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The debate surrounding the € should not be shelved!

The strong showing of President Macron in the second round of the presidential elections was due, in part, to the disastrous demonstration of incompetence and ignorance by his rival, Marine Le Pen, concerning monetary affairs. During the current parliamentary election campaign, she is desperately attempting to bury the matter by postponing any decision concerning the National Front’s position in relation to the Euro.

It remains, however, of great importance that the French voter be fully informed with regard to policies that affect deeply the country’s “monetary national sovereignty” and the wealth of its population. President Macron has put the further integration of the Eurozone at the very heart of his program. The first Franco-German declarations (Macron/Merkel and Lemaire/ Schaüble) demonstrate the will to act rapidly.

Deepening the Economic and Monetary Union implies, indeed, new transfers of “national sovereignty” towards more “shared sovereignty” between its Members. Such transfers are imperative to the extent that EMU Members share a currency and intend to continue to do so. They must, therefore, provide the means to deepen both their solidarity and co-responsibility.

It follows that it is necessary to prove that the advantages of the single currency outweigh by far the constraints that it imposes. Time has come to make a reasoned and irreversible determination, because one of the main weaknesses of the € is the risk associated with its possible future collapse: this uncertainty perpetuates the fragmentation of the “Single Market” and limits the advantages it is supposed to deliver.

Let us first discard the fallacies disseminated both by Marine Le Pen and Nicolas Dupont Aignan, referring to the period preceding the introduction of the €, during which, according to them, coexisted both “national currencies” and a “common currency (the ECU). The ECU was not a currency: there was no ECU Central Bank, no ECU monetary policy, nor any territory in which the ECU was legal tender. The ECU was an artificial construction representing a basket of currencies, the value of which was fixed daily and mechanically in relation to a third currency (the USD) by adding the counter value – expressed in USD – of the fractions of national currency that made it up.

The proposal to introduce a “common currency” based on the model of the ECU, in parallel to “national currencies” implies necessarily the prior withdrawal from the € by all countries that would choose to participate in such a scheme. Florian Philippot (FN vice President) has understood this basic truth when he admits that he has never believed in the coexistence of two currencies in France and that, additionally, he is not prepared to forgo French monetary sovereignty on the altar of a “federal” Eurozone, making his position in favour of “Frexit” abundantly clear. If, in due course, the FN does not follow Philippot’s line – which has the merit of coherence – the two will inevitably be driven to split up.

Having thus dealt with the imposture of the “common currency”, the basic choices between monetary options remain, though in simplified and more comprehensible terms: on the one hand the dismemberment of the Euro, restoring full monetary sovereignty to each country (Philippot et al.) and, on the other, reinforcing the integration of the Eurozone by implementing the necessary institutional reforms (Macron). Let us examine more closely each of these alternatives.

1. The dismantling of the Euro :
The main problem associated with the dismantling of the single currency is how to manage the transition. It is not, as so often has been suggested, a simple matter of reversing the process that allowed the 11 initial participating countries to convert their currencies into Euros without encountering the slightest disruption. Indeed the basic principle of the “continuity of contracts” that presided over the transition towards the € implies that, when leaving, the same principle will be applied; this means that executing contracts denominated in € will, after its disappearance, have to be honored in its counter value expressed in a third currency (most probably the USD). Thus, for example, assuming that the €/$ parity is 1 on the date of withdrawal, it would be necessary, in order to discharge correctly existing contractual obligations, to pay in the new national currencies an amount equivalent to the dollar amount of each contract on the day of settlement. If the new currency had “devalued” relative to the USD since the withdrawal date, the cost of settling would be higher expressed in new “local currencies” (for instance new French francs), the reverse being true in case of revaluation (for instance new DM).

Of course, it would be possible for a “sovereign” State to legislate the compulsory conversion of € denominated contracts into the new national currency. Insofar as such a measure would be unilateral, it would entail creating a disequilibrium between creditors and debtors parties to a contract; in turn, this could lead to the bankruptcy of either one or even both, if creditors would not be paid because of the default of the debtors. The likely domino effect would be catastrophic.

Such considerations do not apply only to the service of a country’s sovereign debt but would upset even more the settlement of all transnational contracts (export/import) giving rise to endless litigation. A State that would take such unilateral measures towards its creditors (investors in its national debt) would immediately be considered to be in default and would lose any access to international financial markets. It would, however, (as opposed to the private sector) have access to the printing press of its captive Central Bank, but such recourse would only weaken its currency further and lead rapidly to uncontrollable inflation.

As soon as the possibility of dismembering the € would become a credible scenario, the imposition of exchange controls, the limitation of bank withdrawals (to avoid capital flight) and the paralysis of broad sections of the European economy would become unavoidable. The interdependence of Member States having significantly increased as a result of the existence of the EU and its Single Market, the ensuing chaos would be beyond the imagination; it would be a far worse situation than prevailed after WWII (minus the destructions), a period during which limitations to freedoms were more readily acceptable because they were considered as an improvement compared with a state of war or occupation.

As is nearly always the case in such circumstances, the main victims will be the most vulnerable members of society. The climate will then become ripe for the emergence of totalitarian regimes and the fulfilment of President Mitterrand’s prediction “Nationalism means war”!

Let us, however, accept that having deliberately decided to assume the consequences of dismantling the €, Member States would re-appropriate their full “national sovereignty”. Remains to be seen whether its exercise would be effective or whether it would not lead most of them to become subordinated to other world powers. Thus they would have unwittingly bartered a share in pooled sovereignty capable of protecting the interests of Europeans on the world stage, against an illusory national sovereignty, empty of any real content. It is precisely the fear of enduring such consequences that is taking hold presently of the British who voted for Brexit, even if their non-participation in EMU will limit its effects to some extent.

2. The integration of the Eurozone.
The dead-end in which the Eurozone finds itself 18 years into its existence, demonstrates the need for an in depth reform of its governance. The status quo is not a viable option because it can only lead, in due course, to the implosion of the single currency with its dire consequences outlined here above. President Macron seems to have perfectly integrated the high stakes involved by deciding to conduct his campaign on a resolutely pro-European platform.

By suggesting to Chancellor Merkel that France is prepared to make (at last) the necessary structural reforms that can restore its credibility as a trustworthy partner, and to make such changes a necessary condition for deeper Eurozone integration, the French President shows that he fully understands that the responsibility and discipline of EMU Members are indissociably linked to the spirit of solidarity that binds them together. That is why there is hope that decisive progress can be made which should allow substituting the current obligations of submitting to rigid rules embedded in the treaties with a regime of more flexible joint decisions taken in light of evolving circumstances.

Thus, the possibility of implementing a truly political management of the Eurozone is emerging. Its executive arm, composed of the European Commissioners representing the EMU Member States and controlled by a Eurozone Parliament, would implement an economic strategy in close cooperation with the monetary policies of the ECB. The latter would have at long last a worthy interlocutor, acting also as a counterweight which would contribute to reinforce its own democratic legitimacy which is all too often contested. Endowed with a budget financed by own resources and with an autonomous borrowing capacity, the Eurozone would be far better equipped to deal with constantly changing economic developments; it could respond in a more focused way to the individual situations of its Members who, in turn, would agree to abide a by common discipline regulating their own budgets and levels of indebtedness. The new indebtedness incurred by the Eurozone would be joint and several obligations (Eurobonds) of its Members who would, nevertheless, remain individually solely responsible for debt incurred by them directly.

Implementing such a governance implies further transfers of “national sovereignty” towards more “pooled sovereignty”; this unavoidable requirement is necessary to ensure the long term future of the Euro and provide it with the management tools compatible with a fully-fledged currency, enhancing thereby its status as the second world reserve asset. This positioning should allow the € to compete at arm’s length with the dollar and bring to an end its exorbitant privileges (the dollar is our currency and your problem used to boast Treasury Secretary J. Connolly). It is easy to understand that if the Eurozone proves incapable of meeting this challenge adequately, none of its Members could pretend to do so individually; they will remain subject to the whims of American policy (and in due course of China’s) destroying once and for all their utopian dreams of restored national sovereignty!

Achieving an agreement among the 19 Members of the Eurozone will be no mean feat; it require that each show themselves capable of making the necessary concessions in their own interests, because failure would spell disaster for all. On that point, I shall make two final remarks which, I am quite certain, will raise significant objections:

First, concerning Brexit: the interests of the Union must take precedence so that, in the negotiations that are about to start, no compromises are struck that would endanger the plans for EMU reform and integration. At all times this objective must be the absolute priority, however strong may be the pressure and desire to reach a constructive deal with the British.

The second point concerns the perception of Germany and its central role in successfully reforming EMU. I believe that the overtures made by the German authorities, which appear prepared to consider Treaty reforms, constitute favorable omens. The federalization of the Eurozone, sketched here above, should considerably reign in the dominance exercised by Germany as has previously been observed relative to its influence over the ECB’s monetary policy. Just as, at the time of the introduction of the €, the country transferred to its partners a share of its monetary sovereignty that it had previously conducted alone over the “DM zone”, the establishment of a “government” of the Eurozone should similarly attenuate Germany’s dominance in favor of a more evenly spread power of influence in which the general interest will tend to trump purely national agendas.

In reality, if the reform is successful, it will be once again Germany that will be required to make the biggest sacrifices in terms of sovereignty, which is hardly surprising since it is the wealthiest State and therefor has the most to lose in case of failure. That is why the recently expressed desire by the Chancellor and her Minister of Finance to see a German assume the presidency of the ECB does not shock me in the slightest within the context of the EMU’s deep reforms. Indeed, the current agreement that provides that, with its headquarters in Frankfurt, Germany cannot seek the institution’s leadership, would become pointless within a Federal Eurozone in which a completely new institutional equilibrium would prevail. The demands on the Germans to show a greater degree of solidarity (mainly financial) could be reciprocated by a symbolic gesture of goodwill on behalf of its partners.
Mrs. Merkel has already unquestionably proved her capacities as a formidable European Statesmen contributing significantly to the defense of the Union’s values which are under attack from numerous nationalist and xenophobic parties. The first steps taken by President Macron raise the hope that, together, they will be able to rekindle the aspirations for a more integrated Europe which is the key to the freedom and prosperity of its citizens.

On the eve of the first round of legislative elections in France, we hope that the elector will realize the vital importance of the stakes in play and, brushing aside the voices of so called false “patriots”, give President Macron a clear mandate to implement his ambitious program.

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