeve before you cross the channel or something like that….

  4. Fiver

    The error from Day 1 has been the complete failure to recognize that Mr. Market is neither objective, nor rational, nor in many respects even adult. Rather, M is as completely incapable of acting in our collective best interests, now or for the future, as the immensely powerful ghouls who pull M’s strings. Having let M out of the Box over the course of 2 generations (the lid never was fully closed, mind you, so M fed on the foulest souls it sucked in until M was certain M was strong enough to attempt a breakout) every craven attempt to appease will simply fuel an insatiable appetite for more. This would not be happening had the initial response in the US/UK/EU/Japan been to duct tape M’s incessant whining yap for a couple weeks, or months, while stuffing M back in the Box, and this time welding it shut. Of course, that required the US to lead, not hand M the keys to the world’s biggest Cookie Jar, the Fed/Treasury. The resulting high has driven M quite mad for more.

    The world simply must NOT cede total control of its future to this raging imbecile consisting of the raw appetite of the very Worst among us and nothing else. People and countries without income cannot pay. Nor is it reasonable to expect Germany, with per capita GDP 25% less than the US to carry all of Europe. It can’t. Simply printing means M never stops screaming for more. We need a global debt resolution mechanism that:

    1) Extinguishes debt that will never be paid.

    2) Apportions the hit based on ability to absorb it now and over time. Nobody with money loses everything, but everybody with money loses something.

    3) M goes back in the Box, and is never, ever, let out again.

    Even if there was no financial crisis we need to do most of this in any event. There are several billion people who quite rightly demand better conditions, while wealthy nations have been on an accelerating consumption binge for
    50 years. We either opt for a far more fair distribution within and among nations, or we’re headed straight for hell on earth.

    It now appears M cannot even wait until March. Now’s the time for a great, big, resounding “NO!!”

  5. Hugh

    What do Hollande’s points mean exactly and how do they form a coherent policy?

    For example, what does a much more aggressive ECB mean. And as others have noted, bigger bailouts could actually increase the moral hazard of the banksters. And Eurobonds? who are the guarantors, the ECB or bankrupt sovereigns?

    How do these ideas mesh with the need to restructure the banking system, change trade patterns, burn rich bondholders, remove corrupt politicians, and address the issue of whether a fiscal and debt union is possible and can be effected in anything like a democratic way?

    1. Typing Monkey

      What do Hollande’s points mean exactly and how do they form a coherent policy?

      They mean that he (probably correctly) thinks that the French electorate consists of a bunch of semi-literate buffoons who will actually believe that France can demand that the rest of the world cater to its whims.

      More specifically:

      A much more aggressive ECB (while “respecting its independence”).

      The ECB will print like hell to bail out the French economy. France will not have to tell the ECB to do so; it will elect to do so on its own and without overt and public coercion.

      Much more powerful bailout funds to “discourage speculation.”

      The Germans will donate money to bail out the French banks, insurance, and pension funds. Maybe even occasionally help rally the CAC40 if its decline makes headlines.

      Eurobonds to spread the risk “of at least part of our debt.”

      The Germans will contribute to financing “at least part of” French deficits

      Interventions by the European Investment Bank.

      The EIB will stop stupidly spending on infrastructure for the rest of Europe and instead support French markets

      A larger European budget with new sources of revenues, particularly a financial transaction tax, to drive industrial policy.

      The EU will screw Britain and use the proceeds to subsidize French businesses.

      Gone are the good ol’ days when politicians would limit themselves to promising to buy off one half of their country’s vote with the resources of the other half. We are now in a new era where some @$$ho!e has the temerity to pledge the assets of twenty six other countries to support the conveniences of his own. Progress and efficiency at its finest…

      Incidentally, if he doesn’t back down, the markets are going to start to crash as the election looms closer and he is more assured of winning. Who the F!@# would want to hold any European positions when you have some moron basically promising to create yet anther headline-generating crisis???

      1. Fiver

        “Gone are the good ol’ days when politicians would limit themselves to promising to buy off one half of their country’s vote with the resources of the other half.”

        C’mon. Surely you can’t mean that.

        1. Ray Phenicie

          In the US, for much of the era since WWI, the society has been split between the bottom 20% and the upper 80% or between those who have not and those who have. The Carter Reagan years saw the bottom 20% joined by another 10% to make a 30% excluded or have nots to the top %70 and the 1990’s saw the split to %40 excluded and now it is indeed (despite what the Occupiers are saying)%50 are in the realm of the excluded. We are moving more and more into that realm of the excluded and in realty today it is at 60%; these are America’s consumers who have too much debt to handle, can’t afford necessities, can’t send their kids to post secondary school, and have no financial future-they are unable to save long term (more than ten years) for retirement or for major purchases (car or home). But in reality, hard core, suffering poverty, not enough to eat, near starvation type filthy poverty affects about %25-30 percent or America, in rural areas it is sometimes 60%. We are steadily moving towards a day, if things go along as they have in the past 40 years, where %80 of the country will be in that nasty, filthy, starving mass of humanity who face only destitution. We are about another 40 years to the fulfillment of the dream of Empire a la Roman.

  6. MarcoPolo

    t must come rather hard to be slapped in the face by the Chinese after having been kicked in the seat of the pants by, in alphabetical order, Argentina, Australia, Chile, Germany, Italy (who sometimes even make wine from grapes), New Zealand, Portugal, South Africa, Spain – and forgive me if I left anybody out.  The French wine industry has proven incapable of the innovation found everyplace else in the world and French wine has “legs” only because of the Common Agricultural Policy (CAP) and the very small (probably bankster) clientele who bury Bordeaux in their cellars assuming prices for overpriced wine always goes up.  

  7. vlade

    The interesting thing is that since Cameron’s veto Merkel talked to Cameron more than to Sarkozy.
    It also seems to me that as a result of the veto she’s taking Cameron seriously and with some respect, while Sarzkozy as “… will eventually do what I tell him anyway”. No wonder he thrown a hissy fit.

  8. Lafayette


    From this weeks edition (17DEC2011):

    For all the fuss about Britain, the main failure in Brussels was to draw up a plan to save the euro. That requires a trade-off. Governments need to bind themselves to credible fiscal rules that provide incentives for good behaviour. They need to assume some form of joint liability for debts, with only the well-behaved benefiting from the shelter of Eurobonds. In return the European Central Bank (ECB) needs to give total support to all solvent members. That would leave much to do, especially to unleash growth and to reform the banking system. But investors would at least see a clear path ahead.

    Merkel needs to read this. A money, without the unlimited backing of a Central Bank, is useless. Never was that the intent when bringing the Euro into being. Unfortunately the Maastricht Treaty overlooked the fact that that assumption should have been defined clearly.

    The Germans are being pigheaded about the ECB, if necessary, printing money to back EuroZone Debt. And yet, that is what the Fed is doing with its “Quantitative Easing” and other Central Banks have done in similarly dire circumstances. Investors don’t care if a country prints money in order to pay its debts. The Germans, however, think such activity could spark runaway inflation. (Which – the Germans keep reminding themselves – brought about hyperinflation during the Weimar Republic.) Why they should believe that even remotely possible today is beyond comprehension.

    In fact, the budgetary Golden Rule, if applied firmly will prevent above-average inflation occurring in any Euro-economy.

    The measures put in place so far are adequate to meet any forthcoming situation of EuroZone’s country’s need for debt-maintenance funds. What worries most investors is that if all the countries undergo significant changes in their Triple-A ratings, then there will not be enough money to go around. What is the chance that such will happen? It is only remotely possible.

    What is possible is that banks will need to make lower debt-maintenance payments by increasing the payback period. Which is, investors will realize, better than defaulting and owning nothing.

    Instead there was another fudge, with neither the governments nor the ECB doing enough. In the run-up to the summit, the ECB extended its support for euro-zone banks—in effect lending them unlimited cheap money. That will help the banks and might in theory feed the demand for euro-zone sovereign debt. But it hardly counts as the “big bazooka” investors want, if only because the banks are wary of taking losses on ever larger stashes of government debt. Moreover, the ECB remains adamant that it cannot intervene as the lender of last resort to euro-zone sovereigns.

    Yes, so what, there was a fudge?

    Money was shipped off to the IMF to be relent to needy countries in Europe should they not be able to sell debt in order to pay debt. Sounds crazy, but that is to what the situation has come.

    “Investors” (whoever may consist of this nebulous community?) may want the BigBazooka but they are part of the problem and not the solution. They hold the debt and pleased as punch when interest rates rise due to the diminution of Triple-A ratings. What they like less is when a Merkel tells them they have to write-off 50% of the Greek Debt.

    Frankly, this was a splendid move on her part. She showed the “investors” that she could push the Panic Button if need be. And that need could very well come round once again, if the lower ratings of the EuroZone debt force the agencies to lower yet again their ratings.

    The ratings are useless, except to push maintenance payments higher, thereby pushing EuroZone Debt Countries diabolically further into the hole by raising debt-maintenance payments. How can that possibly resolve the situation?

    On the other hand, what could resolve the crisis is a Merkel-2, where she tells the investors they need to accept a haircut on country-debt in order to keep maintenance payments in line with what the country can afford – or the countries will be made to default.

    And the Euro goes to hell in a hand-basket as well as those holding its debt, who come out looking bald. Is that what investors want? Doubtfully.

    Remember this phrase, “I owe you a hundred Euros, that’s my problem. I owe you a hundred billion Euros, that’s YOUR problem”. That saying was never more true …

    1. Nathanael

      “The Germans are being pigheaded about the ECB, if necessary, printing money”

      This sums up the problem in the Eurozone.

      Every other problem they have there, we have here. But they have that one extra problem.

  9. Nathanael

    (1) Hollande will win the French election.
    (2) The Eurozone will most likely stagger along until the French election.

    The big question is *what Hollande will do*. These are the possibilities:
    1 – full-swing Keynesian and full-swing anti-bankster
    2 – full-swing Keynesian but pro-bankster
    3 – capitulates to austerity but anti-bankster
    4 – capitulates to austerity and pro-bankster

    In case 4, everything goes on exactly as before.
    In case 3, the banksters start to scream, and we see which Euro politicians are willing to fight them and which aren’t. I’m actually unsure about Merkel here.
    In case 2. the Eurozone split happens, but along weird lines: nobody sticks with Germany except gluttons for punishment (which may include the UK), but some avoid both France and Germany (which may include the UK).
    In case 1, every government which aligns itself with France wins, every government which doesn’t is overthrown, and after a few years France ends up as the undisputed leader of the new Eurozone, with Germany under the SPD or the Greens humbly petitioning to get back in.

    1. Lafayette

      CASE 5

      European consumer demand picks up, increasing Value-Added-Tax revenues (the major source of tax revenues in Europe, not income tax). Treasury coffers begin to fill once again and debt-maintenance schedules are met.

      The CRAs crawl back into their dark hole from whence they came.

      The Golden Rule takes effect and EU governments get serious about where they want to spend their limited funds. Like in Health Care and Public Education. Because they can’t borrow any more money anyway due to the Golden Rule.

      All is well again (with moderately high unemployment but also large safety-nets) and CRAs start pointing the finger-of-blame once again at Uncle Sam who still has a National Debt that is above 60% of its GDP. And worsening.


      Whilst Congress dithers over a long-term solution – until November of next year, when nothing will change.

      And the mess goes on and on and on and on …

      Because no one has the balls to take the bull by the horns in LaLaLand on the Potomac.

  10. Lafayette


    WR: But Hollande is on the campaign trail, and a lot of rhetoric gets bandied about. If indeed he wins the presidency, it is possible that he will back off a confrontation with Germany, as Sarkozy has largely done.

    Lotsa laffs … “if indeed”, indeed.

    Hollande is a socialist apparatchik who’s never had an innovative idea in all his life.

    France has been run (badly) by a group of people who, having a diploma from the Ecole Nationale d’Administration (and thus called “ENArques”), thus think they have a destiny to run France. Imagine that same silly notion existed stateside at the Kennedy School of Government at Harvard …

    Sarkozy is not an ENArque, having been a lawyer by profession, but is surrounded by Free Masons. One must belong to a “clique” (note that this word is of French origin) in order to run France. No cligue, no friends in high-places. No F-I-H-P, no political base.

    By attrition, Sarkozy has managed to slim a bloated national education system of excess teachers (because school enrollments had been declining). Like teachers in the US, in France they are mostly Left Leaning – so what was one of Hollande’s proposals?

    To add 10,000 teachers as soon as he takes office. They can all twiddle their thumbs on a full salary, paid by the French state, whilst Hollande “re-negotiates” France’s debt-crisis proposals with Merkel.

    As someone once said, a long long time ago, about the French Socialists who first took power in France in 1935: “Since then they have forgot nothing nor learned anything”. Frozen in time, they are.


    Still, France has both nearly free national education and healthcare systems. Education is very low cost up to and including the postsecondary level. And no one has to sell their house in France to have a serious malady treated by its national health service.

    For those two achievements in Social Justice, America will be waiting yet a long, long time.

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