Montebourg, the Euro and the Taliban in Brussels

As France passes a new law governing the closure of profitable plants – deemed too dirigiste by employers and too laissez faire by unions – economist Jacques Sapir gives his assessment on the best way to save French industry 

The French National Assembly has adopted the so-called “Florange law’ , which seeks to avoid a repeat of the crisis provoked by the closure of the historic steelworks at the end of 2012. At the same time, the Minister of Industrial Renewal Arnaud Montebourg, who was strongly committed to an industrial solution for the crisis Florange, but who had been disowned by the Prime Minister, Jean- Marc Ayrault, made number of statement, on the need to ” drop the euro” and the “Legal? Taliban in Brussels” (he was referring to the competition directorate of the European Union). The coincidence of these facts invites reflection on both the attitude of Arnaud Montebourg and on the deeper meaning of his action.

An emasculated law

The Florange law applies to profitable plants owners wants to close. It must be stressed here that the text leaves some flexibility to industry in submitting its accounting of the profits of the affected plants. And its a fair bet there will be few cases where firms will declare factories as in the black.

Basically, the text that was passed in order to remove the possibility of nationalisation and aims to “depoliticize” the entire process. So it is left to a commercial judge and an adversarial process where each party submits its arguments on the issue of finding a buyer. It facilitates the hunt for a buyer and provides more information to the employee, but only in appearance. This falls considerably short of the initial idea. That would have seen a procedure for temporary nationalisation, the equivalent of a receivership, to allow time to find a buyer. The new law has very little to do with the original proposals.

The new law will in fact have little impact on situations like Florange. In a little noticed change, a judge has now become the main contact of employees and the company (or the shareholders). This is an important and fundamental break with the tradition of France, as with elsewhere in continental Europe, where it is political power, with the legitimacy conferred on it by elections and its role in representing the nation in social conflicts, that intervenes.

Because it is important to be clear here who has the authority, and therefore the legitimacy to decide. This bill replaces political legitimacy with a judge. It “Americanizes” our labour law and our practice in this area. This will create problems that will become increasingly important. This institutional innovation goes against the French tradition. It cannot fail to cause scandals in the future and will be challenged…

It should be remembered that this law was one of François Holland’s “presidential promises” when he was on the campaign trail. We know that “promises only bind those who listen” in France where politics has in recent years deeply corrupted debate. François Hollande has buried his “promise” and he has capitulated to the bosses. However, he’s not just guilty of this. He could have said, and it would have been more honest, that this “promise” was inappropriate or unwelcome, and it could no longer be kept.

But by replacing a power of the state, even if a weak one, into a judicial mechanism he has overturned our law and customs. If we then consider this against a backdrop where threats loom over the Labour Inspectorate and industrial tribunals, we have to conclude that this government, masked as progressive, is in fact one of the most reactionary in recent years. In seeking to take out ‘politics’ from the social game, Francois Hollande is embracing the British conception of the European Union. We can;t be sure that he is aware of it, but he is unravelling yet more of a now ragged “social Europe”. He could, and the Socialist Party with him, pay a high price in the European elections. It would only be fair.

As for his minister Arnaud Montebourg, he is now very unhappy. And it’s not just him. But we must question his political position.

 The question of the “strong euro”

Arnaud Monterbourg recently made an important statement during an interview with the business newspaper Les Echos. He stated:

“As Minister of Industry, I believe that the euro has become problematic in the eyes of all our businesses. Between 2012 and 2013, it has appreciated over 10% against the dollar and more than 40 % against the yen.” These remarks were entirely justified. This has been emphasised by many economists for many years*. It is certainly regrettable that it took all this time (six years) for France to see this, but give credit when it is due. However, the revaluation of the Euro is understandable when looking at the overall trade surplus of the euro area, a surplus resulting from trade surpluses of Germany and other countries. He then adds :

“The euro penalises industry instead of supporting it amid the grave crisis of competitiveness we are experiencing. All major European manufacturers in aerospace, in food , transportation, the OECD, the IMF and even the Prime Minister’s own Conseil d’analyse économique defend “unconventional” new policies to bring down the level of the euro. Why should we continue to put our heads in the sand? ” Here again, we can only share this observation. Today, the exchange rate of the Euro penalises all French industry (and Italy and others in the Eurozone). This exchange rate accelerates the current process of de-industrialisation.

But as a solution the so-called “depreciation” of the Euro runs several obstacles. On the one hand, one cannot depreciate if  the currency corresponds to an economic zone in trade surplus. One solution may be to lower interest rates. But they are already very low, and the gain, compared to American or Japanese rates, would be too low to achieve the desired result. One can also imagine doing a European equivalent of “quantitative easing” . This would force the European Central Bank to buy large amounts of government debt. This would lead to the creation of money, and, via a market process, as there would be a greater supply for euros than demand for the Dollar or Yen, this would cause a decline in price against the dollar and the yen. But such a programme would encounter the absolute and implacable opposition of Germany.

Indeed, Article 88 of the German Basic Law prohibits the Central Bank to lend to government. Indeed, the Constitutional Court in Karlsruhe has ruled that the practices of the ECB must not violate the German constitution. Moreover, the problem today is about ECB president Mario Draghi’s Outright Monetary Transactions, the legality of which with respect to German law and the status of the ECB, is challenged by 6 of 8 judges  We can deplore it, but we must accept that there is no majority that allows to change policy the ECB. Unless Germany is expelled from the Eurozone, this would be impossible in the Eurozone.

Moreover, even if by some miracle we managed to depreciate the Euro, it would not solve the entire problem. Indeed, if France sells about 50 % of its exports outside of the Eurozone, that leave 50% sold inside. For some countries, such as Italy and Spain, the Eurozone amounts to 65% to 75 % of exports. Depreciating the Euro does not solve the issue of implied overvaluation of currencies of southern Europe vis-à-vis Germany. This overestimation is partly due to the Harz- IV reforms [which slashed the cost of labour], but also – and perhaps especially – the existence of very divergent inflation rates between these countries and Germany.**

Thus, the madness in wanting profoundly different countries to co-exist in the same currency and with the same exchange rate becomes clear. Not so, some argue, that is, if massive transfers of budgetary resources from the countries of Northern Europe to the countries of the South are organised. But these transfers imply that Germany contributes to the tune of 8% to 12 % of its annual GDP, and for at least 10 years. Quite clearly, Germany can’t do that even if it wanted to. And Arnaud Montebourg is well aware of this and that’s why he doesn’t address this issue.

The idea of ​​a depreciation of the euro against other currencies therefore can only have two meanings. Either it is a smokescreen to hide the fact that in practice nothing is to be done. Or it is a way of preparing people for the idea that the Eurozone will dissolve and we will return to the Franc and Europe’s other national currencies and devalue sharply. It should be hoped that this is the meaning that this is what Arnaud Montebourg means, because it is the only one which is consistent with his fight for [for French industry] for close to 15 months.

Leave the Euro and change the EU

This leaves the dissolution of the Eurozone as the only viable and reasonable path, whether consensual, or as a result of the decision of one country (France or Italy) to leave the Eurozone, which would lead to the collapse of the currency. A 10% fall in the Euro against the Dollar would lead to a growth rate of 1.2 % in the event of impairment 10 % according to calculations by France’s Directorate General of the Treasury and Forecasting quoted by Arnaud Montebourg in an interview in Les Echos. We estimate that a 20% depreciation of the French currency (not just the Euro) would lead to a direct gain of 2.5 % to 2.8% growth, and total indirect gain of 4.5 % to 6 %, annually for the first 3 years.

Arnaud Montebourg will have to choose his political position. He can either be an instrument of Government disinformation or assume an alternative position, risking a break with the Socialist Party. He was a lawyer. He knows that we cannot serve two masters at once. In fact, the ” Taliban” of European law and competition, the famous ” free and undistorted” competition, are not in Brussels, or not only. They are in France, and in the government. Arnaud Montebourg will have to submit to them, and turn his back on on his past struggles for French industry, or go into battle and cause a salutary crisis.

RussEurope blog

Translation by Revolting Europe

* Bibow J. et A. Terzi, edits. Euroland and the World Economy, Palgrave MacMillan, New York, 2007.

** It is worth mentioning here that the rate of structural inflation defines the rate of inflation necessary for full employment