How dangerous is Nicolas Sarkozy?

By: Eurointelligence ECB Watch

If a politician on a campaign trail says a thing once, you can safely dismiss it. If he repeats it once or twice, you may still choose to ignore it. But if he says it twenty times, you should listen up. Nicolas Sarkozy’s bashing of the European Central Bank is not only extreme and stupid, as most readers of Eurointelligence would probably agree. It is also persistent, and this is why we should take it a lot more seriously than we have done in the past.

 

Over the last few months he has blamed the euro for job losses, and lately also for low wages, which is absurd. He said the ECB should not only target inflation, but also growth, and most recently he said that, if elected, he would personally enter into a “dialogue” with the central bank about the external exchange rate of the euro.

 

We have refrained from commenting on this issue before because we did not take him seriously. After all, if he meant what he said, European monetary union could surely not survive, and this cannot be in France’s or his own long-term political interest. It was France, not Germany that pushed for a fast adoption of the euro. The deal at Maastricht, and later the agreement on the stability pact, both marked finely calibrated historical compromises between the two countries. Any ex ante rejection of this compromise would reopen a can of worms. Of course, there is still room for discussions on economic governance, for example among the euro group of finance ministers. But the ECB itself is off limits. Both its independence and its price stability mandate are set in stone.

 

So what does Sarkozy want? In some respects his views are similar to those of Oskar Lafontaine when he was German finance minister in the late 1990s, except that Sarkozy is both more extreme, and more successful. Sarkozy believes that

 

1. it is wrong for the European Central Bank to enjoy such an extreme degree of independence.
2. it is wrong that the European treaties mandate the ECB only to follow a price stability target.
3. and that economic policy needs to be closely coordinated between the politicians and the central bank. This applies in particular to exchange rate policy.

 

If Sarkozy sought a direct, one-to-one dialogue with the ECB, we are quite sure the ECB would reject this. The ECB is the only European institution that looks at the world from a euro area perspective, and from that vantage point, a President Sarkozy has no political mandate in respect of the ECB itself. After all, the Fed is not in a dialogue with the governor of Texas, though they will probably serve him a cup of coffee if he drops by. Sarkozy appears not to have thought through this particular problem in any depth. He needs to build alliances among other euro area member states to get his ideas across.

 

If Sarkozy wanted more political influence over exchange rates, he should not bang on the doors of the ECB, but use the French presidency in 2008 to get his fellow European heads of government and state to reinterpret Article 111 of the European Treaties. Article 111 is about exchange rate policy, and unlike most of the other articles relating to monetary policy, it is ambiguous – some people would say that this was done on purpose. This ambiguity means that the European Council could effectively decide to interpret Article 111 the way it likes. At the moment, the ECB takes the view that monetary policy should be conducted with a view of internal stability only, leaving the exchange rate to float freely. Any exchange rate policy, such as a target band or a cap would by definition undermine the price stability target in the long run. There is actually no point arguing with the ECB about this. The fact is that the ECB has interpreted article 111, while the politicians have not. If Sarkozy thinks he has problem, it is not with Mr Trichet, but with Ms Merkel.

 

It is our understanding that the Germans may even be open to discussions on certain aspects of euro area governance – though not anything that would require any changes to the treaty or the future constitution. Germany’s finance minister, Peer Steinbruck, a Social Democrat, said at a recent Ecofin meeting that he would have no problems with a more formal role by ministers over exchange rate policy – though this is not official government policy yet.

 

There is also a strong case for an improved exchange of information. Last year, for example, the French learned about Germany’s decision to raise value-added taxes only through the newspapers. This is hardly the way things should be in a monetary union. There is also a case for close co-ordination of structural reform policies (see for example an interesting recent paper by Xavier Debrun and Jean Pisani-Ferry on this issue). There is a lot in terms of co-ordination, co-operation, or simply information exchange that can be done under the existing regime.

 

If Sarkozy really wanted to improve the quality of euro area economic governance, his rhetoric actually makes things worse. He whips up an anti-European frenzy among his core supporters in France, and an anti-French frenzy elsewhere in the euro area. If he pulls as many stunts as president as he did as a campaigner, there are going to be serious political tensions ahead.

 

Almost everything in this analysis applies to Royal as well, except that she is a lot less persistent than Sarkozy – and therefore less threatening. The Germans – or rather Merkel and her entourage - currently favour Sarkozy over Royal for the reason that they think Sarkozy will deliver a French Yes vote on the renamed constitution. They think that Sarkozy will be able to avoid a referendum, and have the agreed successor to the Constitution ratified by parliament. But first, it is not clear that he will have a parliamentary majority behind him. Second, if the UMP were to win the parliamentary elections in June, it is not clear at all that he would be able to avoid a referendum even then. The new treaty is not going to be as small as Sarkozy thought it might be, and there are a lot of people in France, who will demand a vote on this.

 

The real nightmare scenario is that Sarkozy does not deliver on the constitution, yet delivers on his threats regarding the ECB and the euro.

 

So before you endorse Sarkozy on the grounds that he is supposedly more liberal, or more pro-Anglo Saxon, or because you like his employment reform proposals, be careful what you wish for.

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