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Thursday, 23 October 2014

Power flay

Sarkozy's euro warning smacks of desperation

Nicolas Sarkozy says he is concerned about the future of the euro. But it is his own fortunes that he is really worried about. The French president has issued dire warnings about next week’s European Union summit, hinting that the common currency could be “destroyed” if the meeting fails to agree on a grand plan to tackle the debt crisis.

Meanwhile Moody’s has finally broken long-standing taboos surrounding France’s triple-A sovereign debt status. The credit rater says it might change the outlook from stable to negative. Spreads of French sovereign bonds over German bunds have widened to 20-year highs. Sarkozy’s nerves can only be further frazzled because he will face the opponent candidate he most dreaded at the French presidential election next May: François Hollande is a moderate socialist whose broadly reasonable fiscal stance may well appeal to centrist voters.

If the EU summit ends in acrimony, or if promises of a grand bargain turn out to be a damp squib, Sarkozy would lose one of the last arguments in favour of his re-election: that in times of crisis, France needs an experienced hand, weathered by four years of financial crisis.

The major problem is that France can’t afford the grand scheme Sarkozy is calling for. To settle the euro debt problem once and for all would most likely require France to commit more resources. In the process, it would get nearer the dreaded ratings downgrade. Similarly, Paris fears the new, higher haircuts that might be imposed on Greece’s creditor banks. That might force the government to put up recapitalisation money that French banks wouldn’t be able to find elsewhere.

A credit rating downgrade for France would in turn have serious consequences for the euro zone. The regions’ bailout fund, the European Financial Stability Facility, depends on its largest members for its own triple-A rating. More than ever, France depends on Germany’s unambiguous commitment to keep the euro together, and Angela Merkel’s sympathy for her partner’s problems.

Context News

Senior figures in the French government have upped the rhetoric on the euro debt crisis, warning of ominous consequences if a European Union summit failed to reach a comprehensive solution next week.

“Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent”, French president Nicolas Sarkozy said. He added that the summit must reach “very important decisions” to cope with the “unprecedented financial crisis”.

France’s prime minister Francois Fillon has warned that Europeans were “sitting on a volcano” threatening the whole European construction process.

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