Ambrose Evans-Pritchard: Euro exit fever reaches heart of French establishment


By Ambrose Evans-Pritchard
The Telegraph, London
Monday, October 21, 2013

Calls for EMU breakup are spreading into the upper echelons of the French foreign policy establishment, and the pro-European core.

An astonishing new book by François Heisbourg -- "La Fin du Reve Europeen" ("The End of the European Dream") -- argues that the "euro cancer" must be cut out to save the rest of the EU project before it is too late.

"The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further," he writes, adding:

"There is nothing worse than having to confront the sunless mornings (matins blemes) of an endless crisis, but we are not going to avoid it by denying the reality, and God knows denial has been for a long time, by default, the operating mode of those in charge of EU institutions."

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At some time in the future, he insists, Europe's leaders should relaunch the euro, but only after they have established the necessary federalist foundations, and only among a vanguard willing to accept the full implications of a federal currency.

The call to "put the euro to sleep" for Europe's own good is a new twist. We heard a little of this from Germany's AfD anti-euro party, but they had other baggage. The Heisbourg book is a head-on challenge to the Merkel Doctrine (largely rhetorical, contradicted by Germany's actions) that a collapse of EMU would stir up all the old demons of the 20th century.

Yes, a disintegration of the euro might indeed lead to such a calamitous outcome if events are allowed spin out of control after years of festering crisis -- the current course -- but what kind of an argument is that? It happens only if they let it happen. It is high time somebody from within the EU elites exposed this sentimental Quatsch and misuse of history for what it is.

Prof Heisbourg is certainly an insider, a different kettle of fish from the Front National's Marine Le Pen, now leading French opinion polls with vows to kill off EMU and restore the French franc.

A product of the Quai d'Orsay, he is an ardent European federalist and long-time champion of EMU, and currently chairman of the very blue-chip International Institute for Strategic Studies (IISS).

He says Europe's leaders have lost sight of priorities, seeming to think that the European system must be convulsed and refashioned for the needs of the euro, as if -- pre-Copernican -- the sun rotates around earth. "You cannot create a federation to save a currency. Money has to be at the service of the political structure, not the other way around," he says.

While he would dearly love to see the great leap forward to an EU federal superstate -- which he deems necessary to render monetary union workable over time -- this dream is now "pure fantasy."

Attempts to create a "European demos" have obviously failed. The nations are drifting further apart. A referendum on any such concentration of power in the EU institutions would fail almost everywhere. "Integration has reached the limits of legitimacy," he writes. The EU intrusions once tolerated as "disagreeable" have now become "insupportable."

Reading between the lines, he seems to have been shocked into writing this book by Germany's role in the Libyan crisis, its refusal to provide transport planes (a routine courtesy for NATO allies) to help France "stop another Srebrenica massacre" in Benghazi, even after intervention had been approved by the UN Security Council and the Arab League.

The splendid Joschka Fischer called Germany's decision to line up with Russia and China "a scandalous mistake," warning that Germany risked waking up one day to find itself in "a very precarious position" if it continued to play this game.

You can perhaps read too much into the Libya episode, but the Franco-German body language has not improved much over Syria. Or as my esteemed Telegraph colleague Con Coughlin puts it: that Germany's default position is now pro-Moscow.

You might conclude -- though Prof Heisbourg does not go so far -- that Germany is no longer an ally of France in any meaningful sense in defence and foreign policy (or indeed trade), and if so that has shattering implications. You might even conclude that the EU is already dead, an empty shell.

Needless to say, Prof Heisbourg does not accept the latest claim by the EMU Gang of Five that Euroland has turned the corner, or that crisis policies are "beginning to deliver results."

The quintet is revealing: Rehn, Dijsselbloem, Asmussen, Regling, and Hoyer -- a Finn, a Dutchman, three Germans; the voices of creditor enforcement. Could they not find a single Latin, if only for show?

He calls it a "cancer in remission." The attempt to cut debt by fiscal austerity -- rather letting growth erode the burden over time, a l'Americaine -- and to do so without monetary stimulus, has been the "fatal choice." The debt ratios are punching higher, toward the point of "non-linear rupture."

Depression and mass unemployment in southern Europe are not a stable equilibrium. The citizens may have shown the "patience of angels" so far, resisting 1930s reflexes. There have not yet have been any coup d'etats, he writes, or a return to Italy's terrorist "years of lead," or even to the student mayhem of 1968.

But none of this can be taken for granted. Starkly different narratives of the crisis are emerging among creditor and deficit states, which he compares to the split in attitudes after World War One when twisted views fed an ideological backlash. Treachery and skulduggery are suspected. The worst motives are imputed, and black legends take hold. He likens it the emergence of the Dolchstoss theory (stab-in-the-back) in Germany.

The current course will lead to "serial crises ending in a nervous breakdown and an uncontrolled disintegration of the euro with all its consequences" -- he writes -- invoking a direct parallel with the sudden unraveling of the Soviet Union, a denouement with which he was closely associated and which caught almost everybody by surprise.

Europe's leaders face the same choice as a general overwhelmed in combat. Do you stand and fight to the point of annihilation, or do you break out of encirclement, saving the rump of your army for another day, the battle lost but not the war? He explicitly cites France's orderly retreat under Joffre before the Marne in 1914, a feat of moral recuperation that the kaiser's high command thought impossible.

His plan is a complete breakup of the euro and a return to national currencies. "Either the euro exists in its entirety, or it does not exist at all." He rejects the halfway house of a North-South split, the idea proposed by Germany's ex-BDI chief Hans-Olaf Henkel for a Germanic Thaler in the creditor core and a residual euro for the Latin bloc (plus France) that allows the weaker states to both devalue and uphold their euro debt contracts.

The rupture must be prepared in total secrecy by a handful of officials in Berlin and Paris, with everybody else kept in the dark. It would be carried out with lightning speed over a long weekend, modeled on the Brazilian abolition of the cruzerio in 1994, a task performed with military efficiency.

The final chop to the neck has to be a Franco-German joint act in order to "avoid the catastrophe of a situation where Germany is seen as responsible." Only on this basis can the EU project then be held together. The others would all have to accept the fait accompli.

Capital controls would be imposed. The national central banks would have to carry out QE to cushion the shock. Currencies would float for a while before being linked again in a revival of the managed "snake."

Personally I prefer a different version put forward by a group of French souverainistes at L'Observatoire de l'Europe. This involves fixing new exchange rates until the dust settles, using a formula that takes into account the accumulated inflation differential and trade balances since the launch of EMU.

Under the souverainiste plan, the devaluations/revaluations are set against a new ECU unit of account reflecting the average weighting of the old euro (not anchored on the new D-mark). The public debt of each state would be reconverted overnight into local currency (like Argentina's peso law), whoever the creditors might be. But private external debt would be settled against the ECU, a compromise that shares the losses between weak and strong states.

Prof Heisbourg's plea for second shot at EMU and a push to federal union 10 years hence strikes me as residual romanticism, or perhaps just a way of showing that he has not yet joined reprobates like me in the Eurosceptic mob.

Why the historic nation states should be any more willing to abolish themselves in 10 years than they are now is not explained. As he so eloquently describes, the 60-year effort to bind them together has fundamentally failed, and those like Mitterrand and Kohl shaped by World War II have long since vanished from the scene.

He acknowledges that the French and Dutch "no" to the European Constitution was a turning point, the moment when it became clear that citizens would not accept the EU superstate structure needed to make EMU work. I agree entirely. The 2005 referendums changed everything. But if that is so, then it is also clear that the antifederalist feelings of the nation states go deeper than anguish about the euro, since in 2005 the EMU project seemed to be going swimmingly. It was not until Greek crisis in 2010 that people started to understand that there was something wrong with the euro itself, and even after that it was a slow epiphany.

Nor do I think that Prof Heisbourg will be able so separate himself from the Eurosceptics by clinging to ideological purity. The machine will fire a cannonade of epithets, as those on the receiving end know from hard experience. In any case, his arguments are more or less the same as ours. A great many Eurosceptics were once "pro-Europeans," to use an irritating expression. I was one myself. It was why I learned all the major languages of Europe (badly, to be sure, but not for lack of enthusiasm) in the late 1970s and early 1980s, and why I studied in Germany, France, and Italy, a sucker for the dream. Then I went to live in Texas.

Bernard Connolly was the official in charge of currency policy at the European Commission in the Delors era when the plot was hatched, and himself resisted pressure to cook the arguments to promote the agenda. He could see even then that such an incoherent venture would end in debt spirals, depression, and economic apartheid, as indeed it has. That is why he became a Eurosceptic in the first place.

Be that as it may, his conversion (the EMU priesthood will call it betrayal) is revealing. It tells us a great deal about the currents at work in French policy circles, and exposes the cracks beneath facade of Project hegemony. Once the Quai d'Orsay set starts to break the taboo, we must be nearing a political inflection point.

Bet on Europe's recovery if you want, but remember one thing. The North-South gap at the root of EMU's troubles will be not closed by a return to tolerable growth -- far from assured -- because it will also bring forward the day when Germany demands interest rate rises. The crisis changes shape. It does not go away. Monetary union remains dysfunctional with growth or without growth.

Belief that a fresh cycle of economic expansion will put this endless saga behind us is just the latest of so many illusions. Prof Heisbourg is right. Delay no longer serves any useful purpose for Europe. 'Twere better the deed were done quickly.

My next EMU book is the "The Fall of the Euro" by Nomura's Jens Nordvig. Looks like a cracker.

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