Currency wars, the Euro and Frexit

News that the G20 will ‘avoid a currency war’ is supposed to be a piece of good news.

But for millions of ordinary people in France and the weaker, Mediterranean Eurozone states who are really struggling economically there’s no relief in site from the rising exchange rate of the Euro against its major trading partners, notably the Yen (up 11.3% ) and the Dollar (9% since July 2012). For it is they, not their ruling classes, nor workers in the northern members of the 17-nation Eurozone, who have most to lose.

Unsurprisingly, French ministers are sounding increasingly nervous about the impact of a strong Euro. But Germany is vehemently opposed to any action to reverse this. Germany, apparently worried that a weaker Euro may stoke inflation (a historical bug bear, but this fear is misplaced), just repeats its demand that the response by Europe must be to boost ‘competitiveness’.

Of course currency is a tool in boosting competitiveness. But that has been ruled out by Germany, with respect to the rest of the world, and by virtue of the Euro’s design, within the Eurozone.

For workers in France and the south, this demand by the Eurozone’s largest member means that once again they will be paying for higher export prices caused by a strong currency with wage cuts and the loss of other benefits and rights that constitute costs for business.

Here’s French economist Jacques Sapir on the impact of the rising Euro and the real choices facing France

France is one of the least integrated in the euro area, where it only carries out 50% of its international trade. In other words, the rest of the international trade is based on the dollar, pound, yen or even other currencies. This is why a revaluation of the euro has disastrous consequences for the French economy. In 2008, growth would fall 1% for each 10% the euro appreciated. Now that the euro zone is in recession, the potential for export-led growth is largely outside the Single Currency area. Everything suggests that the potential impact of the increase of the euro against other currencies will have far more serious consequences: it is a contraction of 1.2% that we would face in the event of an appreciation of 10% of the euro.

Assuming – and this is a very optimistic assumption – that the revaluation of the Euro lasts only through the first half of 2013, that’s a further contraction of 0.6% growth that France would face at the end of the year. Elsewhere we have already explained why the government growth forecast of 0.8% has no chance of materializing. An optimistic forecast is zero growth (0.0%) and the pessimistic forecast is -0.5%. To these figures should therefore be factored in, if the appreciation lasts only half a year, the additional effect of -0.6% mentioned above, which would, according to the assumptions, mean a change in the gross domestic product (GDP) of France in 2013 of between -0.6% and -1.1%. The gap with the assumptions on which the budget was planned for 2013 will range between 1.4% and then 1.9%. This means a production loss of 28 to 38 billion euros and a loss of tax revenue of between 12.6 to 17.1 billion euros.

To these figures must be added the additional unemployment caused by the further decrease of the activity. One can estimate between 120 000 and 180 000 new job losses, adding to the already expected increase for 2013. Such an increase will result in additional unemployment expenses [for the government]. The induced deficit will be the sum of the revenue shortfall and these additional costs, of between 15 and 19.6 billion, or 0.75% to 1% of GDP. The European Commission will probably have no choice but to let it go. But it is clear that the target of a 3% public deficit will not be reached in 2013 or in 2014. It will, at best, not be until 2020, under these conditions and with this policy, that France achieves a balanced budget.

 …the rising euro…will also exacerbate the loss of competitiveness of French companies, causing a further decline in investment and additional plant closures. We know that the chances of economic recovery are particularly susceptible to falling investment. Even in the unlikely event of a recovery in global economic activity in 2014, France would not be able to enjoy it.

In fact, the rise of the euro will completely reverse the effects of the measures taken by the government, and in particular the [increased labour market flexibility and cuts to business costs] brought about under the recent pact for competitiveness and employment “competitiveness-employment” pact It will push French companies under water.

So what is to be done?

Sapir continues:

The government will be faced with a choice: either seek to further compress wages and, consequently, household demand, with implications that can be guessed for unemployment; or exit this destructive policy framework by leaving the euro and substantially devaluing the franc.

French leaders and probably the Italians also affected by the rise of the euro, will try to get the ECB to put an end to this rise, but the ECB’s room for manoeuvre is particularly constrained.

The ECB could buy U.S. and Japanese debt (private or public) to back the dollar and the yen against the euro. This has always been rejected on the largely fallacious pretext that this would undermine the role of the euro as a reserve currency. Another, more acceptable argument is that some of the Us/Japanese debts are not good quality. But it must be said that the ECB accepted from banks debt that was of doubtful quality…. 

The ECB may also engage in substantial debt monetization in Europe, on the model of so-called quantitative easing inaugurated by the Fed since 2009. It is stuck on this point by the veto of Germany, terrified (to what it claims …) by the risk of inflation. But the euro area suffers from a combination of inflation at 2%, historically high unemployment and general recession … Proof, if any were needed, that inflation is not due to excess demand and currency…

In short, everyone knows that Germany has been manoeuvring these past months to regain full control of the ECB. If it does, it is to ensure that the central bank in Frankfurt leads a monetary policy that suits Germany – the defence of the traditional value of the euro – but contrary to the interests of the countries most affected by the recession.

Thus the statements of French ministers will have no effect, because they are not supported by credible threats vis-à-vis the ECB and Germany.  France will sink ever deeper into recession and this means a diet of misery and unemployment for a growing proportion of the population.

Memoire des Luttes

Jacques Sapir’s comments were translated by Revolting Europe

More from Jacques Sapir at russeurope