Following the previous thread about lag, devaluations and j-curves now there is a real case of politicians versus economists. In this case France’s brand new president: Sarkozy and the European Central Bank (ECB).
I don’t want to appear one-sided with this guy. There are many likeable things in him, but there’s something bonapartist about him (yes, Napoleon Bonaparte was one of the predecessors of populism, IMHO). Even Angela Merkel, the gal that has raised the German’s economy and self-esteem, is a bit anxious about him.
different leaders, different perceptions
Sarkozy has decided to erode the ECB’s independence. In fact that’s a long tradition in French politics and Sego wouldn’t have done otherwise. I’m not the one to say that ECB’s decisions, taken by some economists inside that fortress, cannot be improved. (Wish I knew better than them) But i can see something inherently good from having economists insulated from politics.
Sarkozy is a clear opposer of a strong Euro. In his campaign he claimed he’d pressure ECB to force a devaluation and blamed the current exchange rate of all evils. It’s getting boring to hear that Brussels is blamed for everything local politicians don’t want to assume.
It’s true that the Euro is expensive and that hurts exports, but it is also true that means cheap energy, which Europe is highly dependent on. If the high exchange rate was a problem, it’d be only part of it.
Exports have been bad for France, but not that bad for Germany which is back in the road to growth (one million jobs created in the last year and a new exportation record), and they share the same exchange rate. Maybe there’s something related to a strong participation of the state in the economy, an inflated welfare state that makes for a nice way of living but leaves a huge bill to pay, or simply resistance to change, a very well known fright to loose a higly secured way of life that is not compatible with much needed reforms. (3 hour week, low spending in research and development, low inflation control…)
Don’t forget that most of exports and imports of the Euro zone are between member countries. And those interchanges are not affected by exchange rates. And many of the other countries, such as Spain (wish we had the strength of the French economy), have made steep reforms and changes, opening the economy, growing strongly (of course with a lot of structural problems but nonetheless strong growth), and reducing unemployment. Euro devaluations won’t help the French compete with the Germans or stop the relocation of industries that move to Eastern Europe seeking lower wages.
But it’s not only a exchange rate problem: there’s a new European scepticism there, similar to that experienced by Britons, but this time french-flavoured: “faire plier le BCE” (make it bend). Something about French self-economic determination and distrust of an Euro that is not maleable to political interests. (and remember: the loss of independence and thus credibility of the ECB would come with a cost too)
Trichet says: do not mess with the ECB
It’s funny that happens while the ECB’s president is a frenchman: Jean Claude Trichet.