Bickering with Britain hardly helps France

Rather than lashing out at its neighbour as the euro sinks, the French government would be better served focusing on financial problems in its own backyard.

David Cameron, left, the British prime minister and Nicolas Sarkozy, the French president, have had their differences. Miguel Medina / AFP

The French government just doesn't seem to understand the real implications of the euro, the single currency that France shares with 16 other EU countries.

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French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. Christian Noyer, the head of the central bank, has argued that the rating agencies should begin by downgrading Britain. François Baroin, the finance minister, recently declared: "You'd rather be French than British in economic terms". And even François Fillon, the French prime minister, noted that Britain had higher debt and larger deficits than France.

French officials apparently don't recognise the importance of Britain being outside the euro zone, and therefore having its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.

If investors are unwilling to finance the French budget deficit - that is, if France cannot borrow to finance that deficit - the country will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France's budget deficit is 5.8 per cent of its GDP, whereas Britain's budget deficit is 8.8 per cent of GDP.

There is a second reason the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the pound to weaken relative to the dollar and the euro, which the French, again, cannot do without a currency all of their own. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.

The euro-zone fiscal and current-account deficits are now the most obvious symptoms of the euro's failure. But the credit crisis in Europe, and the weakness of euro-zone banks, may be even more important. The persistent unemployment differentials within the euro zone are yet another reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.

Nicolas Sarkozy, the president, and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration. It was the French officials Jean Monnet and Robert Schuman who launched the initiative for European political union just after the Second World War with the call for a United States of Europe. The French regarded the creation of the euro as an important symbol of progress towards that goal. In October 1980, Jacques Delors, then the French finance minister, pressed for a single currency with a European Commission report, "One Market, One Money", which implied that the European free-trade agreement would work only if its members used a single currency.

For the French, achieving a European political union is a way to increase Europe's role in the world and France's role within Europe. But that goal looks harder to reach now than it did before the beginning of the European crisis. By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.

Looking ahead, stopping the euro-zone financial crisis does not require political union or a commitment of German financial support. It depends on individual euro-zone countries - especially Italy, Spain, and France - making the changes in their domestic spending and taxation that will convince global financial investors that they are moving toward budget surpluses and putting their debt-to-GDP ratios on a downward path.

France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.

Martin Feldstein, the professor of economics at Harvard, was the chairman of the former US president Ronald Reagan's council of economic advisers and is a former president of the National Bureau of Economic Research

* Project Syndicate

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