The Euro and the Montgolfier Balloon

The fate of Europe is now heavily dependent on the apparently technical question of the excessive current value of the euro, against all other major currencies, and this is an accurate reflection of the unfortunate strategic vacuum of the euro zone, the only monetary zone suicidal enough to accept to carry the weight of all the devaluations of the others.

If the ECB's recent decision to lower its key interest rate to a new record low 0.25% from 0.5% has led to a very mild drop in the exchange rate between the euro and the dollar, (of $1.33 to the euro), this exchange rate is still too high: it had, for the creation of the single currency, a value of just $1.13 for its creation and dropped at one time to less than a dollar a euro and then climbed to $1.38, while the British pound and the Japanese yen have been devalued 25%, thanks to great political coherence between the central bank and the government of these two countries.

The too high euro exchange rate is disastrous at all levels: because it destroys in the space of a few days all gains in competitiveness which have taken years to regain; it forces companies to reduce their prices, and to fire employees, in order to preserve their internal and external competitiveness. By decreasing the costs of imports, it reduces inflation at a level that is much too low and it leads to the excessive consumption of energy. It is caught in a vicious circle in which any attempt to reduce government deficits by reducing public expenditure leads to a higher unemployment rate and reinforces the economic downturn. And ultimately, it will put the more indebted countries in a position where they will not be able to repay their public debt without plundering the savers en masse: a strong euro leads throughout the euro area to a Cypriot situation.

Finally, politically, it makes the euro unpopular and allows its enemies to denounce its existence; while it is rather its political non-existence which constitutes its main fragility.

Indeed, the euro will not disappear if it is too weak. But it will become politically unaceptable if it is too strong. And then it will explode like a balloon that went too high.

By contrast, a drastic drop in the value of the euro will make it possible to increase exports, decrease imports from outside of the Euro-area, create jobs, bring deflation to an end and reduce public debt burdens. All this will strengthen support for the single currency and enhance the political credibility of the euro zone.

In order to accomplish this goal France must be sufficiently convinced about the above in order to harness the active involvement of the Germans and the ECB in this endeavour.

The Germans are still hostile to this notion, because anything that might give the impression of a weak currency and a return of inflation frightens them. Not out of regard for democracy (Hitler, contrary to what is often said, did not come to power to tame inflation, but after it was tamed), but out of anxiety regarding demography: they need trade surpluses and price stability so that this surplus continues to grow to pay for the pensions of people that are actively employed now, that future generations will no longer be enough to finance.

Once the political decision-makers convinced, the finance ministers will only have to shout in chorus, to any meeting of the euro group, that the exchange rate of the euro is too strong; and the ECB will only have to answer that it is not opposed to such a drop in the value of the euro for this to take place. And if necessary, the ECB could still cut its key interest rates, which is still higher than that of the Fed, the central bank of the U.S.A. (0.25 against 0.08 %).

Of course, the United States will be hostile to this, explaining that even with a strong euro, the balance of payments of the euro area has expressed a surplus, while theirs is negative. They will explain that the German surpluses (already huge, since they were even higher than those of the Chinese), will increase again, with a weaker euro. Probably. But why would the eurozone be the only one not to use the same weapons used by others? And the Americans, who failed to oppose the fall of the yen and the British pound, currencies of their main allies, will not be able to do anything against a weaker euro, if it is decided and conducted resolutely.

A weaker euro, to a reasonable extent (one euro to the dollar) is therefore a major battle; it must dominate the horizon and mobilize all forces. In France, this must become a major claim, complementary of all other efforts to restore competitiveness through innovation. The weaker the euro, the stronger is Europe's position in the world. And vice-versa.