Talk at the EReNSEP conference "France and Europe after Brexit".
This talk tries to give answers to two important questions in the current context: to what extent is the euro an economic and political cost for France? And is an exit or dismantling of the euro possible, or would it rather be a catastrophe?
Let’s start with the first question. For France, the identifiable costs of belonging to the euro area are essentially three: two of an economic nature–price competitiveness and budgetary austerity–and then a 3rd of a more political nature–which resembles a “monetary veto”.
The weight of the divergence between France and Germany
The first of these costs therefore goes through the famous “price competitiveness” channel. Of course, on the Left, we do not like this word of competitiveness, which refers to the rules of capital and its logic of competition. But it is a fact that within a single market, the one that manages to produce cheaper ends up eliminating its competitors.
Indeed, in the euro area, since the mid-1990s, German employers have been able to achieve a strong compression of wages relatively to productivity gains–the Hartz reforms of the Schröder years being the symbol of that development (but not its only cause). Conversely, during the same period, French wages have evolved in a manner consistent with productivity–which is certainly not sufficient to recover the ground gained by capital during the 1980s, but which at least corresponds to a more cooperative behavior in a monetary union.
This wage divergence has given German companies a considerable advantage, which has allowed them to compete effectively with foreign firms. Germany has produced a huge trade surplus, much to the detriment of its European partners, France in particular.
It is important to understand that the euro plays a role there: without the single currency, the Deutschemark would have appreciated, cancelling German competitiveness gains, and restoring some balance.
It is also in the name of competitiveness that in France we have been imposed the CICE and the “Pacte de Responsabilité” (reforms mainly consistintg in cuts in social contributions for employers): lowering the social contributions is supposed to restore the competitiveness of French companies vis-a-vis German ones. We know that the CICE created virtually no job, because the VAT increase and the expenditure cuts that finance it have had a recessive impact. But the essential is not there for our leaders: in practice, the euro provides them with a convenient pretext to break our social protection, that is to say to lower the socialized wage.
There is, however, one element of truth in the arguments justifying the CICE: the wage divergence between France and Germany has a very concrete impact in terms of unemployment. It led, through the German trade surplus, to the destruction of jobs in France.
Is it possible to quantify this impact? My colleagues Xavier Ragot and Mathilde Le Moigne tried it . They came to the conclusion that if German wages had evolved like French wages, the unemployment rate in France would be 1.2 to 3.3 points below what it is today. And even if my colleagues do not present it this way, this can be considered as a cost of the euro because, without the single currency, the Franc / Deutschemark parity could have adjusted and neutralized the divergence.
I do not forget that in this rebalancing scenario, many jobs would be destroyed in Germany in the export sector. But a fiscal stimulus and a general increase in wages would increase German domestic demand, creating new jobs, so that such a scenario could be envisaged without increasing unemployment among our German friends.
Austerity as the founding contract of the euro
The second cost of the euro for France is evidenced by the budgetary austerity that was implemented in order to comply with the Stability and Growth Pact.
Concretely, the procedures for monitoring national budgets systematically lead to further cuts in expenditure–especially public investment–when it is not a matter of raising taxes on popular consumption. These rules are all the more absurd in that in practice they lead to demand more austerity in a crisis situation, whereas it would be necessary to do exactly the opposite to restart activity.
Of course, it is theoretically possible to disobey these rules. But this would already question euro area membership, because a currency is a social contract. And as absurd as it may seem, the contract that founds the euro is the Stability Pact. To break this contract is to challenge the euro in its legal and political foundations.
Disobeying the austerity rules would also imply taking the risk of a public debt crisis. Because the so-called “market discipline” would start to kick in in this case: the interest rates on the debt would go up, possibly going as far as rendering impossible the financing the State budget; this is what the countries of southern Europe have experienced. And it would be unrealistic to rely on the ECB’s purchases under its Quantitative Easing to prevent this crisis: as the Greek example has shown, the ECB does not hesitate to use monetary policy to discipline governments resisting the neoliberal agenda.
In the end, can we assess the cost of austerity imposed on France because of its membership in the euro area? The exercise is tricky, but let’s try it anyway. The European Commission calculates the “structural fiscal adjustment”, which is the concept closest to a measure of austerity. For France, since 2010, this adjustment corresponds to about 3 percentage points of GDP. Under reasonable economic assumptions, this may explain about 1 to 1.5 percentage points of the unemployment rate.
So, of course, the example of the United Kingdom shows us that being outside the euro does not automatically protect against austerity policies. Nevertheless, belonging to the euro area is a commitment, and in reality a constraint, to follow austerity policies. And these have a high cost, in terms of unemployment and poverty, but also in closed public services or unrealized public investments.
A risk of monetary veto
It is therefore clear that the euro is fueling the economic and social crisis in France. And even if it is not at the same scale as in the countries of the South, the economic mechanisms are similar. But this is perhaps not the most serious issue.
Because the euro is a real democratic problem. As Robert Boyer says, “money is the basic institution of a market economy. […] [It] appears […] in the economic order, as the equivalent of language” . This means that money is not a mere veil over exchange, an essentially neutral tool, as mainstream economists say. On the contrary, it is a central institution of capitalism, and like any other institution, it is the object of a power battle.
In this perspective, the problem of the euro is therefore not that it is a supranational institution–for in theory one can build democratic supranational institutions; the problem of the euro is that it is a currency structurally out of reach of popular intervention. It is no coincidence that the ECB is the only truly federal but unelected institution that jealously defends its “independence” vis-à-vis elected governments and parliaments (but certainly not vis-à-vis financial markets).
In fact, the ECB played a decisive role in the failure of the Syriza experiment. In February 2015, it deliberately cut off one of the two liquidity sources of Greek banks. Then it suggested that there was a beginning of bank panic–and in the mouth of a central banker, such a statement is largely self-fulfilling. Finally, it completely cut off liquidity just before the July referendum, causing the banking system to be totally paralyzed. As Michel Aglietta put it, “from the destruction of confidence in money are born the crises that bring back the absolute need for liquidity, paralyzing activity” . The action of the ECB during the first six months of the Syriza government could hardly be better described.
Could such a “monetary veto” be applied to France if it decided to turn its back on austerity and neoliberal policies? This is hard to say. Presumably the French ruling class allied with the European leaders would play a double game, openly worrying about the risk that a left-wing government is putting on France’s participation in the euro, while at the same time organizing behind the scenes the monetary stranglehold. The financial and economic health of France being better than that of Greece, the drying up of liquidity would however be more difficult to organize. And contradictions could appear within the ruling class, because the exit of France would destroy the euro, and this would harm the interests of a fraction of these ruling classes. The outcome of this confrontation depends on economic and political developments that cannot be anticipated.
Nevertheless this shows that, for the French and European Left, it is necessary to prepare what is now called “Plan B”.
In the short term of the confrontation with existing institutions, this means taking measures of monetary self-defense: issuing a parallel currency, requisitioning the Banque de France or even private banks, imposing capital controls.
And for the longer term of the necessary return to monetary co-operation, we must think of a new European monetary system with two pillars: a common currency, and national currencies with fixed but adjustable parities according to a rule (of which there are several variants).
I do not wish to discuss these aspects here, although it is necessary to pursue the reflection process in order to refine the proposals and the scenarios.
The issue of financial interpenetration
I would like to conclude by examining two arguments that are often used to show that an exit or dismantling is impossible (even by those who recognize the serious defects of the euro area).
The first argument concerns financial interpenetration. The latter would be so advanced that the dismantling of the euro, or even the exit of a single country, would have cataclysmic consequences on the financial balance sheets of economic agents. In the case of France, the fear is that the burden of public debt, currently in euros, would become much heavier after an exit from the euro and a devaluation of the new Franc. The same fear is expressed for companies that go into debt on international markets.
In a recent study with Cédric Durand , we show that these fears are largely exaggerated, even if the problem has to be taken seriously. The exposure of the different sectors is much less than is generally imagined. Thus, French public debt is almost entirely issued under domestic law, which means that it can be converted into Francs by simple legislative act without any legal breach in the loan contract. In the private sector—both financial and productive—the exposure is more important, but it must be put into perspective: these sectors are indebted, but they also hold international financial assets which will revalorize and act as a cushion of security. Additional measures of economic policy, in particular with regard to access to cash and essential imports, will make it possible to absorb the shock.
The end of the euro can promote cooperation
There is another argument put forward, in particular by our friend Michel Husson, which deserves attention: according to him, reforming the euro by establishing a transfer union from northern to southern countries is economically equivalent to dismantling the euro and rebalancing exchange rates. He summarized it in the following way: “The debate does not oppose a transfer union to the end of the euro, but two possible forms of transfers.”  He thus concludes that putting in place a new co-operative monetary arrangement is as demanding, if not more so, in terms of cooperative goodwill than simply reforming the existing euro. For him, the project to exit the euro is a mirage that diverts attention from the conflict between capital and labor.
This argument is seductive at first but it is, in my view, erroneous. It is based on an overly static view of historical processes: incentives for cooperation are not at all the same within and outside the euro.
In the present context, where wage regimes and the dynamics of class struggle are essentially national, employers benefit from non-cooperation between countries: for German capitalists, the current configuration allows them to maintain their competitive advantage, since exchange rates are locked; and the capitalists of the southern countries also draw some benefits, since they can explain to their employees that austerity is necessary to be competitive, given the overvaluation of the euro for these economies (this is the CICE effect of which I have already spoken).
But in a system of national currencies, non-cooperation has far fewer advantages. In flexible exchange rates, market forces tend to rebalance competitive differentials, so that any benefit from the general decline in wages is ephemeral. Even in fixed exchange rates, it is not possible to durably overvalue its currency (because foreign exchange reserves end up being exhausted), nor to underestimate it (this creates an inflationary risk, sterilization having its limits). Conversely, in such a configuration, there are international gains to cooperation: a certain stability of exchange rates is necessary in order to avoid disrupting trade in goods and services between European countries.
To conclude, it is clear that the euro is a factor of economic, social and democratic crisis. It is a straitjacket that fuels mass unemployment in France and aims to prevent any alternative from emerging. So of course, the end of the euro can not constitute as such a political project, nor even a campaigning axis. Nevertheless the Left must seriously prepare itself for it: this is the indispensable condition to make its program of rupture credible.
 Mathilde Le Moigne and Xavier Ragot, France et Allemagne : Une histoire du désajustement européen, June 2015, OFCE Working Paper no. 2015-17.
 Robert Boyer, Économie politique des capitalismes, 2015, La Découverte, pp. 22-23.
 Michel Aglietta, La Monnaie, entre dettes et souveraineté, 2016, Odile Jacob.
 Cédric Durand and Sébastien Villemot, Balance Sheets after the EMU : an Assessment of the Redenomination Risk, October 2016, OFCE Working Paper no. 2016-31.
 Michel Husson, Union de transferts ou sortie concertée de l’euro : une fausse opposition, September 2016, note hussonet no. 101.