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The French Don't Get It
CAMBRIDGE "“ The French government just doesn't seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.
French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, "You'd rather be French than British in economic terms." And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.
French officials apparently don't recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.
If investors are unwilling to finance the French budget deficit "“ that is, if France cannot borrow to finance that deficit "“ France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France's budget deficit is 5.8% of its GDP, whereas Britain's budget deficit is 8.8% of GDP.
There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.
The eurozone fiscal deficits and current-account deficits are now the most obvious symptoms of the euro's failure. But the credit crisis in Europe, and the weakness of eurozone banks, may be even more important. The persistent unemployment differentials within the eurozone are yet another reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.
President Nicolas Sarkozy and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration. It was French officials Jean Monnet and Robert Schuman who launched the initiative for European political union just after World War II with the call for a United States of Europe. The French regarded the creation of the euro as an important symbol of progress toward that goal. In the 1960's, Jacques Delors, then the French finance minister, pressed for a single currency with a report, "One Market, One Money," which implied that the European free-trade agreement would work only if its members used a single currency.
For the French, achieving a European political union is a way to increase Europe's role in the world and France's role within Europe. But that goal looks harder to reach now than it did before the beginning of the European crisis. By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.
Looking ahead, stopping the eurozone financial crisis does not require political union or a commitment of German financial support. It depends on individual eurozone countries "“ especially Italy, Spain, and France "“ making the changes in their domestic spending and taxation that will convince global financial investors that they are moving toward budget surpluses and putting their debt-to-GDP ratios on a downward path.
France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.
Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2011. www.project-syndicate.org
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Username Password New registration Forgotten password AGK 12:18 28 Dec 11http://www.nakedcapitalism.com/2011/12/public-money-for-public-purpose-toward-the-end-of-plutocracy-and-the-triumph-of-democracy-part-iv.html
OldGuy 09:59 28 Dec 11Let's see... You can buy British bonds which are safer because you get your haircut one day at a time via inflation, rather than "risky" French bonds which give you a haircut or not, depending on whether the economy survives Italian and other indiscreet government acts.
As a mathematician & economist writing to an economist, let me assure Dr. Feldstein that 2+2 = 4 with the same certainty that 3+1 = 4 or, in the case of the French, perhaps 4+0 = 4. Blarney about inflation not being a haircut is blarney at best.
Anticonformist 11:11 28 Dec 11"...Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt."
If so, any country that has its own currency has no risk of default, thus should be rated a triple-A... How is it possible for a Harvard professor to make such a shallow post?
rebentisch 01:30 29 Dec 11"French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt." -- Feldstein's argument is plain stupid.
jacob92250 01:55 29 Dec 11
While I'm reading your article, I'm smiling at the French government role play. In fact this government truly did get it. Actually, From one side, according to the French newspapers Mister Sarkozy was close to consider a downgrade. From the other one, Mister Baroin and Fillon are like Sancho Panza while being aware of what you exposed. But their posture is for us, the french citizens (I'm included in the pack)...Get ready my fellow citizens to be slashed, the wicked credit rating agencies are responsible of our misfortune. We did all of our efforts but Alas, Alas Alas....
AUTHOR INFO Martin Feldstein Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research. MOST READ MOST RECOMMENDED MOST COMMENTED Is Modern Capitalism Sustainable? Kenneth Rogoff What Can Save the Euro? Joseph E. Stiglitz A Summit to the Death Kevin O'Rourke Fragile and Unbalanced in 2012 Nouriel Roubini Occupy the Classroom? Dani Rodrik A New World Architecture George Soros Did the Poor Cause the Crisis? Simon Johnson America's Political Class Struggle Jeffrey D. Sachs To Cure the Economy Joseph E. Stiglitz No Time for a Trade War Joseph E. Stiglitz Occupy the Classroom? Dani Rodrik The Exchange-Rate Delusion Michael Spence Who Will Fix the US Economy? Henry Mintzberg A Summit to the Death Kevin O'Rourke The Worst and the Best of Austerity Jean Pisani-Ferry ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 54 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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http://www.nakedcapitalism.com/2011/12/public-money-for-public-purpose-toward-the-end-of-plutocracy-and-the-triumph-of-democracy-part-iv.html
Let's see... You can buy British bonds which are safer because you get your haircut one day at a time via inflation, rather than "risky" French bonds which give you a haircut or not, depending on whether the economy survives Italian and other indiscreet government acts.
As a mathematician & economist writing to an economist, let me assure Dr. Feldstein that 2+2 = 4 with the same certainty that 3+1 = 4 or, in the case of the French, perhaps 4+0 = 4. Blarney about inflation not being a haircut is blarney at best.
"...Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt."
If so, any country that has its own currency has no risk of default, thus should be rated a triple-A... How is it possible for a Harvard professor to make such a shallow post?
"French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt." -- Feldstein's argument is plain stupid.
While I'm reading your article, I'm smiling at the French government role play. In fact this government truly did get it. Actually, From one side, according to the French newspapers Mister Sarkozy was close to consider a downgrade. From the other one, Mister Baroin and Fillon are like Sancho Panza while being aware of what you exposed. But their posture is for us, the french citizens (I'm included in the pack)...Get ready my fellow citizens to be slashed, the wicked credit rating agencies are responsible of our misfortune. We did all of our efforts but Alas, Alas Alas....
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 54 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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