by Carrie
Thu Dec 21st, 2006 at 07:17:34 AM EST
From the diaries. -- Jérôme. Originally posted at Eurozone Watch by Daniela Schwarzer.
Daniela is one of the leaders of Newropeans, and I had a chance to meet her at an informal event in London earlier this month. She maintains a blog together with a colleague and she has agreed for me to cross-post her latest entry here. I expect her to take part in any discussion in the comments and hope she will cross-post more in the future without my intervention.
The full text of her blog entry is below the fold, but here's the first paragraph by way of introduction:
Eurozone Watch Blog: French candidates go wild on wrong problem (by Daniela Schwarzer on December 19, 2006)
ECB-President Jean-Claude Trichet has clearly gone into the offensive. In an interview published in three European daily newspapers in parallel on Monday, he justifies the ECB's recent rise of the interest rate ("We are not hampering growth!") and underlines the persisting risks of inflation the ECB sees. He did not speak to the French press (but to the German daily Der Tagesspiegel, the Luxemburger Wort and the Greek Ta Nea) - but most of the answers he gives can be read as a reply to the recent critique that has emerged from France.
ECB-President Jean-Claude Trichet has clearly gone into the offensive. In an interview published in three European daily newspapers in parallel on Monday, he justifies the ECB's recent rise of the interest rate ("We are not hampering growth!") and underlines the persisting risks of inflation the ECB sees. He did not speak to the French press (but to the German daily Der Tagesspiegel, the Luxemburger Wort and the Greek Ta Nea) - but most of the answers he gives can be read as a reply to the recent critique that has emerged from France.
Leading politicians (among them the two most likely opponents for the French Presidency, Ségolène Royale and Nicolas Sarkozy), have engaged in a polemic around its recent decision to raise the interest rate by 0.25 percentage points. But that is not where they stop. Since November, an intense debate questioning the ECB's policy, its instruments and its status has evolved. Top politicians (including Prime Minister de Villepin) have called into question the ECB's role, suggesting that governments should have a say in the bank's decisions, especially as the euro rises against the dollar.
Most of the current French polemic can be assigned to the upcoming election battle, which will gain pace in January when the neo-Gaullist UMP nominates its candidate (most likely Sarkozy) for the April/May 2007 Presidential elections. Unemployment, especially among the youth, is a persistent issue in the domestic debate to which all candidates will have to present a convincing answer. As the scope for action in the public sector (job creation programmes etc.) is small due to tight public finances, while programmes to enhance employment in the private sector have not brought the intended results in recent years, the candidates are probably glad to have found a scapegoat - the ECB.
As such, it is a good sign that the debate on economic governance in the Eurozone reaches the top political level in the second largest member state of the currency union. The direction the debate takes however is deplorable for two reasons.
First, the positions put forward start out from a purely national logic, completely ignoring that fact that it is in a European dimension that monetary (and most of economic) policy should be discussed once there is one single currency. The French populism comes at a cheap price under the conditions of EMU: If the same polemic had developed around the Banque de France back in the 1980s/1990s involving Presidential candidates and the Prime Minister, the result would very likely have been a depreciation of the French Franc resulting from a loss of trust among market participants. Now, market participants know that the ideas currently put forward in France will not lead the ECB to loosening its monetary policy. So the French critics are free-riding on the fact that the euro is there - and share the potential costs of their irresponsible behaviour with their Eurozone partners (see below).
Second, directly confronting the ECB will not bring the EMU's economic governance forward. It is totally unrealistic to assume that there is scope today for a reform of its statutes (which requires unanimity of the member governments) or that there are efficient means to influence its decisions politically. By taking up positions of the pre-Maastricht era (in other words: the 80s of the last millennium) as aggressively as has be done in recent days and weeks, dialogue on more realistic reforms with those governments which stick to the fundamental design of EMU (such as central bank independence), becomes ever more difficult. Other member governments have already reacted with hostility to this debate, which will make constructive dialogue more difficult. For instance in Germany, where in recent years some openness to discuss economic governance in the EMU developed, the debate in France re-awakes fears that EMU cannot be maintained as the stability union it was designed for - and diminishes the readiness to engage in a pragmatic debate on future reforms of the EMU.
Regarding the ECB, if any, the direct confrontation is likely to have the oppposite effects of what French politicians call for. If the bank gets the feeling that the polemics against it gain so much influence that market participants revise their inflation expectations to a higher level, it will get ever more insistent on price stability and more restrictive in its monetary policy to avoid secondary effects through wage increases based on higher inflation expectations.
This is why other EMU-member governments should pay attention to the effects of the economic populism of both Ségo and Sarko. All members of the currency union have to bear the costs, if ever the ECB reacts by raising the interest rates more quickly than it would otherwise have done.
French politicians should rather use the political and economic weight of their country to speak to the other member governments in order to get a joint assessment of the situation. Other member states meanwhile should be very clear what kind of debate they want to have on the future of the EMU. As the German EU-Presidency starting on 1 January 2007 does not want to have this issue on its Agenda, the best first adressee is the Eurogroup's President Jean-Claude Juncker.
For a change, France should test a strategy where it considers the ECB's monetary policy - like it or not - as a variable in the game which it will not be able to influence to the better (meaning lower interest rates from the French point of view), but could rather push it to the worse. Instead, it should take into consideration which other means are there to improve growth and sustainable public finances the Eurozone.
At least four issues should be considered: fiscal policies and the macro-economic policy mix in the EMU, the need to moderate unit labour costs developments in some countries (through an increased dialogue with the social partners) in order to giver lesser reasons to the ECB to take a rigid stance, the need to improve the functioning of capital, labour and goods/services markets in the EMU and finally the question, how in a mid-term perspective the EMU could be given a democratically legitimate fiscal regime including mechanism to ensure cyclical stabilisation across national and regional borders which could make the real interest rate problem less salient. Tackling these issues makes more sense than bashing the ECB - if the objective really is to give EMU an economic government, which Sarkozy again claimed yesterday.