5:25
This would put a crisis at the very heart of the EU, and that would be very, very dangerous. I was in Bordeaux over the weekend covering the riots, and I have to say that the scenes of destruction were truly shocking. Does the French government have a chance of getting this under control? Well, it's difficult because some of the demands are about increasing education spending. The French government has no funds for any expenditures. He is trying to cut budgets. He is trying to contain his budget deficit. There is great uncertainty about what will happen in France after the elections. This makes it difficult for anyone to predict the future direction of France's fiscal policy at this time, and also
makes it difficult to pass a budget, given that the French plan to spend more on debt service this year than on education or defense. One of the things that spooked the bond markets was that both the far-left and far-right candidates, Jean-Luc Mélenchon and Marine Le Pen, presented economic programs that included lowering the retirement age. Now, if you want to cut spending in France, pension spending is the biggest item, and you can't do that if you lower the retirement age. Let's talk about what would happen if the situation worsened and France experienced an economic crisis that would in some ways resemble the European debt crisis of the 2010s, since then the most important player on the scene would be the ECB. Christian, it's
your job to follow the ECB for The Economist. How prepared do you think they are for a scenario that would see even more crazy economic policies and possibly a bond market crisis in France? I think it's very important that during the euro crisis there were no institutions to limit it to only those countries that actually had problems. So, we had a spread to other countries because suddenly the markets started asking questions about Italy, Spain, Portugal, etc. This is no longer the case. I think the markets understand that if there is a problem with France, the institutions that have been created and the ECB will try to do everything to keep it in France and so that
only France feels the pain from the markets. The ECB has strengthened as an institution. He understands, and I think the markets understand, that the ECB supports government debt under certain conditions, right? And it also showed that there are limits to what the ECB is willing to do if countries do not fulfill their part of the obligations. One of the ECB directors once put it this way: the ECB expects macroeconomic prudence. I think that's an apt phrase, don't you? This, you know, may not be following fiscal rules to the letter and paragraph, but it is a demonstration of macroeconomic prudence. And then the dynamic comes into play, where markets know that the ECB will intervene if governments do their part. And then the question arises: will governments do
their part? But I think the lesson from, for example, Italy is that you can't win at this. You can't win in the case of Greece either. You can't beat the ECB. You cannot win in the face of the threat from the markets. So I think any idea that comes from France that doesn't involve France being willing to cut the deficit and demonstrate that kind of macroeconomic prudence will mean that the ECB will wait and watch as the pain spreads to France. But you're essentially saying that in a confrontation between France and the ECB, you think the ECB will win, despite the fact that France is one of the two most important political players in the eurozone, right?
There are two views on this. The first is exactly as you say: France is a very important country. It is one of the two parts of the European engine, along with Germany. And therefore it has much more power within Europe. But you can also look at it another way: "Okay, since France is so important, the system can only work if France plays its part, right?" Both the ECB and Germany know that they cannot simply force the ECB to bail out France. Thus, you are raising questions that concern the very core of this European project. So I'm not sure that the fact that France is bigger and more powerful necessarily means that the ECB will be more lenient. You could also argue that, on the contrary, the ECB should be tough because France should be
one of the two anchor countries of this whole project, including the EU itself, right? This would, and it would be very, very dangerous. Mike, this is ultimately where the threat to the Eurozone comes from, because, you know, if Christian is wrong about this, and the French resist the ECB's attempts to impose fiscal discipline before they get support in the bond markets from the Central Bank, then there will be a game of survival in which the ECB loses and ends up printing money to guarantee French debt without any adjustment program. This is, in effect, the end for the Eurozone, isn't it? Because you can't have a monetary union
without fiscal stability. Absolutely, and I think this is the end for her politics as well. And I think the distinction here from what happened with Greece and some of the other troubled countries in 2009, 10, 11, 12 is really helpful. France could enter the bond market right now. France can borrow more. It borrows at a slightly higher interest rate, but French bond markets are functioning. They are relatively orderly, it's just a rational risk that is built into the price. Greece could not access the bond market at the worst possible time. There wasn't much moral risk there. Nobody looked at Greece in 2010 and said, "Oh, well, if we can get bailout, why do n't we just do what Greece did?" It was not an attractive proposition. If
France can simply run large deficits, if the French can retire earlier than anyone else in the rich Eurozone countries, it starts to look like this to voters in Germany, the Netherlands and many other countries: why are we even trying? Do you know why we try to balance our budgets? Why are we trying to apply sensible fiscal rules if everyone just gets a " free ride" from the European Central Bank or other institutions, even if they do nothing. And I think that this is the political complexity of the situation. And giving France such carte blanche would be extremely dangerous, even if we consider that it is financially important in the short term. I think politically it would blow everything up, maybe forever. That would be very dangerous indeed.
I think we also need to look at other countries and their policies. So, let me just remind everyone that the Alternative for Germany party was founded as a party against bailout of Eurozone countries. And if they currently have support at 30%, the room for maneuver for German politicians to agree on any kind of aid is extremely limited. Things were different back then, when the AfD party didn't even exist, and there was a consensus among centrists that this project needed to be kept stable. Now, when AdN has 30% support, this is a much more difficult task. So such far-right populist politics in Europe are completely incompatible with financial assistance Good. Fascinating discussion. Now it's time for predictions. It's time to put everyone before a
choice. So our question today is: will France destroy the eurozone? Christian, what do you think will happen? Well, as a German, I would say definitely not. No, I think there are certain institutions that can contain the problem and inflict the necessary economic pain on France so that it, even if not immediately, comes to its senses. I will express my opinion: I believe that France will face a bond market crisis similar to the one that Britain had under Liz Truss. But I don't expect it to destroy the eurozone. I think Europe will find a way to cope, but it will get harder
before it gets easier. Mike, I'll give you the last word, because for those who don't know, Mike is unfortunately leaving The Economist, so this is his last appearance on Inside Economics. So, Mike, for your final contribution, what is your forecast? Will France destroy the eurozone? There may be famous last words, but I think not. If we can say one thing in favor of the European Union, it is that has learned a great deal after the euro crisis to transform populist parties that came to power into more reasonable forces. I know it sounds crazy, but I was in Greece in 2015, when it seemed quite likely that Greece would reject bailout and potentially exit the eurozone. It was then ruled by the far-left Syriza government, and they were
forced into submission by the forces of European integration. In fact, the Greek people have decided that they do not want to leave the European Union. If you look at support for the euro, the single currency, it is much higher today across the entire monetary union than it was during or even before the euro crisis. I think when it comes to real action, and the situation is likely to get much worse, the real question will be: will France or any other country want to leave the eurozone? There will be political pressure in the opposite direction. Maybe things have to get pretty bad before we get to that point, but I think that's how it's going to work out
