×

Op-Ed: Leave the euro alone ... in the ECB's safe hands

    • The noise from Germany's election and a likely French-German discussion will not affect the European Central Bank's policy mandate to run a sound currency in an environment of price stability
    • The euro area assets are a sound investment play under the watchful eye of the only truly independent central bank in the world

      As the German election campaign gets more robust in the run-up to September 24, you will probably see the euro issues moving center stage. The Socialist challenger Martin Schultz unsuccessfully tried to attack using Germany's contested migration/refugee policies. He is now turning to the future of the monetary union and the damage caused by a disastrous fiscal austerity imposed by Chancellor Angela Merkel on sinking euro area economies in the wake of the last financial crisis.

      France will also continue to push its euro agenda to keep it at the top of the French-German dialogue with Berlin's incoming administration.

      German Chancellor Angela Merkel speaks with Mario Draghi, president of the European Central Bank (ECB).
      Getty Images
      German Chancellor Angela Merkel speaks with Mario Draghi, president of the European Central Bank (ECB).

      Before you hear the next strident predictions about the end of the European single currency, here are a few things to keep in mind.

      The European Central Bank has a treaty-sanctioned policy mandate to maintain price stability and the soundness of the financial system under its supervisory and regulatory authority. That mandate can only be revoked by the treaty cancellation — a political move for which there is no winning constituency in any of the 19 euro area member states.

      The ECB's policy mandate is all the euro area needs, and it is all a central bank can deliver.

      That is also all the current holders, and prospective buyers, of euro-denominated assets have to know to design an optimal investment portfolio.

      With these clarifications out of the way, we can turn to the French-German euro area politics.

      Don't rush excessive budget cuts

      Barring a miracle, Mrs. Merkel looks set for a landslide victory. That will probably lead to the next epochal event in the history of the euro, because France and Germany apparently want to use the monetary union as institutional scaffolding for a tightly integrated confederate structure. People familiar with the "European project" will recognize that this would just be a way station to a fully-fledged European economic and political union.

      The most recent initiative to get moving in that direction comes from France in the aftermath of last May's presidential elections, where some of the contenders (dubbed "populists") made a politically fatal mistake of advocating the country's exit from the EU and the abolition of the euro as a French legal tender. Those "populists" were roundly defeated in large part because all opinion polls were consistently showing that French voters wanted to stay in the EU and to keep the euro.

      Projecting this election result on a broader scale of European policies, the new French administration has proposed the creation of a euro area budget, managed by the common finance ministry with a political oversight by the area's executive and legislative authorities.

      Ostensibly, the French are presenting this project to "guarantee the finality of the monetary union."

      That may be true, but I also believe that the real intent is to put a binding outside constraint on the French domestic political process — and to confront an overpowering German influence.

      France is struggling with a notoriously brittle body politic, a condition aggravated by a wide-ranging resistance to inevitable roll-backs of an unaffordable welfare state. Those are the key problems behind the country's slow economic recovery, and the ensuing difficulties in bringing its public finances in compliance with the euro area rules.

      Paris is now under observation in an EU "excessive deficit procedure" for its 3.4 percent of GDP budget gap last year, and apparent difficulties in meeting this year's commitment of narrowing the red ink to 2.7 percent of GDP. With its public debt of 96 percent of GDP, France is also far above the euro area mandated limit of 60 percent.

      Trimming the government spending under conditions of slow economic growth and the legacy of "acquired socio-economic privileges" is a tough call. And yet, with public sector outlays of 56 percent of GDP — compared with 44.3 percent in Germany and a euro area average of 48.1 percent — France must take a knife to the politically flammable and sacrosanct social welfare provisions.

      Even out the French-German dialogue

      The French leaders obviously think that would be easier to do under pressure from the euro area debt and budget rules that are directly enforced by a common finance ministry.

      Now, this is where Germany comes in. Looking at all that from outside, it seems that Berlin has used the French fiscal difficulties to inflict a real complex of inferiority on a country that, for a long time in the postwar history, showed statesmanship and generosity in bringing a defeated and humiliated Germany back into the European community of nations.

      Things have gone so far that the new metrics of the French-German relations are being determined by the French budget deficit (3.4 percent of GDP) versus the German surplus of 0.8 percent of GDP, and the French public debt of 96 percent of GDP compared with 68.3 percent in Germany.

      Incredible, isn't it? But that's the way it is. And to rub it in, Merkel gave a quasi dismissive response to the French proposal of the institutional changes by saying that she would first have to see whether any changes were needed, and what that would mean for future euro area policy forums.

      In other words, Germany will decide. Undaunted by driving rain and looking in an imperious form, a beaming Merkel, a shoe-in for another term of office next September, was mingling last Tuesday with royalty and the great and the good at a black-tie opening night performance of Wagner's Die Meistersinger von Nürnberg at the Bayreuth Festspielhaus.

      What a contrast to the mood in Paris, where the French President Emmanuel Macron was being sharply knocked down in opinion polls from his Jupiter (Greek mythology's king of all gods) status. He sounded exasperated last week as he was calling to order his unruly and disoriented parliamentary majority, upbraiding his infighting cabinet members and asking his prime minister to operate with a "greater sense of direction." As Macron's newest BFF would say: "That's yuge."

      You know now who will be the winner of "the friendly French-German debate" about the proposed watershed changes in Europe's institutional architecture.

      Macron will also needlessly aggravate his case by caving in to calls from Germany and French business leaders for radical hiring and firing labor market reforms. Somebody should explain to the president that there is no evidence that such a disorderly flexibility is needed to break labor market cost rigidities. Over the last five years, average French unit labor costs grew at an annual rate of 0.8 percent, compared with 2.3 percent in Germany. Last year, those labor costs rose only 0.6 percent in France, nearly three times less than 1.7 percent in Germany. That was reflected in corporate profits that drive equity values. The French CAC40 shot up 19.2 percent in the year to last Friday, beating the German DAX and matching the Euro Stoxx 50.

      The captains of French industry, urging unnecessarily disruptive radical reforms (they say they don't want small "reformettes"), should be reminded to run a tighter ship. At the moment, 25 percent of all goods and services consumed in France are supplied by their foreign competitors, a sharp and steady increase from about one-fifth at the beginning of this decade.

      Investment thoughts

      The election noise in Germany, and the likely French-German dialogue to use the euro area as a foundation of a confederate structure, will not, and cannot, affect the ECB's policy mandate to run a sound currency in an environment of price stability, defined as an inflation rate of 0 to 2 percent.

      The French-proposed euro area fiscal union, with balanced public finances and a declining public debt to 60 percent of GDP, from the current 89.2 percent, would be an excellent fundamental feature for the euro as a global transactions currency and a reliable store of value.

      Apart from that, a more assertive France — as befits a country of great culture and civilization, a veto-wielding member of the UN Security Council and an authentic and independent nuclear power — would provide a better balance in European politics and in the euro area decision making. France has to shake off its fiscal policy complex. Progress has been made toward fiscal consolidation. The French primary budget has been balanced; it will now have to be shifted to a surplus of 2 to 3 percent of GDP — and kept there — to stop and reverse the growth of public debt.

      The euro area assets are a sound investment play under the watchful eye of the only truly independent central bank in the world.

      Commentary by Michael Ivanovitch.

      For more insights from CNBC contributors, follow @CNBCopinion on Twitter.