France leading backlash against euro

Whatever French honeymoon the euro may have enjoyed, it’s over.

With elections looming, France is leading a backlash against Europe’s eight-year-old monetary union and the hard currency that has crowned it since January 1 2002.

Five years after the euro-themed New Year parties – which quickly gave way to gripes about prices that were not borne out by inflation data – opposition to the currency is hardening in many member states. The euro is increasingly blamed for a range of economic woes, surveys show, from weak exports to the offshoring of jobs.

Taking their cue from the 2005 referendum in which French voters torpedoed the EU’s draft constitution, French politicians of all stripes are now training their periscopes on the European Central Bank and its French president, Jean-Claude Trichet, in the final months before the presidential and legislative polls. Their main complaint: The ECB is too independent.

“It should no longer be up to Mr Trichet to command the future of our economies, but rather up to leaders designated by the peoples of Europe,” Segolene Royal, the opposition Socialists’ presidential candidate, said last month.

Royal, whom polls show to be neck-and-neck with the main contender on the right, Interior Minister Nicolas Sarkozy, is not alone in suggesting that the bank should not be left to set euro-zone interest rates on its own, free from political pressure.

Sarkozy, a former finance minister, surprised economically liberal supporters when he suggested last month that the ECB’s jealously guarded independence should not prevent monetary policy from being placed “at the service of a powerful economic policy.”

While stressing his support for the common currency, Sarkozy argues that its strength against the US dollar and other currencies has made French labour less competitive and caused jobs to be transferred abroad. “If we carry on like this, we won’t be able to make Airbus planes in Europe any more,” he told a gathering of party faithful in northern France.

Sarkozy castigated the ECB for failing to consult with politicians. “Independence is one thing, refusing to enter into a dialogue is another,” he said.

The ECB has raised its key refinancing rate from 1% to 3.5% since December 2005, keeping euro-area inflation firmly under control but, critics say, stifling economic growth and propelling the euro to economically damaging heights. The bank’s governing council is expected to leave rates unchanged when it meets tomorrow in Frankfurt.

French President Jacques Chirac, who is thought unlikely to stand for re-election in April, also took a swipe at the ECB last week. Europe needs “an active exchange rate policy, like those of the US, Japan or China, that works not only to combat inflation but also for growth and employment,” he said in his New Year message to diplomats.

A majority of the French public has swung against the euro, according to a poll published last month. Some 52% of voters now believe that giving up the franc had been bad for France, pollsters TNS Sofres found. The survey questioned 1,000 people, suggesting an error margin of plus or minus 3 percentage points.

“The euro is a complete disaster,” said Monique, a 63-year-old housewife out shopping today in north-eastern Paris, who preferred not to give her surname. ”Things cost so much more than they used to, and who wanted it in the first place? It was the government. They didn’t ask our opinion.”

But Jean-Claude Connac, who runs a small cheese shop in the same neighbourhood, said the common currency’s impact was “positive overall,” even though it led to higher prices. The euro has boosted trade within Europe, and its current strength has benefits as well as drawbacks, he said, citing lower fuel prices. “With the franc, we weren’t very well positioned against the dollar.”

The introduction of euro notes and coins did produce some price increases - especially for small, everyday purchases – as storekeepers, cafes and vending machines rounded up for convenience. But official data show that overall euro-zone inflation actually fell in the year that followed.

The European Union’s own survey found that public support for the euro declined over the 12 months to September in nine of the 12 countries that rolled out euro notes and coins in 2002. The 13th member of the euro zone, Slovenia, began using the currency January 1.

In Germany, one of the prime movers behind the euro’s creation, 58% of the population now want their old marks back, a separate poll found.

The ECB and its defenders are fighting back. The day after Royal’s comments, European Commission President Jose Manuel Barroso told students at France’s HEC management school that “it’s thanks to the strength of the euro that our energy prices are bearable and our interest rates at historic lows – the necessary conditions for growth.”

Trichet himself has toured European newspapers offering interviews in which he staunchly defended the euro and the ECB’s independence. The euro zone’s first 12 members saw 2.7 million jobs created in the eight years before the euro’s introduction, he recently told EU lawmakers, and 11.7 million in the eight years that followed.

The Organisation for Economic Co-operation and Development also warned in a report this month that the euro risked becoming a political scapegoat for problems caused by governments’ failure to reform. Other ECB supporters point out that the stronger euro has not stopped German exports from recovering strongly.

One of the main problems, some economists say, is that the introduction of euro notes and coins coincided with the dot-com bust and the downturn that followed.

“We’re not yet in a situation where governments are able to demonstrate the economic benefits of the euro,” said Gilbert Koenig of France’s National Centre for Scientific Research.

Meanwhile, the temptation to blame the ECB will not get any weaker as the French elections approach. A bank is expected to raise rates again in February or March – just as the campaigning nears its climax.

“France’s economy is suffering from decades of neglect and introverted business policies and tax laws,” said Steen Jakobsen, chief investment officer with Denmark’s Saxo Bank.

“The election is only months away, so I’m expecting increased focus on the strong euro versus the dollar as an excuse.”