Greece, France and the future of the euro

Woman walks past Greek election posters The outcome of the election in Greece makes it more likely it will leave the euro

Financial markets were not surprised by the French or Greek election results, so they initially chose to be only mildly alarmed. But the more that investors and policymakers think about them, the more worried they are - for good reason.

Short term, at least, the most important thing that has happened in the past few days is that Greece has moved several steps closer to leaving the euro.

True, a majority of Greeks want to stay in the single currency. But this is not a one-off protest vote: they clearly do not want to stay in on the terms negotiated by the previous government, and the rest of the eurozone do not want to offer them better ones.

Greece and its eurozone partners have come close to the brink before, and always found a way to step backwards again. Experience would suggest they will do so again.

There's no evidence, after all, that a party committed to tearing up the terms of the rescue package can even form a government in Greece.

Questions to answer

But you have to say the chances of a messy Greek exit are higher than they were a few months ago. And, let's face it, they were pretty high then.

Weeks without a government, probably leading to new elections, more uncertainty and a wrangle over the next IMF review in June - it all leaves plenty of room for accidents.

So, the rest of the eurozone finds itself once again needing to answer two questions:

First, do they have the tools and money to protect the rest of the European periphery from the fallout of a Greek exit?

And second, do they have an economic strategy that can offer those other troubled economies a way out of crisis, without leaving the single currency as well?

Bigger war chest
Francois Hollande and Nicolas Sarkozy Could Germany's relations with France actually be better under the new president than the old?

The answer to the first question is that they are much better prepared than they were 6 or 12 months ago - both psychologically and financially - to tackle the market contagion from a Greek exit.

Policymakers exaggerate both the size and the immediate usefulness of the enhanced 700bn-euro ($911bn; £564bn) European "firewall", which could be supplemented by the new money that has been lent to the IMF by Britain and other countries.

Even on paper, the funding now available would not be enough to cover the financing needs of all of the countries in the firing line for any length of time. But the war chest is much larger than it was.

And at least some thought has been given to how it could be deployed, at a pinch, particularly to shore up banks in countries like Spain.

The answer to the second question is that they have an economic strategy for getting out of this - but it's not one that any of the key players in the eurozone have a great deal of confidence in (with the possible exception of Chancellor Merkel).

Which 'growth'?

What's changed in the last few weeks is that the ECB President, the incoming French President, the International Monetary Fund and the European Commission all now seem to agree that there needs to be a greater focus on "growth".

The bad news is that they completely disagree on what a more "growth-focused" approach would look like.

For ECB chief Mario Draghi (and the Italian president Mario Monti), it means deeper, faster structural reforms to free up labour markets, deregulate service sector industries and generally rein back the role of the state.

For Francois Hollande, it means looser fiscal and monetary policies, and a slower pace of structural reform (if any).

That, after all, is the platform he fought the election on, though it must be said, President Sarkozy had not been such a great champion of a smaller state. French public spending is now around 58% of GDP - by far the highest in the eurozone.

For the European Commission, it means a lot more references to the word growth in Brussels policy documents - and a lot of new European infrastructure projects which might well take years to get off the ground.

The IMF and the financial markets would probably like to see a combination of all of these: long-term structural reforms to free up economies and put government spending on a more sustainable path, combined with some short-term relief on austerity and (with luck) easier monetary policy as well.

If Chancellor Merkel could then agree to some form of mutalisation of eurozone government debt, well, a workable way out of the crisis might actually be in sight.

French theatrics

Does President Hollande's victory make it more likely that this miraculous deal might be struck?

One is tempted to say it is less likely, given Mr Hollande's rhetoric on the campaign trail.

This is not a man who seems to think France is crying out for difficult reform. He is a man who sounded for all the world like a man who would like to keep things more or less as they are, only with fewer spending cuts.

But, as I wrote here recently and discussed on the Today programme this morning, when you look at his policies, the difference between President Hollande and President Sarkozy looks a lot smaller.

He would delay the VAT rise due to come in the autumn. And he would balance the budget by 2017 rather than 2016.

But on paper, at least, there's a smaller gap between them than there was between Labour and the coalition in 2010.

You never know, if President Hollande and Chancellor Merkel are committed to making it work, the Franco-German relationship might actually do better with a less theatrical character running France.

The German Chancellor is under pressure herself after this weekend's disappointing local election results. And she wasn't President Sarkozy's greatest fan.

So, this weekend's events need not spell disaster for the eurozone. But they do spell a lot more uncertainty. For that reason alone, investors and policymakers are right to be nervous.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 325.

    Need I say anymore.....?

    Watch the three minutes and tell me you don't agree with him..........

  • rate this

    Comment number 324.

    People vs bankers? Think your confusing two issues there! Euro crisis prompted by countries living beyond their means & losing control because they don't own their currency and credit crisis caused by US/UK banks over exposure to sub prime debt. The later caused by fraud perpetrated by about a dozen investment bankers.

  • rate this

    Comment number 323.

    Very interesting to see that the Greek politicians are now not willing to take the helm, all running scared as they have no answers.

    Are they still getting paid even though they are not working?

    Time for the Greeks to go bust and stay within the EU and EZ.

    That should get the thinking caps on for those in power.

  • rate this

    Comment number 322.

    316 David Aston.

    I would have to put up my prices to pay for changing my money as I travel from one coutry to another. Perhaps this will make me less competative and see my business decline, and generate more unemployment.

  • rate this

    Comment number 321.

    At best France is going to be Germany's poodle. Paris will be ruled from Berlin, only permanently this time.
    They can't compete with Germany if they stay within the eurozone.
    Eventully they'll go the same way as Greece, the Republic of Ireland, Spain and Italy.
    The future of Europe is a powerful Germany surrounded by impoverished vassal states.

  • rate this

    Comment number 320.

    Just watched Portillo on the Greek crisis on Beeb2.

    Whatever has happened to the man? Thoughtful, rational and really rather nice.

    He should go into politics!

  • rate this

    Comment number 319.

    Hey, Steph, how about comparing what you had to say when Santander was posted as the saviour of British banking and what bloggers here told you in reply.
    You quote clever clog economists from the old alma mater who keep on proving they don't know what they're talking about and that untrustworthy but pompous PR handouts are all they are capable of.

  • rate this

    Comment number 318.

    Re 314 - John_from_Hendon – “Entirely wrong - we are already in 'an ever closer union'” ..... “Go and learn some of the languages of our neighbours”

    Firstly, an ever closer union is an aspiration; we do not have a political union yet. Secondly I speak French and live in Belgium – this does not prevent me from holding opinions that may not accord to your rose tinted views of Europe.

  • rate this

    Comment number 317.

    315 Just because some French diplomats coined the phrase "ever closer union" all those years ago doesn't make it true in real life. It's just a reflex tic for those who think European unity and the sclerotic bureaucracy in Brussels are one and the same thing.

    The straitjacket EUphiles doubtless have more posturing and threatening to do before we settle down to building sustainable European unity!

  • rate this

    Comment number 316.

    what would happen if we woke up tomorrow to no euro but to pesatas franks escudos etc

  • rate this

    Comment number 315.

    254. Notanothernutter "We must close the democratic deficit between the people of the EU and its politicians."

    Quite right - let us (the people) directly elect a President of Europe and an executive.

    It is OUR Europe not some plaything for popinjay upstart prime ministers and chancellors of the constituent states.

    Let the people of Europe vote for the next 'Herman Van Rompuy'!

  • rate this

    Comment number 314.

    266. val1149 "It is far too early to go there and will only end in tears if we try it."

    Entirely wrong - we are already in 'an ever closer union' - to attempt to reverse out will be hugely damaging to the UK.

    Go and learn some of the languages of our neighbours - try Welsh as you seem desirous of destroying the UK.

  • rate this

    Comment number 313.


    "Let's discuss this "single identity" after a Hollande/Merkel meeting. Shall we?"

    There is only one suitable and valid description of your position - warmonger!

    Your right wing position always causes wars! Please stop it immediately.

    We will work and live with our friends and neighbours as equals, using the same currency in spite of your best destructive efforts.

  • rate this

    Comment number 312.


    185.powermeerkat "European identity doesn't exist"

    Oh yes it does!

    "We have as much of a single identity as any other successful federal states"

    USSR? Yugoslavia? :-)))

    Let's discuss this "single identity" after a Hollande/Merkel meeting.

    Shall we?

    Btw. what a great pic of them in Gavin Hewitt's European blog! :-)))

  • rate this

    Comment number 311.

    149 - "As soon as London re-opened the red braces brigade decided, as usual, that there are no massive profits to be made by acting calmly

    Chaos (& Profit & Short Selling) Rules, OK!"

    Yep. Driven by fees & commissions so its churn churn churn.

    The stock market is shrinking rapidly in the US as people get sick of being gouged like this, are they also taking their money out of it here?

  • rate this

    Comment number 310.


    Never met anybody who would identify himself/herself as Arizonian, Californian, Texan, Virginian.


    Err... not so sure about those Texans!



    Or you can get a swift process and be hanged just as swiftly aferwards.

    Like all them horse thieves and Santa Ana's poor hirelings.


  • rate this

    Comment number 309.

    283 etc

    MANY public sector schemes are in the clarts & operating only off the incoming contribs - I think the LG one is pretty much in this state?

    But the NHS superannuation scheme is in surplus and so are many others - despite the best efforts of the Ruperts to p*** it all up the wall - & their political hirelings via QE .

    There is still 'something to steal'

    I'm sure they will steal it

  • rate this

    Comment number 308.

    When I talk with friends who have imagrated from developing countries for a better life,most of them feel that one generations has to pay the price in hardship and economic pain for the future of their children who will not. All I see is deley tatics from Goverment. Is there an exit strategy or are we just bearly keeping the economy together for this moment? Who's John Gault?(Attlas Shurgged ref)

  • rate this

    Comment number 307.

    There is a common presumption that remedy A or remedy B will cure the EU disease. Remedy A is austerity. Remedy B is stimulus. The disease is sovereign debt & deficit spending.

    Consider the presumption. What if it doesn't hold?

    What if neither remedy A nor B will help? What then?

    At what point can we face the death of a complex system?

    How long do we grieve before we accept death, and move on?

  • rate this

    Comment number 306.

    "I also note that the citizens of the USA seem less than enamoured of immigrants"

    Incorrect. Americans, including those of Mexican descent, are simply sick& tired of ILLEGAL aliens & cross-border criminal/narco activity.

    Of course, correct, people with your IP would have hard time to get a working/resident visa in the US.

    As long as people like me have something to say about it. :-)


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