Over the past two years, financial markets have turned the spotlight on a succession of countries — Greece, Ireland, Portugal, Spain and Italy — turning each into the epicenter of a seemingly perpetual European financial earthquake. However, politicians always recognized that the heart of the European project was the relationship between France and Germany. Is that relationship now in jeopardy?
There is a falling-domino argument that suggests that the crises on Europe’s periphery will have a knock-on effect on the Franco-German core. France, in the aftermath of a property and asset-price bubble, is vulnerable to some of the same combination of banking and public-finance problems. Indeed, now France’s presidential election has politicized the link between peripheral dominos and Europe’s French heart.
In his final campaign rally before the first round of the presidential election, French President Nicolas Sarkozy stood in front of a banner proclaiming la France forte, or “strong France.” For much of his audience, Sarkozy’s head obscured the “e” in France, so that the slogan looked more like franc fort, or strong French franc — which sounds like nothing if not “Frankfurt,” the German financial center that is the seat of the European Central Bank.
Sarkozy’s speech reinforced that message. Only reelecting the president could save a strong currency that guaranteed French wealth and incomes. The left would trigger a currency collapse and a run on French securities that would bring the euro crisis from Greece, Spain or Italy to the heart of the European process, France’s relationship with Germany.
The French presidential campaign has reopened an old theme of French politics. Left-wing politicians see themselves as the victims of financial conspiracies. In 1924, a socialist and center-left coalition, the cartel des gauches, was met by a flight of money and a run on the franc, which the left believed was organized and facilitated by the Banque de France (the central bank).
In 1936, when communists allied with socialists in Leon Blum’s Popular Front, and pushed through wage increases and reductions in working hours, another franc crisis erupted, and, within two years, the center right was back in power. In the meantime, though, the left had nationalized the central bank.
The most recent episode in this long-standing drama came with former French president Francois Mitterrand’s victory in 1981. As president, for the next two years he ran an experiment in socialist economics, designed to woo communist supporters. Banks were nationalized and wages were raised, causing repeated runs on the franc. The government was forced to impose harsh capital controls, including restrictions on what citizens could spend abroad as tourists.
After two years, Mitterrand faced a dramatic question: Should France continue on the path of “socialism in one country,” or did European integration require a U-turn? As Mitterrand’s finance minister, the moderate and Europhile Jacques Delors executed the U-turn that brought France back to Europe and to the “franc fort.”
The parallels between now and 1981 are very close. In 1981, there was a European framework for currency stability, the European Monetary System, which Mitterrand regarded as the personal project of his right-wing opponent, then French president Valery Giscard d’Estaing. It seemed obvious for him to attack the stable currency as a conservative project for holding down working-class wages. In the middle of a recession, it also looked like the cause of unemployment in France.