French Officialdom Now Discussing Eurozone Exit

Just because a taboo has been broken does not necessarily mean that more radical action is in the offing. But the flip side is that, while we’ve been busy following debt ceiling and budget hijinx in the US, there are some surprising developments on the other side of the pond. One is that, as anti-Euro candidate Marine Le Pen is leading in polls in France, respected members of its ruling bureaucracy are deeming the Euro as a failed experiment and presenting detailed plans as to how an breakup could be executed.

Mind you, the Eurozone has been limping from crisis to crisis for so long that it’s hard to take new signs of trouble seriously. And the latest sighting, the publication of La Fin du Rêve Européen (The end of the European dream) by François Heisbourg describes the euro as a cancer imperiling the European Union, has more symbolic than practical importance. But it does mean that the idea of leaving the eurozone is no longer relegated to the lunatic fringe in France, one of the cornerstones of the currency union. In addition, there are are more credible proposals being floated for how to effect a dissolutions.

Ambrose Evans-Pritchard of the Telegraph, who provides a detailed write-up of the Heisbourg plan, is not wild about it, particularly since Heisbourg calls for a second go at a monetary union in ten years after Eurozone members have put the needed Federal architecture in place. After an ugly breakup, it’s hard to see how citizens can be rallied to take up an initiative that failed a second time.

There is one reason to pay attention to the French divorce talk: it’s a sign of festering political discontent with Germany. And remember, the French-German alliance is the backbone of the eurozone. Evans-Pritchard tells up:

Reading between the lines, he seems to have been shocked into writing this book by Germany’s role in the Libyan crisis, its refusal to provide transport planes (a routine courtesy for Nato allies) to help France “stop another Srebrenica massacre” in Benghazi, even after intervention had been approved by the UN Security Council and the Arab League.

The splendid Joschka Fischer called Germany’s decision to line up with Russia and China “a scandalous mistake,” warning that Germany risked waking up one day to find itself in “a very precarious position” if it continued to play this game.

You can perhaps read too much into the Libya episode, but the Franco-German body language has not improved much over Syria. Or as my esteemed Telegraph colleague Con Coughlin puts it: that Germany’s default position is now pro-Moscow.

You might conclude – though Prof Heisbourg does not go so far – that Germany is no longer an ally of France in any meaningful sense in defence and foreign policy (or indeed trade), and if so that has shattering implications. You might even conclude that the EU is already dead, an empty shell.

Heisbourg also reminds reader of how grim the fundamentals are:

Prof Heisbourg does not accept the latest claim by the EMU Gang of Five that Euroland has turned the corner, or that crisis policies are “beginning to deliver results.”…

He calls it a “cancer in remission”. The attempt to cut debt by fiscal austerity – rather letting growth erode the burden over time, a l’Americaine – and to do so without monetary stimulus, has been the “fatal choice”. The debt ratios are punching higher, towards the point of “non-linear rupture”.

Depression and mass unemployment in southern Europe is not a stable equilibrium…Starkly different narratives of the crisis are emerging among creditor and deficit states, which he compares to the split in attitudes after World War One when twisted views fed an ideological backlash….

The current course will lead to “serial crises ending in a nervous breakdown and an uncontrolled disintegration of the euro with all its consequences” – he writes – invoking a direct parallel with the sudden unravelling of the Soviet Union, a denouement with which he was closely associated and which caught almost everybody by surprise.

There’s a tendency, particularly in recent years, to discount the political component of economic crisis, particularly since the recent record is that government officials eventually prostrate themselves before the Bond Gods. The hated TARP was eventually passed. The US debt ceiling was increased, with altogether more high drama than international observers thought was necessary. The Trokia has repeatedly stumbled through crises and debt restructurings.

Yet these patch-ups are still fraught, and every time the principals come to the table, it seems that tempers and trust are wearing more and more thin.

It no doubt will seem like an extreme comparison, but I keep thinking about the set of circumstances that led to the collapse of Creditanstalt in 1931, which produced an international financial crisis and bank failures all across Europe. Mind you, I’m not predicting a Creditanstalt-type collapse, but to make the point that the trigger was political, not economic, and so it is important not to underestimate the possibility that political frictions can be the detonator for major financial dislocations.

I think it’s separately worth discussing this episode because it is a critically important bit of economic history that is still not well understood.

I’m attaching the best analysis I’ve seen of Creditanstalt failure, but will hazard to provide a relatively short summary:

1930: Germany is a complete mess. It’s 2-3 years into the Depression. Unemployment is high, people are hungry, and society is on the verge of breakdown in the hardest-hit areas.

President von Hindenberg offers Bruning of the Catholic party the Chancellorship. Hindenberg has emergency powers to rule by decree (although they could still be overruled in Parilament). He hasn’t allowed Bruning’s predecessor from the Social Democratic Party to use them. Bruning judged the key coalitions (the army, industrialists, landed aristocracy) and his own party as ready to move to the right. The government was continuing to run deficits (which were funded just about entirely internally). Bruning’s efforts to reach a budget agreement simply made everyone unhappy: the right wanted deeper cuts, the left thought where the burden fell was unfair (sound familiar).

Von Hindenberg and Bruning dissolved the government in September 1930. Oops! The Nazis made huge gains and became the #2 bloc in the Reichstag. Foreign investors freaked out. The mark fell and the central bank had to raise interest rates a full point.

Von Hindenberg had Bruning formed a new government. Despite the repudiation by voters, Mr. Market had temporarily cowed the opposition. Bruning reappointed his old cabinet and talked up austerity. The government was able to sell an international syndicated loan. Bruning talked up a plan to buy the government more breathing room by refinancing short-term government debt into longer maturities. Weak improvements in the domestic economy bolstered international confidence.

The Nazis left the Reichtsag in protest, giving Bruning more leeway and he was able to pass a budget. But possibly the biggest development of February 1931 was that the French signaled that they might make long term loans to Germany. France was the second largest creditor nation of the era. They had, not surprisingly, been taken aback by the September election. But the conservative French government fell in December and a more liberal and internationalist coalition took over. This vote of confidence was more important than the actual amount of money committed. The halting improvement in key economic figures and the change in French posture led to a rise in the stock market. The bond market rallied strongly for the first four months of 1931.

So why with Germany seeming to be starting to be on the mend, did everything come unravelled?

The article sets forth, in a meticulous way, that the collapse was not a classic bank run. Even weeks after the Creditanstalt failure, German deposits at its major banks that failed were at largely the same level. What did deteriorate was not demand deposits, but time deposits. The withdrawals thus weren’t to escape a bank collapse (although that’s what resulted), it was a run on the currency.

Von Hindenberg and Bruning, implausibly, were also implementing a right turn on the international front:

Screen shot 2013-10-22 at 4.50.22 AM

To make matters worse, the Parliament approved a plan for a customs union with Austria, which became public on March 21. This violated the spirit, and potentially the letter of the Versailles Treaty, which barred German and Austrian integration. France immediately threatened to stop lending to Germany.

Bruning was caught between the need to make even deeper budget cuts as the economy continued to deflate, and persuading the countries to which Germany owed reparations to provide relief in order to prevent social upheaval The French and resulting financial market reaction aborted the possibility of a long-term loan’ Bruning tried squeezing harder while engaging in an international charm offensive. But it was too late:

Screen shot 2013-10-22 at 5.01.04 AM

Bruning then attempted to work up a deal that would inflict enough additional pain on domestic constituencies to enable him to win some concessions on reparations. A domestic bond issue had failed before the Creditanstalt collapse, proof of deteriorating confidence. Talks over how to fill the budget gap were fraught.

Bruning repudiated reparation payments on June 6. The article details the further unraveling. And the real trigger was the final recognition that austerity would not work: “Underneath it all, however, ran the wrenching fear that the government could not make its colossal budget cuts stick.”

But the immediate trigger was the bone-headed, politically driven effort to prioritize military spending and poke a stick in the eyes of other European countries in the form of the customs union with Austria. This looked necessary from the perspective of domestic politics. Now Germany was such a basket case that the odds it could have limped though its mess are questionable. But the point is that the proximate cause of the European bank failures that delivered a huge blow to the global economy, was set off by political, not economic, events.

It now seems that any big upheaval as a result of the festering aftermath of the financial crisis is unlikely. But a Eurozone breakup would be hugely disruptive and very detrimental to growth. While the odds are not all that high, they are still higher than a mere tail event, and political tensions continue to escalate. It’s still more likely than not that the Eurozone will hang together, but the widely accepted idea that politicians know better than to defy the Bond Gods may prove to be unduly optimistic.

Ferguson/Temin: Made in Germany: The German Currency Crisis of July 1931

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  1. David Lentini

    But the point is that the proximate cause of the European bank failures that delivered a huge blow to the global economy, was set off by political, not economic, events.

    I’ve never understood how anyone could expect to divorce politics from economics, especially macroeconomics, and have a credible (macro)economic theory. At the macro level, the actions of governments—political institutions—are too critical to be ignored. Even at the micro level, the degree of political uncertainty (or certainty) can have profound effects on decisions about whether to save or spend, and what to spend on.

    Of course, adding these elements would only make the fool’s errand of a deterministic economic “science” more apparent. Also, by insisting on ignoring poltical factors, economics further enables the élites to use politics to bend economic forces to their own will. Just like ignoring the banks enables bank fraud by denying its importance, so too does denying politics enable political meddling in the economy for the benefit of those having power.

    1. from Mexico

      David Lentini said:

      …by insisting on ignoring poltical factors, economics further enables the élites to use politics to bend economic forces to their own will.


      This is the entire intent and purpose of classical economics, to obscure and call attention away from the role that politics plays in economics. As Stephen Toulmin sums it up in Cosmopolis: The Hidden Agenda of Modernity:

      The function of cosmopolitical arguments is to show members fo the lower orders that their dreams of democracy are against nature; or conversely to reassure the upper class that they are superior citizens by nature.

      But, as Toulmin goes on to observe, “there has since 1776 been a growing perception that…inequalities cannot be justified by appeals to ‘the Nature of Things’ or ‘The Will of God’ or any other mere doctrine.”

      The best debunking of cosmopolitical arguments ever expressed in art is this short clip from The Wizard of Oz:

      1. Banger

        This is one of the fatal ideas of our time that there could be something called “economics” that is separate from politics. The idea is even more laughable than the “end of history” arguments of a couple of decades ago and is closely linked to that bit of silliness. Thus the allocation of resources becomes simply an engineering problem where all actors, naturally, act in the interests of the whole in a “free” market system.

    2. sue

      WWI war reparations, which virtually all historical non-revisionism defines as destructive power dooming German economy, was a political choice, on part of allies-however, it was certainly not a “domestic” policy. I don’t see how this can be argued as such.

      1. from Mexico

        I have a friend of German ancestry who argues that after the Allies did their job on Germany in the wake of WWI, it was impossible for the center to hold, and that Germany was either going to go Communist or fascist. The lords of capital in the Anglosphere were intent upon it going fascist, and so contributed significantly to the rise of Hitler. Even guarded admirers of the British upper crust like George Orwell do not deny this.

        In this regard, I think the person who was really clairvoyant and spoke with more historical accuracy than Keynes was Veblen. If you haven’t read Veblen’s “Review of John Maynard Keynes: The Economic Consequences of the Peace,” you might want to take a look.

        While I can’t go the distance with the “Versailles Thesis” folks like Webster Tarpley ( ), which by the way is extremely popular with the Latin American Left, I nevertheless believe that the key role that the US and UK oligarchs played in Hitler’s rise is purposely downplayed in Anglophone history.

        1. Chris Rogers

          @ down Mexico,

          I Don’t usually disagree with you, I concur that its the victors who usually write history to serve their ambitions, but to say the UK, or at least History and Economic History departments in UK Universities downplay the support Hitler and the NAZIS received from both the City of London and our country’s ruling elite is a gross exaggeration and far from the truth – now I read History and Politic’s in University in the late 80’s and early 90’s and those studying the period, be it British Politics, economics or German history/politics/economics of the interwar years were, and are, fully aware that many sections within the UK establishment lauded Hitler, and indeed furnished him, his Party and Germany itself after Hitler’s ascent to power, with much coin.

          Indeed, although in my neck of the woods – I’m from South Wales, Winston Churchill is a dirty name, he was one of only a handful of the UK establishment who considered both Hitler and his National Socialist Party a threat. Indeed, during the timeframe, the UK establishment and its powerful middle class interests were highly fearful of Communism, believing Hitler was a good bet to thwart its spread across Europe – the same applies to Franco in Spain, but funnily enough not Mussolini’s fascists in Italy.

          Just read some Eric Hobsbawn who was required reading if you were studying European history. And whilst it is true that immediately after the war, Historians were a little shy at actively telling the truth, it was after all during the period leading up to the Cold War, by the late 1950’s leftwing intellectuals and historians were keen on examining and highlighting the truth.

          An illustration of this was seen only a few weeks ago following the UK’s Daily Mail onslaught against the father of the leader of the Labour Party, Ed Miliband – Ralph Miliband being a well known and respected leftwing intellectual and Communist scribe. It did not take long for the fact to appear that the owners of the Daily Mail, the Rothermere’s during the 30’s were staunch supporters of Hitler and National Socialism, illustrating once again the depth of support Hitler received from vast sections of the UK’s ruling elite – obviously our left at the time despised Hitler, but it too was divided in whether to support Stalin, or expose the brutality of the then Soviet Union.

          An interesting period in British history and if a right-winger, one certainly not to gloat about – however, much of this was even being taught in schools in the 70’s, so hardly hidden I’m afraid.

          1. Tom

            The history of Hitlers rise has not been written yet. Just go to the Public Record Office and try to find files on British involvement with extreme right wing groups in Germany after the first world war. Everything relevant is still under lock and seal. But there´s lots of anecdotal reference, memoirs of members of the Freikorps a.s.o. It was also noted in Moscow at the time. It is only logical to assume that Hitler´s movement was also supported. Which would explain where the money came from in the beginning. A question that has not been conclusively answered to this day. Of course neither the Nazis not the British would have admitted to their early collaboration. But it is only logical considering that the greatest nightmare of the British establishment would have been a socialist Germany allied to the Soviet Union. At least until 1923 it was a possibilty that no foreign observer could completely discount. Hitler and his movement were something like early day Osama Bin Ladens. At least until it became clear that they might take power. Then the smarter part of the British establishment (Churchill) changed their minds.

            1. Chris Rogers


              I concur with you that the Public Records Office has, and is censoring much detail from the 1920’s and 30’s in relation to the interwar governments support for rightwing forces in Weimar, and indeed the Establishments support for both Hitler and the National Socialists both during the NAZIS ascent to power and unto 1940 indeed when many were urging peace upon the British government.

              Now, whilst some official documents are censored, indeed may not see the light of day for a few more generations, it would be incorrect to suggest that UK historians, many on the left, are only too happy to name and shame when the details are available or have leaked out.

              Suffice to say, as someone from a working class background in South Wales, please be reminded when Tory-led administrations were castigating the numerous unemployed for being “work shy”, many of these same persons were among the first to join the International Brigades in Spain and face-off fascism.

              Obviously, the UK’s establishment would like to brush these appalling realities under the carpet – the Left certainly has no interest in this and has been vocal in condemning the UK’s leadership and the establishments support for extreme rightwing political groupings thought favourable to the UK’s business interests, and indeed, its Empire at the time – which obviously, I like many others find repellent and disgusting in equal measure.

    3. susan the other

      The similarities are there. In the 30s Germany was looking east for lebensraum. Now they look east for trade and both oil and the Northeast Passage are a big plus for Russia. China is a solid trading partner for Germany. I thought it was weird when Sarkozy went to war against Libya so eagerly, and now Hollande and Syria. Who says France isn’t sovereign? It’s just a selective sovereignty. The sadistic austerity forced on citizens for the political and financial mistakes of their elite are also too similar to war reparations to ignore. Like Andrew Haldane ha told us, the cost of the Great Financial Crisis exceeds by far any war debt. If the EZ breaks up it won’t be the end of the world. But it will set the international capitalists back a few steps. They might not become the big free market overlords they want to be.

  2. Hilary Barnes

    French “officialdom”? “Intelligentsia” might be a better word, less suggestive of the idea that the people in power are thinking along the same lines as Heibourg or Marine LePen. And LePen “leading the polls”? Sort of, but the Front National has a very long way to go if is ever actually to rule France. So far it has just two members of the National Assemnbly.A long analysis in Le Figaro last week of how many seats the National Front could win (max) in the muncipipal elections next year suggested 1,000. Shock horror? Remember, there are no less than 36,000 municipalities in France, which makes a huge number of municipal councillors. One can imagine anything in 2017 when the next presidential and National Assembly elections are due, but Le Pen as president and in control of the National Assembly? Not probable.
    But, yes, the Euro system is so full of flaws and austerity policy wrecking such havoc that the system may well break down. But there are also ideas around for averting the worst scenarios. There is link below to one of them, a thoughtful 94-page note titled “A French Default” by some not yet senior members of the French intelligentsia:

      1. Jean Val

        According to the French Wikipedia page, François Heisbourg graduated from the French administration school l’ENA and served from 1979 to 1984 at various high level position in both foreign affairs and defense. He then worked for various companies linked to the defense industry (until 97) as well as became involved into several “institutes” to this day. He has also been regularly appointed to various public commissions reporting to the parliament or government. He is deeply linked with the French officialdom for sure, but I would be hard press to find any proof that his thinking is “mainstream” among the very top right now. François Hollande seems to be wedded with the idea that problems will go away thanks to a recovery now underway.

      2. Ken Ward

        Heisbourg has been one of France’s best-known strategic analysts for several decades. Off-hand, I can’t think of a more prominent one. Completely at home in the English-speaking world, he was Director of the London-based International Institute for Strategic Studies in 1987-92, the first French citizen to hold that post.

        1. Tom

          Hi Yves. I don´t speak French well, only English, German and Russian. I lived in Asia until two years ago and therefore followed mainly English speaking news. And of course Ambrose Pritchard. Two years ago I returned to Europe. Before that Mr. Pritchard seemed to me a voice of reason. Now though having talked to a wide variety of Europeans I believe he is completely over the top. Mr. Heisbourg seems to me a French version of Wolfgang Münchau. I.e. a foreigner who becomes more British than the British but not a genuine voice of his own country. And Madame Le Pen becoming French President? Not as long as the powers that be don´t support her. And they don´t. The mass media is tightly controlled in France and the French establishment is still wedded to the Euro.

          1. Ken Ward

            I first met Heisbourg in 2002 when he visited the Australian intelligence agency where I worked and he warned against the oncoming folly of Bush’s invasion of Iraq. Not bad for someone who was ‘more British than the British’ and ‘not a genuine voice of his own country’. I met Heisbourg again in his Paris strategic affairs institute several years later and the only thing unusual I noticed about him as a French intellectual was that he chose to speak in English.

            1. Tom

              I met a former British bataillon commander a few weeks ago and he told me that he didn´t know a single officer who was for the invasion of Iraq when it happened.
              Politics is certainly important but unless the pressure from down below gets really, really high somebody like Madama Le Pen is not going to make it against the Paris establishment. There are a million ways to stop her if you control the media. And for now people are still happy to be manipulated. France after all is still a fairly comfortable place for the majority.

  3. Moneta

    There’s one important situation the US has not lived and felt in its bones yet which Europe has. Scarcity.

    The type of scarcity where you can not deforest at all anymore and absolutely need to produce added value stuff. The type of scarcity that probably pushed England to colonize.

    France thanks to its internal wealth has has always tended to navel gaze. I would argue that France colonized mostly because of rivalry. They never committed themselves to their colonies like England did. That’s probably a big reason why the French lost against the English in Canada.

    Another important thing that France and England understand is the value of the printing press in keeping their position of power. If England is about to print, France will certainly want to gain more control of its own printing presses.

    I worked for a French bank just when the Euro started. The French were optimistic and truly believed they could keep up with the US. You could see dollar signs shining in their eyes and they admired America.

    I listen to Radio-Canada daily. It has a strong connection to France because it is in French. From the interviews, the French are clearly in a depression and looking for their identity. They are quickly becoming protectionist and nationalist. When it comes to the US, there is not much admiration left that is for sure. In the 90s, France thought the Euro could protect them as a block, now I don’t think they have any illusions. They definitely don’t want the US to gut them and even the average Joe seems to know about Goldman Sachs.

    I have trouble believing that France will let Germany and the UK outrun them. I just can’t see them propping up the weaker countries. Compared to many other European countries, France is blessed with a good geography which has attracted many invaders throughout the centuries. I’m sure its self-preservation instinct is kicking in.

    1. sue

      Moneta is disregarding France’s own Imperialism-which, for one example, led to U.S. involvement in Vietnam.

      France also operated-operates as Perkins describes in “Confessions of An Economic Hit Man”; their banks-corporations exploiting resources worldwide-see South-Central America (privatization of public infrastructure-resources), 70’s-80’s and beyond-controlling local water resources.

      1. Moneta

        You are once again distorting my position.

        France enjoyed a period of reserve currency. Then the UK got its turn and now the US.

        I am not denying France’s past nor am I denying how it will use it in the future. By mentioning the fact that the UK and France have a high respect for the printing presses, I am OBVIOUSLY referring to a form of imperialism, for those who can read between the lines anyway.

      2. sue


        While living in France-Germany (Benelux) when Euro was instituted, we often discussed whether Euro would be implemented-this due to bank profiteering at transactions of changing money, country to country. The only conclusion we could define upon implementation of Euro involved intention to displace dollar
        as basis of international monetary system.

        Interestingly, this has led to considerable financial competition, which has been
        used by Robert Rubin type Wall Street financiers to drive deregulatory legislation leading to economic disaster.

        Last weekend PBS carried economic discussion whereby most involved defined
        a future without a single basis of international monetary system, within the next 30 years.

        Obviously we are living a period of world financial exploitation-as well as resource exploitation. France, Spain, Portugal, Netherlands, Britain, Italy were historically involved in resource exploitation.

      3. sue

        While living in France-Germany (Benelux) when Euro was instituted, we often discussed whether Euro would be implemented-this due to bank profiteering at transactions of changing money, country to country. The only conclusion we could define upon implementation of Euro involved intention to displace dollar
        as basis of international monetary system.

        Interestingly, this has led to considerable financial competition, which has been
        used by Robert Rubin type Wall Street financiers to drive deregulatory legislation leading to economic disaster.

        Last weekend PBS carried economic discussion whereby most involved defined
        a future without a single basis of international monetary system, within the next 30 years.

        1. Moneta

          Europe is still in resource exploitation. Calculate energy going into its system and energy going out. It’s amazing they have managed to get away with it for over 70 years.

          It has a few hundred years more than North America in the study of money creation and philosophy. America just throws its weight around and has not learned the refined skills of seduction and persuasion. Americans are still teenagers.

          Take a look at these charts:

          What would you do as a leader? In a leader’s seat, I think I would be dusting off my printing presses.

      4. gepay

        Like any country there are many different groupings in France. It must be rememvered that France barely managed to remain a democracy during the depression. Think of the Vichy government later. There are the French that formed ‘Le Cercle”. Then there is the France that managed in a very French way only to give up 25% of its native Jews to the Germans – foreign refugee Jews are a whole other story. There is the nationalistic France characterized by DeGaulle. There were those that tried to assassinate DeGaulle. There are the industrialists that have common interests with other European industrialists. There is the France that did not join in the invasion of Iraq. There is the France that was big on bombing Libya and wants regime change in Syria. There are the French that like the government programs that are family friendly. There are the French that thought of the European Union as a way for France to be the rider on the German horse. There is the France of Montesquieu, Voltaire, Sartre. The wine and cheese… whatever Hollande is not much of a real socialist. In fact whatever happened to the socialists of Europe?

        1. Moneta

          While you may be right, your comment is a reflection of what is going on the liberal side. It brings out so many points that when they are all put together, they do not look actionable.

          Liberals want life to be fair for everyone but that is just impossible. Plus, they don’t seem to see the link between their desires, actions and globalization and centralization.

          Liberals want freedom, fairness and world peace. This means sending money to poor people in other countries instead of helping those at home. They want government to take care of the poor and needy but this disconnects them from their fellow men.

          There has to be a balance between centralization and decentralization. The human mind is made for small groups and in today’s system, community is getting stifled. That’s what the conservatives have understood but the liberals just can’t seem to grasp.

          They are all over the place. Until liberals start focusing on community and decentralization, and their rants get concise, no one will listen.

  4. Not a regular


    thanks for your great reporting of things which really matter. I had no time to read the full Ferguson paper (whom I highly recommend to take with a big pinch of salt) – so the following might be in contradiction – or not:

    The “creditanstalt” meltdown was mainly facilitated by the French treasury/government to avoid/stop the envisaged “customs union” between Germany and Austria – everything to “contain” economic power on the other side of the rhine – there is not much more to it. [I read this serveral time, and I am not sure, but I think it was in “the lords of finance” as well?]

    So much for unintended consequences.

  5. Sluggeaux

    The alignment of German foreign policy with Moscow is an important driver of its relations with France. Let’s not forget that the reunification of Germany was not fully integrated when the American-liberal styled Eurozone launched almost 20 years ago. Chancellor Mutti Merkel is a Russian-speaking product of the DDR — and has a different political understanding of the world than does the liberal West. Yves is correct about political dislocation driving the loss of confidence in currencies — the question is will the Dollar or the Euro be the next Reichsmark…

    1. sue

      There certainly does appear to be a propaganda effort to let it be seen that the Euro will be the next Reichsmark-on the other hand, when Euro began, it started in the .70 cents range, against the dollar. Today it costs one dollar thirty eight cents to purchase one Euro.

      It is necessary to apply historical perception of propaganda, when comparing France-U.S., perhaps most particularly with regard to labor. U.S. media, every few years, finds it beneficial to castigate French business acumen, with regard to labor-unionized workforce. Let’s all remember famous bushism-“The French don’t even have a word for entrepreneur.”

      Political rhetoric attempting to define Bush having never so stated aside, some of our family, including myself, actually witnessed this uttering.

  6. JEHR

    PM Harper has just signed an agreement with the EU which will dramatically change our economic environment.

    The quote below is from an open letter to Harper that I signed and sent:

    …. CETA is just another corporate power grab that undermines our ability to create good jobs, protect the environment, and expand social programs for those who need them most.

    I am opposed to banning “buy local” strategies at the municipal level. I am opposed to giving profitable brand name drug companies any more patent protection than they already have. And I am opposed to giving European companies the right to sue Canada when public policies like environmental regulations interfere, even modestly, with their profits.

    Walk away from CETA. You would be doing all of us a favour.


    Maybe the dissolution of the EU will save us!

  7. Richard Lyon

    It really is difficult to believe that anything will disrupt the EU’s perpetual squabbling. Even in the peripheral countries where the pain of austerity has been greatest, a majority has been unwilling to withdraw from the EU. The monetary union has not been a resounding success, but it looks like people are generally inclined to see the EU as having a net benefit over what Europe was like without it.

  8. Jackrabbit

    The PIIGS have shown that discontent with the euro can be ‘contained’ (to use Bernanke’s infamous word).

    Discontent has mostly become a negotiating tool, in much the same way that economic weakness in the US is positive for the stock market because the Fed will keep printing.

    In a larger sense, you could simply say: beware of perverse incentives. History shows that they create instabilities that can not be ‘contained’ for long.

  9. Ancient Brit

    It amazes me that anyone takes seriously any comment on Continental Europe in general or Germany in particular written by Ambrose Evans Pritchard. Both he and his employer The Telegraph are notorious for grinding this particular axe day after day.
    As I think a global crash is in the winds and am thus liquid, I shifted quite a percentage into the Euro when all around were suggesting it was about to break. Not for me the Dollar or the Pound thank you very much.
    The German fiscal rectitude will slowly make itself felt throughout the whole zone and I believe help create a worthwhile economy not saddled with the super saturated debts that infest the U.S.and the U.K.
    The French are now facing a moment of truth and they do not like it.

  10. Finster

    While accurate in describing the foreign policy rift between Berlin and Paris, you are going over the top in your comparison with the 30s. As can be read in the excellent “Lords of Finance” by Liaquat Ahamed, France in that time was still waging WWI economically against Germany and using its foreign reserves to blackmail the Bank of England and Britain against any detente.

    Berlin’s decision to move with Russia or at least abstain is first one of Realpolitik, but second one which recognizes the importance that no steps are taken, which antagonize beyond repair a major power.

    The blockaded UN security council was a valuable asset all through the cold war (apart from the vacant seat during the Korean war), precisely because it prevented one Superpower to step into vital interests of the other and thus precepitate WWIII.

    While Lybia may not have been a great day for German foreign policy, the Syrian conflagration is so murky and dangerous (we are talking about a Russian naval base in the country and genocidal tendencies on both sides of the conflict) that I consider it absolutely correct that Berlin did not support a rash air campaign, but rather was a wise partner to France by putting the brakes on and mediating with Russia.

    The French German partnership is alive and well in many EU institutions and the common market. Both are “ordo liberal” and not “neo liberal” in their trade and economic policy. Both desire greater regulation of finance.

    1. Yves Smith Post author

      I was very clear and said MORE THAN ONCE that I don’t see a Creditanstalt type event but I was using it for a different reason, that most commentators see the Euro problem as solved because most economies are no longer shrinking but are bumping along the bottom and TPTB have managed to beat back market upsets and cobble together debt restructurings when they needed to.

      The point of using the Creditanstalt case was 1. It’s an important bit of history and 2. The immediate trigger was political.

      As to the merits of the Lords of Finance, the Ferguson/Temin analysis is based on detailed archival work, including study of the market reactions at the time (bond yields, money market rates, fund flows) and actual accounts of the banks that failed and how they failed. The prevailing accounts of the Creditanstalt failure and why/how the German banks fell over weeks later are superficial by comparison.

      You and he both miss that there was a thaw and a new government in France that was elected in December 1930 was taking a more accommodating economic policy towards Germany. Germany really was at the breaking point. Now that lifeline may have been too little, too late. We’ll never know. But the customs union idea led to a reversal of the French position, and that was the trigger of the currency crisis that tanked Creditanstalt and then the German banks.

      You need to read the full Ferguson/Temin paper. I’d hazard you haven’t.

      I also clearly said the risk of a Eurozone breakup is low, but I regard it as higher than a tail event (1%) which means it is still worth watching. And I’ve said repeatedly in previous posts that if anyone is gonna split, it’s Italy.

      What this piece did raise is that political frictions between Germany and France are rising. Now this may just be a short term outbreak and things settle back down. But if the trajectory continues, that creates new political stresses in a fraught situation and those can often have unexpected side effects.

      1. Tom

        Phrased like that I agree. A Euro break up is more than 1%. God help us if it happens. It will open the box of Pandora. But so would a cataclysm in China, or another 2008 type crisis in the US. I tend to believe that they will happen simultaneously. At least that was the experience of the 20th century. And the world has gotten only more interconnected since then. Counterintuitively I believe it will be Russia and Eastern Europe that will suffer the least. Western Europe and especially Germany will take the brunt. The US will be worst. Greece and the South though will be a lot better. Why I think that? Because I witnessed the breakdown in Eastern Europe and Russia. There was resilience because people could go back (and did go back) to all sorts of scavenging, small farming, walking (instead of taking the bus). All no option in the most highly developed parts anymore. There is no knowledge, no resilience, and no environment for it left.

  11. Ignacio

    The nationalistic turn in France is the sign of the times and paralleles similar turns in most if not all eurozone countries. Trying to predict which spigot could induce an euro breakup is almost impossible. For instance, I tend to despise the possibility that the nationalist drift in Catalonia would end in the breakup of Spain as a country, but this drift migth induce the exit of Spain. The next round of fiscal repression could trigger an escalation of events that migth change the minds of the governing class against the euro.

    In Spain there is still a growing amount of debt that must be written down or nazionalized at the expense of households. Although the government is saying one day after the other that Recovery is around the corner (see the stocks! see the commercial balance! see the risk premia!) the fact is that jobs are still being destroyed and salaries diminishing. Thus, if the next round of fiscal cuts is made again at the expense of households after having sold that Recovery is around the corner, the current government will be in a seriously difficult position, no matter if the country is in commecial surplus or stocks rise as salaries go down.

    1. Bapy


      Which round of fiscal cuts? Spain was supposed to cut spending and has had to re-adjust forecasts various times, meaning, they just said they would cut and cut nothing. I’m not sure that’s what the issue is a “lack” of spending, I think the issue is continued government spending on top of a depressed economy. Meaning, the economy is bad as it is and the government is making it worst by spending.

      If you see it this way, than you can easily see where the nationalistic movement comes from. It’s more and more tax payers getting their earnings forced out of them and hand it over to government bureaucrats and lazy bums on the dole. This is where your right wing voters will come from. The thought (correctly) is that the socialists thugs have and continue to destroy these countries. The producing class can only take so much and they are saying “enough is enough”. The same is happening in Greece, Italy and will eventually hit every country using the same approach as the French.

      Don’t think these “right wingers” are going to die off, they are going to grow in numbers until the BS stops.

  12. Hugh

    In Europe, Germany can boast it’s not France. France says it’s not Italy. Italy says it’s not Spain. And Spain boasts it’s not Greece. But things keeping getting worse. So Germany ends up where France was the previous year, and France where Italy was, and Italy where Spain was, and Spain where Greece was, and Greece continues to stake out new territory. I don’t see any grounds for optimism from the standpoint of the peoples of Europe. The question remains not if but when the eurozone collapses.

  13. Fiver

    Ambrose-Pritchard has never, ever, considered what it would be like to make policy from something other than an Anglo-shperic Empire perspective – the UK has several times run up phenomenal debts covered by rubric that “growth” will later bring those debts down. Well, UK debt is now something of the order of 450% of GDP (similar to the US if everything is counted)a situation of no particular concern for the likes of Ambrose.

    But both he, in Britain, and his kindred spirits in the US never consider their respective nation’s pure power position’s effects on the analysis of the viability of these extreme debt loads. Britain’s finances wouldn’t last a day without its huge interlock with the most powerful and wealthy player on the planet. Similarly, the US cannot even conceive not being in the position of controlling the world’s reserve currency vis its petrodollar and other commodities relationships.

    Anyway, Germany ought not to be chastised for not following France’s altogether vile efforts to sack Libya under the guise of a bogus Ghaddafi threat of “massacres” nor France’s support for the mercenary jihadists under direct control of the Saudis with overall US direction to attempt yet another regime change operation through violence absent anything like majority support withing the country targeted.

    I have long argued the fusion of the US Empire with the US-based corporate globalist agenda would create intense strains with Germany and Japan as their interests diverge from those of US Empire.

  14. J Hatch

    As Merkel is getting her gas (& some good bit of the coal) from Russia, and has moved to ditch her nukes, is it no surprise she takes marching orders from Putin? Much of the conflict in Syria, Georgia, and on up is about keeping alternative gas supplies out of German hands. She’ll march to his tune or it will be a cold winter of discontent among her constituents.

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