Wolf Richter: French Megabank – “Germany Should Leave The Eurozone”

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

France’s government is struggling to stay relevant. François Hollande has become the most despised president since comparable polls started in 1958. To save his skin, Prime Minister Jean-Marc Ayrault proposed a total tax reform by shuffling around who pays what, an impossible undertaking, fraught with strive and protests. He didn’t even inform Economy Minister Pierre Moscovici. Blindsided, Moscovici decided to not let himself be “buried alive,” as he said….

The struggle in this administration to somehow come out politically alive is in full swing.

On the far right, Marine Le Pen, head of the National Front, has been clamoring for years to “let the euro die its natural death.” Getting France out of the Eurozone is part of her solution to the economic quagmire. But since it’s her idea, the political elite that have taken turns governing France for decades have to brush it off.

Suddenly, there’s the next solution. This one is attractively presented with graphs and in simple economic terms that even a politician might understand. It’s seemingly well-reasoned and has no visible partisanship attached to it. And it came from one of the largest megabanks in France, Groupe BPCE, that hardly anyone knows.

It was established in 2009 through a government bailout and a near-simultaneous merger between the Caisse Nationale des Caisses d’Épargne and the Banque Fédérale des Banques Populaires. These vast cooperative bank networks continue to exist with their separate brands. And that’s what consumers see. BPCE has €1.15 trillion in assets and owns about 20% of the retail banking market. It’s huge.

And now, its asset management and investment banking subsidiary, Natixis, released a zinger of a study designed to influence policy. It’s titled, “On a purely macroeconomic basis, Germany should leave the Eurozone.”

Germany should get out of the way so that the remaining countries can devalue in a big way what would remain of the euro. France, Italy, Spain, Greece, etc. have always done that, one way or the other, before the euro took that nifty tool of sudden money destruction away from them. It would be the ideal solution for France.

After conceding that there may be non-economic reasons to form a monetary union, the report lays out five reasons why Germany needs to exit. But it offers an alternate solution: if Germany wants to stay, it needs to pay.

1. Asymmetries in the economic cycles.

While Germany was stagnating between 2002 and 2005, the rest of the Eurozone was growing. Since the financial crisis, the opposite has been happening. Same with unemployment. Between 2002 and 2005, it shot up in Germany but declined in the rest of the Eurozone. Since 2008, it dropped in Germany while it skyrocketed in the rest of the Eurozone to a record high of nearly 15%.

This asymmetry is based on credit. In Germany, growth or lack thereof is largely independent of credit. But in the rest of the Eurozone, growth is predicated on massive credit expansion, so when credit ballooned before the financial crisis, the economies grew. When credit collapsed afterwards, the economy sank into a quagmire. Due to this asymmetry, the report argues, a common monetary policy is not appropriate for the Eurozone.

2. Weakening economic ties between Germany and the rest of the Eurozone.

After the financial crisis, German exports to the rest of the Eurozone dropped. But Germany didn’t just throw in the towel and sink into a long recession. Instead, it pushed hard to export to other parts of the world. So 2012 was a record year for German exports, but the share of exports to the rest of the Eurozone dropped from around 45% before the financial crisis to about 35%. These weakening trade ties indicate apparently that Germany is more attached to the rest of the world than the Eurozone.

3. Structural asymmetries.

There are a number of them. For example, 35% of GDP in Germany is associated with manufacturing and industrial services, compared to 20% for the rest of the Eurozone. The labor market in Germany is more flexible than in some of the rigid situations elsewhere. The poverty rate in Germany is rising faster than in the rest of the Eurozone – from 11% in 1999 to 16.1% in 2012, as opposed to the rest of the Eurozone, where it rose “only” from 15.7% to 17.6%. And the savings rate in Germany, with its rapidly aging population, is higher than in the rest of the Eurozone. (This is a particularly spurious argument: with the exception of France, most Eurozone countries have rapidly aging populations, Italy faster than any other.)

4. Different needs in exchange rates.

Germany “prefers” a strong euro, the report finds, and the rest of the Eurozone needs a week euro to become competitive in the export markets.

5. Incapacity in the rest of the Eurozone to impose “internal devaluation.”

“Internal devaluation” has been the hallmark of efforts to get the southern European economies off the ground: slash wages to make production more competitive. Cutting household income was supposed to resolve the crisis. This happened in Spain in a huge way, to the detriment of Spanish workers, and with at best mixed results for the economy. But this cannot happen in France, where the cost of labor, mostly due to taxes on labor, has reached extremes. The people won’t sit still and allow their wages to be slashed, and the government can’t live without the cash flow it siphons off from payrolls. So for France, the only solution forward would be a massive devaluation.

But it’s not hopeless, the report concludes. To save the Euro as it is, with Germany in it, three things must happen: accept the growing concentration of industries and services in Germany; accept the migration of workers from other countries to Germany (already in full swing); and impose transfer payments – “correcting transfers,” the report calls them – from Germany to other Eurozone countries to keep them afloat. Taxpayers in Germany would subsidize governments elsewhere. The French would love that.

The report seems to have two goals: get the French political establishment to give serious thought to the euro, and give the German political and business establishment, where the euro remains unquestioned, a choice: either accept to subsidize the rest of the Eurozone or get out.

Surely, this will go over very well in Germany.

If Germany were to leave, Austria, economically joined at the hip, would form a currency union with Germany. Other countries might join. This would be the northern euro, drawn up by France!

But the French government is desperate. Hopes that the economy would miraculously turn around have evaporated. Pressures are mounting. Unemployment keeps rising. Businesses are bailing out. No one has any other solutions. And someday, this idea, proposed by a non-partisan entity, the largest retail bank in France, might gain some traction within the political establishment, and when it does, the results will be unpredictable and very messy.

“Insurrection” is showing up in the French media, though it’s still more an exaggeration than a description. “Fiscal discontent” is better, but not broad enough. Now President Hollande is going to turn this debacle around. Read….  The Most Despised Tax-And-Retreat French President Sinks Deeper Into Economic Quagmire

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  1. psychohistorian

    Nice bit of reporting.

    It seems this is more of, If in doubt, blame it on someone else.

    No one ever discusses the real capital flows causing the gyrations discussed in this article by the global plutocrats because they are not made public in the world in which we live.

    1. TheCatSaid

      The real capital flows were indeed recently discussed. This was in a presentation David E. Martin gave at the Breakthrough Energy Movement last month in Boulder, Colorado. (The talks from the October 2013 conference have not yet posted on the internet, but they will be.)

      The shocker revealed by the data–

      The primary beneficiaries of global capital flows since the recent “crisis” are major utility companies. The capital flows in this direction dwarfed capital flows to the financial sector by a factor exceeding 30x IIRC.

      (Analyzing massive amounts of unstructured data is one of David E. Martin’s specialties. He is CEO of M-CAM.)

      I will post a link to the presentation as soon as it is available.

      1. TheCatSaid

        And I have no idea how these capital flows impact the Euro or related policy.

        Any ideas of the implications, in light of the main topic of this post, eurozone structure and membership?

        I haven’t seen any discussion on NC of geopolitical economic / financial / monetary impact of capital flows being directed primarily to utilities, or of what policy opportunities & risks this implies.

      2. Fiver

        People are paying their sewer, water and electric bills no matter how much money they have? Shocking indeed.

        1. TheCatSaid

          Capital flows of this magnitude are not coming from people or businesses paying their bills.

          The amounts in question are many times the capital involved in “routine” financial speculation & bailouts.

  2. American Slave

    Well…. It’s a long story on how Germany arrived here today but I think it starts at the end of WW2 when the allies arrived from the west and the Soviet Union from the east cities like Paris and Antwerp etc were in good shape while Germany was a hideous ugly bombed out mess with hardly a building intact and ditto for Japan while to top it off the allies were implementing the morgantho plan to starve Germany to death and turn it back into an agrarian society causing the German hunger winter while at least in the late 1940s the Soviet Union had restored industrial production in the east while the rest of the world stood around and did nothing till the martial plan and the only production they originally let west Germany engage in was coal mining and export under a far less price than the world market price at the time as in $20 a ton compared to $80 if I remember the paper I saw.

    And then the story is the same about keeping Germany down till about the early 2000s when chancellor Shroder was up for election and the Bush administration did all they could to make sure he loses and then when he won the re-election on the platform of going against the Iraq war as Germany has had bad experiences with war Bush and the rest went on a campaign to push Germany out of America and to the bottom of the ocean which is when Germany signed the gas pipeline deal with Russia and made there turn to China which at the time everyone laughed at since Chinas economy was about the size of Sweden’s back then but now no one is laughing.

    So im not sure exactly the way the German elite thinks but they did do a lot to increase production especially with there technical and vocational school system they have and the money they receive from there import export bank while the US and UK spent money on war and gas prices aren’t even cheap to show for it.

    As a final note the austerity is forcing a lot of countries in Europe to cut back on military spending as it is.

    1. American Slave

      I would also like to add that while chancellor Merkel tries to hold on to her so called “special relationship between the US and Germany” the economic and trade situation brigs Germany ever closer to the China Russia nexus whether she wants it or not.

      So as they say FTM(follow the money)

  3. marinbelge


    Not a bad post at all from a “policy-thinking” pov. A lot a people would certainly agree with the content “in private circles”. Discussing the “Euro fort” is always useful.

    Yep, deflation is in full swing here the real one. Not the joke that some are taking about, the true one on CPI. I am talking as an Austrian, unsupportive of any inflation. The Euro is indeed quite strong from an European in-house standpoint.

    Does that bring enough political ground to serious challenge the Euro in any way?

    Are we talking possible “real politik” in this arena? I bet not.

    The issue I have with the post as as a French reader of this blog is that IHMO it offers a limited grasp on the real balance of political power here in Paris. Policy-making discussion will always about what is politically possible…

    “BPCE has €1.15 trillion in assets and owns about 20% of the retail banking market. It’s huge.”

    BPCE is not a political force at all here. French policy leaders have little respect for weak corporate hands. Even banking ones (sounds like a difference to Washington DC). Policy-makers will listen to BNP and, should they join with BNP, SocGen and possibly Credit Agricole. Full stop!

    Political support for the kind of policy that is promoted here is bordering to nil. The fact that Marine Le Pen party, on the right wing, has been challenging the Euro construction for so many years, even acts as a nuclear deterrent. Indeed!

    You cannot be against the Euro here unless you want to join what people here call proto-fascist, isolationist right-wingers. Or crypto-communists, the late comers to the Euro-bashing :)

    Much worse than been dubbed a “tea-party-er” – I have not a single problem with been associated with parts of Ron Paul and family say – than a friend to Lepen … And family

    Because of this parochial issue, France is stuck with the “Euro as it is” with zero ability to negotiate in Brussels or elsewhere.

    Looks like the Hollande-Moscovici is waiting for the next funding crisis to occur to start to “discuss” monetary issues with Merkel…

    The chances for them to get the strong hand over the issue during a funding crisis is of course a plain zero. Holland is no Churchill. Not even a Sarkozy or a Chirac, let alone a De Gaulle.

    The African adventures of our premiers are misleading of France external policy. France is unprepared and has never had add such a political weak hand on European affairs.

  4. John

    I live in the eurozone and can add politics here is like anywhere else. Decision makers are always detached from Main Street. Having said that the political elite at the EC and in political capitals in Europe would rather the public suffer irreparable harm than to drop the euro. It’s kind of like the ACA. Smart people knew the outcomes would be a disaster but the elite nevertheless soldier on to ensure maximum pain. So it is with the euro.

    1. fajensen

      As often with Germany involved, the EUR-project is “Zum Endzieg”!

      … yes, I think that “they” absolutely would be willing to sacrifice one third of the European population to malnutrition and preventable diseases to preserve the Euro.

      1. OpenThePodBayDoorsHAL

        Maybe Germany can just drop the euro and do what the Ukraine did: line up with Putin. He’s probably not even listening in on Merkel’s cellphone.

  5. Maju

    Good idea but quite a bit too late. More so considering it’s just a proposal with near-zero likelihood of being implemented at all in the short term. It’s much more likely that the Eurozone collapses altogether before the governments of Latin Europe can articulate such a joint effort. Right wing governments in particular are much more likely to follow the German diktats or, in the case of France maybe (especially if the FN manages to win), break apart unilaterally with the Eurozone and other EU schemes like Schengen (free circulation of people, joint external borders) without forging any ties with its southern neighbors other than ad-hoc ones.

    One certainly wonders about the viability of such a “lone France” (without colonies) led by the far right but that’s beyond the point. The point is that it may well happen and, that way, Germany would be able to establish its North-Central European zone, dropping the southern countries, which have become burdensome for them. An FN victory in France therefore would only play into German hands (never mind the racist nationalist terror regime that would be implemented inside France, with unpredictable but surely horrible consequences).

    The result would be (will be?) a newly fragmented Europe, with an array of semi-isolate Latin countries (and Greece), each going its own way without course and maybe drifting also to the far right, especially in the case of Italy. The German bloc in the Center-North would probably work for a while and become a regional powerhouse, which would be pretty much the same as the current situation in many aspects nevertheless.

    The proposed alternative (German pays for staying and keeping the current hard-euro scheme) will foreseeable be rejected by Germany (the alternative of a broken and impoverished Europe fits better with their desires), so it’s not any alternative. Whatever the case it is a poor quality option because it retains the idea that the ECB must work against the interests of the vast majority of European citizens – it’s a pitiful patch.

    The only realistic option for Germany to stay within the Eurozone, would be that it accepts controlled, strategical, inflation of the euro, according not to any pseudo-gold-standard great scheme, as happens now, but to the changing needs of the majority of the Eurozone.

    In any case, it’s too late, I believe. I seriously doubt that they can save this collapsing card house no matter what they do.

    1. Fiver

      Corporate globalization/financialization is a far greater factor in this than any real or imagined strictly “German” quality. Erase Germany tomorrow and global corporate capital won’t be flooding Greece or Portugal or who knows how many other nations or portions of nations that do not have what corporations “need”, seeing as how us idiot Boomers gave corporations the power to do just about anything, including defining the terms of their existence. I think it was someone on NC that said he thought a “corporation” was resembled a life form in some respects.

  6. John

    What we need here in the euro zone is for each country to go back to their own currency. At least then we will have some breathing room. Nationalism and local politics get in the way of any meaningful fiscal union.

    Hopefully, the French can get populist leaders in place to move away from austerity and onto a progressive agenda. The French are the most robust in going after perceived wrong doing. That may be the trigger we need.

    Then again, the EC leadership are always undermining progress with their expansionist trade policies. Ttrade policies have the effect of lowering salaries and living standards. Belgian construction workers, for example, are in constant competition with lower salary Polish workers. So it is with great surprise the Ukraine elite this past week turned down a trade pact with the euro zone. A rare win for sovereignty.

    1. Maju

      You don’t get out of the euro so easily. It’s a trap like the most addictive drug you can imagine: the withdrawal symptoms would be so brutal that most prefer the known evil to the foreseen withdrawal collapse.

      Also a shared currency is highly convenient for border crossing, be it personal or business. The problem is which kind of currency: goldbacks like the euro are not really useful for macrofinancial management, we can see that clearly, so a more flexible and democratic (!!!) approach is needed. Who elects Draghi? Not us. Who sets the rules of the ECB? Not us. A major problem is lack of democracy in EU, which is a de-facto federal state but a very undemocratic one.

      A quite good (less bad?) solution would be indeed to get rid of Germany and its Northerner clique but again this is not so easy, mostly because Germany won’t leave no matter what but also because it is not clear that the Latin states retain any sort of statemanship among their political figures: Europe is full of petty manager politicians without any sort of effective leadership, much less vision.

      Never mind subtle but highly effective corruption (plus coertion) which effectively gives the power to the big corporations, many of which are not even European.

      It’s the end of Europe as we dreamed it. The only hope is to dream it again in new democratic and socialist colors, a Europe in which the producers (and not some proprietary vampires) control the production for their own goals.

      That will take time and a lot of struggle, if it can happen at all. I do not renounce to dreaming and in a sense I feel that the crisis touching France is the beginning of the solution (in Europe every conflict goes through France, and also every solution).

  7. charles 2

    What is significant in this article is that it is signed by Patrick Artus, who is quite a heavyweight in euro government advisory circles. By no means he is a maverick. He was, and probably still is, a staunch supporter of the euro project.

  8. 12312399

    Germany leaving the Eurozone would only be the first step.

    An even bigger problem is French industry, food processing (anything labor intensive) moving to EU-Eastern Europe due to lower labor/regulatory costs.

  9. TomDority

    “Internal devaluation” has been the hallmark of efforts to get the southern European economies off the ground: slash wages to make production more competitive. Cutting household income was supposed to resolve the crisis. This happened in Spain in a huge way, to the detriment of Spanish workers, and with at best mixed results for the economy. But this cannot happen in France, where the cost of labor, mostly due to taxes on labor, has reached extremes. The people won’t sit still and allow their wages to be slashed, and the government can’t live without the cash flow it siphons off from payrolls. So for France, the only solution forward would be a massive devaluation.”

    The reason slashing wages will not work is that the costs for living and working will remain high (overpriced land that makes rent and buying homes more expensive – debt overhang) So, obviously, favoring rent extractive activities while further limiting the income of labor thru taxes will cause massive human suffering.
    The only thing needing devaluation is the bloated cost of land and the over taxation of wealth producers (wealth requires labor and land in it’s production…period).
    Tax the rent extractive activities back into public use….they sure need it.

    1. Maju

      Actually inflation with, as happened in the past, collective bargain clauses that mostly kept the real salary level, works largely by correcting the price imbalances, such as the heavily overpriced housing costs, which will devaluate quickly even if retaining nominal prices. Same for public debt, whose erosion is in the interest of all except speculators. A problem may be that collective bargaining is being dynamited as we speak (at least in Spain).

      But the greatest benefit is that state expenditure can be extended for much longer (even to absolutely ridiculous levels, as the examples of Serbia and Zimbabwe show), reinjecting much needed capital to the economy independently of the caprices of the so-called “markets” (oligarchic VIP clubs of a few international looters and bloodsuckers). No non-imperial capitalist economy can survive without proper state intervention but for that the state needs to be able to (wisely, I hope) use the money-printing machine.

  10. jfleni

    RE: “Germany should leave the Eurozone”
    Nothing succeeds like success and nothing fails like failure! The Euro is a flop and a disaster! At least some thoughtful French opinion recognizes the truth, and wants to deal with it intelligently. The Germans and their ethnic twins in Austria and Switzerland must be thinking about the problem, but just after an election in Germany, are keeping their own council at present.

    I was hoping that the Irish or Portuguese or Spanish would lead the way, but that apparently will not happen. The Italians have the second-strongest large economy in Europe, and now with their political burlesque show ended, could be the key to a solution.

    Whatever happens, the recognition of the Euro’s failure is the essential first step; Europe will have deal with that starting right now.

    1. TheCatSaid

      “I was hoping that the Irish or Portuguese or Spanish would lead the way”

      Ireland’s joined to the USA / multinationals at the hip and will do as it is told.

      Portugal – not enough strength on its own.

      Maybe Spain or Italy. . .

      It’s more likely that everyone will wring their hands and do nothing till the whole thing collapses. No one wants to take the risk of making the first move.

    2. Maju

      Spain and Italy clearly lack the kind of leadership (statesmanship) needed to do what you hoped for (which I also hoped for at some point). They are semi-colonies, privileged ones but clearly dependent semi-colonies in any case.

      Spain has too many internal weaknesses: more than half of the state (in terms of population) could be detached off easily and that, barring a most unlikely federalist refundation that brings together all the pieces, plays against it being able to do anything independently of the wider Western bloc: the USA, France, Britain, etc. can easily play these conflicts into their favor if they wish to, so the Castilian nationalist leadership shuts up and obeys. For example in the hypothetical case that Spain invaded Gibraltar (what it can do easily), Britain could respond by arming the Basques, for example and maybe declaring a protectorate on Canary Islands. The only way for Spain to remain in existance is to be docile with the Western Bloc, there’s no way around it other than renouncing to Castilian chauvinism, what they won’t.

      Italy is less fragile internally but it seems to have lost the combative revolutionary spirit of the Cold War era altogether. Today it is the former communists, now recycled as “Democratic Party”, who manage the Troika diktats very obediently. The masses may march through Rome and Milan every other day but electorally the real Left has collapsed, so they seem leaderless and goal-less.

      I did have high hopes for this moment of the crisis reaching France because the workers in France can be extremely combative and much better organized than elsewhere, even forcing the unions to support an indefinite general strike (what happened in 2010 with some success). However the French seem to be drifting to the Far Right, and that is totally hopeless, for themselves and for Europe as a whole.

      I’m very pessimistic right now and only the roar of the continuous (but largely unreported) protests that shatter the Union these days (especially in the South, from Bulgaria to Portugal, going through Greece, Italy and Spain) keeps the flame of hope burning in my heart.

  11. Ishmael

    As I have mentioned before my wife is Greek. I spend a lot of time with Europeans. We just had a friend visiting from Normandy for 2 weeks (she votes for Le Pin even though she is Jewish). I just finished working with some Italians and Spaniards. Most are against the present economic situation but when you mention exiting the Euro it is always “Oh, no we can not do that.” The exception is our French visitor. She said the Euro was way over valued. They want their cake and eat it too. They want the benefits associated with being tied to Germany but the out of control government spending and corruption of their own country.

    At some time they need to decide which road they will go. To be German you have to maintain discipline and stay with-in the lines. That is very difficult to do for the Latin countries and the Balkans.

    The thing that gets me is the disenfranchisement of being part of Austrian-Hungarian empire is what generated WW 1 and later WW 2 where hundreds of millions died and now they are practically attempting to put the empire back together under another name. Go figure!

  12. Gerald Muller

    I wish to concentrate this comment on the statement that the FN (Front National) in France should be labelled “far right”. True, it is nationalistic in the extreme and loathes immigration from Africa and Romania. That could be considered far right.
    However, on the economy side (and this blog is about economy), the FN is far left. Its program is all about nationalizations, increase of the minimum wage, the state über alles on all fronts etc. This program could have been written by Melanchon, who is the ultra far left spokesman.
    On the theme of Germany leaving the euro, this has been suggested by Ambrose Evans Pritchard a few years back. Nothing new under the sun.

  13. theyenguy

    Germany will not be leaving the Eurozone, not now, and not ever.

    The position posted in the article is dreaming of the Austrian economics mind, and is a mirage on the authoritarian desert of the real. Jesus Christ, acting in in dispensation, a concept presented by the Apostle Paul in Ephesians 1:10, is tasked by God The Father, to fulfill and perfect every age, bringing it completion much like a ship’s captain completes the manifest before setting sail.

    Liberalism was an age and a paradigm whose objective was to make investors filthy rich via the seigniorage of a banker regime consisting of a speculative leveraged investment community and a US Dollar Hegemonic Empire, through the process of globalism, based upon the sovereignty of democratic nation states, founded upon the most extreme financialization of equity and debt as is possible, as has been foretold in bible prophecy of the Statue of Empires in Daniel 2:25-45. It was God’s desire from eternity past to create two massive legs of iron wealth, these being the British Empire, and the US Dollar Hegemonic Empire, immediately before He brings forth the Two Feet Empire, with its miry mixture of policies of regional economic diktat in the world’s ten regional zones, and totalitarian collectivism in mankind’s seven human institutions.

    God ordained from eternity past that there be adept individuals living in creativity doing great things in Greenwich, CT, Louisville, CO, Lone Tree, CO, San Jose, CA, Palo Alto, CA, or Midland-Odessa, TX, and a whole host of other modern cities. And that there be psychopaths, living in clientelism and dependency on transfer payments, SNAP Food Stamps, Medicaid, and Public Housing in in the Mission District in San Francisco, CA, and in other skid rows, as well as living next door to you!

    Any moralizing by Austrian economists, coming from the reasoning of liberty, or scolding from Socialists, coming from the presentation of egalitarianism, is what the Apostle Paul calls subjective will worship, the worship of one’s own beliefs coming from philosophy or religion, and is a position that is not based upon the objective truth of New Testament Scripture.

    Jesus Christ on November 27, 2013, during the week of Thanksgiving 2013, manifested peak liberalism in the investment marketplace creating peak prosperity, immediately before he pivots the world’s economy from liberalism into authoritarianism.

    Soon, the utter and total death of fiat money will be the cause of worldwide recession, and will be the genesis factor of both a global financial system crash and the rise of trust in regional governance, beginning first in the Eurozone, and that eventually ten kings will come to rule in each of the world’s ten regions, as foretold in Bible prophecy of Revelation 17:12

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