Only Germans Love the Euro These Days
French presidential candidate Marine Le Pen unsettled investors with her pledge to pull France out of the euro and re-denominate all French debt in newly minted francs. Polls suggest Le Pen won't get the chance; she is expected to lose a second-round runoff. Even if polls are correct this time, that doesn't mean the euro is safe.
In fact, political support for the single currency has been waning -- especially in Germany's two largest euro-zone trading partners.
In both France and Italy, there is now a plurality of support for candidates who advocate a withdrawal from the euro, with pro-euro candidates gathering less than 30 percent in polls. In France, anti-euro candidates -- Le Pen and Socialist Jean-Luc Melanchon -- together have nearly 40 percent support. Of course, that doesn't mean that all of Le Pen's supporters, or Melanchon's, oppose the euro. Most French voters still tell pollsters they favor the euro; but clearly that support waning, as the latest Eurobarometer poll showed. Anti-euro sentiment, once a blip on the fringes of public opinion, is now credible and has found its way onto political platforms.
Respondents are asked whether they think the euro is a good or bad thing for their country. In Italy, the euro gets even less love than in France, with 47 percent saying the euro is a "bad" thing for their country. That is in stark contrast to Germany, where there is now a clear majority in favor of the euro. This chart shows how opinion has changed over time:
This is a dramatic reversal in opinion: A German population that was initially reluctant to give up the Deutsche mark is now firmly wedded to the euro, while support in France and Italy has declined (particularly sharply in Italy's case). But this shift is the logical result of the euro's structural deficiencies. German industry, whose productivity has been increasing more than its European counterparts, now dominates the continental economy. While German unemployment was decreasing and its economy recovering from the financial crisis, Italy was stagnant with rising unemployment. Already saddled with a very large public debt (now over 130 percent of gross domestic product), Italy could neither reflate its economy, nor bail out its banks, while whole segments of its industry, particularly in lower and medium-cost goods, have disappeared.
France also struggled with competitiveness and has coped by increasing the public debt burden and accepting high levels of unemployment. The euro made it impossible for intra-European exchange rates to adjust to reflect the relative attractiveness of the euro zone economies. And there are no U.S.-style material federal fiscal transfers to smooth imbalances.
The result has been high unemployment, slow growth and accelerating capital flight from the periphery countries. Target 2, which measures liabilities resulting from cross-border payments between euro-zone central banks, now shows very high imbalances for Spain and Italy. If the euro were to break up, the ECB would insist that it is owed a very large debt by the southern tier, as ECB chief Mario Draghi made clear recently.
The current recovery may help postpone the moment of truth, but an unpalatable decision is inevitable between two equally difficult options. One option is to reform the system so that the euro zone becomes a functioning monetary union with the possibility of real fiscal transfers and enforceable structural reforms. That requires treaty changes; an arduous process at best in Europe. The alternative is that the euro zone splits up and national central banks, which have continued as part of the system of European central banks, regain control over national currencies. This is technically possible, though as economist Barry Eichengreen wrote here recently, there is no doubt that it would entail large-scale disruptions.
Politically, however, the dynamic is clear. Emboldened by the success of populist movements in Britain and the U.S., anti-establishment parties have increasingly made the euro their target. A monetary union is also a political and social contract. When local political majorities no longer accept its implications, the union is endangered.
The euro may well survive this year's wave of elections and populist calls for a return to national currencies. But without reforms the structural imbalances will only get larger and political opposition will grow. Even if Le Pen doesn't get her way, she has started a conversation that the rest of Europe will no longer be able to ignore.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Jean-Michel Paul at JPaul@acheroncapital.com
To contact the editor responsible for this story:
Therese Raphael at email@example.com