Today’s downgrade of France’s AAA credit rating was well-trailed, so they’ve had plenty of time to work out their rebuttal in advance. And they’ve come up with a couple of glib but specious responses: comparison with the US dollar, and the Pound Sterling.
Excuse #1: “So what?”, say the French insouciantly. “We’ve been downgraded. The USA was downgraded last year. Didn’t affect them. Won’t affect us”. The implication is that France is just like the US, that the French currency is much like the American currency, and that there’s a direct read-across from one to the other. Put like that, the error is glaring.
The USA is a sovereign nation with its own currency and its own central bank, the Federal Reserve. The dollar is the world’s reserve currency. Other nations around the world are sitting on mountains of American T-Bills. In a very real sense, these investors have nowhere else to go. I don’t see them rushing to invest in the €uro as an alternative. And if China (say) decided to dump the dollar, it would immediately drop in value and take China’s foreign exchange reserves with it. Of course investors are looking elsewhere as far as they can — that’s why the Swiss Franc is over-valued, and why the UK (remarkably) is being seen as a safe haven.
But in the end there’s no substitute for the greenback. That’s why the USA can live with the downgrade. France will find it less easy (although it may well be that because the downgrade was widely anticipated, it is largely priced-in).
Excuse #2: “France’s debt position is very similar to the UK’s debt position. So if S&P want to down-grade France, they should logically down-grade the UK as well”. This started out with French Finance Minister François Baroin, and has since been repeated by a number of his colleagues. Today, a prominent German politician, Michael Fuchs, a Christian Democrat, made the same point. (Isn’t European solidarity wonderful, by the way? It seems to be a game of beggar-my-neighbour).
This point deserves our attention, because it shows either that European leaders simply fail to understand the problem with the €uro, or more likely, that they understand it, but are unable to face up to it. They still pretend that the problem is down to bankers’ irresponsibility, or to the failure of member states to keep to the rules. They pretend that the €uro can be saved by fiscal integration, or debt mutualisation, or austerity, or by tougher implementation of the rules, backed by statutory penalties. They refuse to recognise that this is not a problem of implementation, but a fundamental problem with the original architecture of the single currency. Economic divergence (most conspicuously between Germany and Greece) has created unsustainable problems of competitiveness that can never be solved within the €uro. Only massive and permanent fiscal transfers between north and south could sustain the currency union — and that would be politically unacceptable.
The difference between the UK and France is simply that we have a currency and a central bank, and they don’t. So in extremis, the Bank of England can create new money to repay our debts. We all know the inflationary consequences, but printing money may be preferable to default and insolvency. France, on the other hand, has only a part share in someone else’s currency, and a European Central Bank where it has no control, and (as long as Angel Merkel is in place, with her Germanic monetary rigour) precious little influence. France is therefore much more likely to default — and hence the downgrade.
It’s important to understand why France’s lines of rebuttal are misplaced, but perhaps more important to recognise the abject failure of EU leaders to understand the problem. And until they understand it, there is no solution. When they do, the answer is to dismantle this disastrous and damaging monetary experiment.