How Domestic Politics Shaped the French Government's Position During the Euro Crisis

Abstract

Throughout the euro crisis, the French government has pushed to invert the rules of the Maastricht Treaty. After the height of the crisis had been overcome, one can see the success of the French government. The European Central Bank (ECB) has assumed a fiscal policy role by its extensive government bond buying, the no bailout clause has been replaced by the permanent European Financial Stability Facility and negotiations over a stronger political union have gained new impetus. This contribution traces the influence of different societal actors on the French government's preferences, which have largely shaped the outcome of the European summits. By following the domestic politics approach, it systematically juxtaposes the support or the discontent of the business community, namely that of the financial industry and the industrial interests, with the electoral pressures by the broad French public.

The paper asks whether the economic interests trumped the electoral concerns and shows that the strong ties between the French financial sector with the southern periphery have been a driving factor in the first years of the euro crisis. As public opinion grew more and more disgruntled, it constrained the French government, which in turn changed its substantive position in the negotiations and sought to allot many of the responsibilities to the ECB, to avoid further unpopular financial commitments and bank bailouts.

Key words:

• Domestic politics
• eurocrisis
• France
• banking industry
• public opinion

Notes

1. In 2005, the French people voted against the Constitutional Treaty amid a deteriorating economic environment and expressed only lukewarm support for the Maastricht Treaty in 1992, as the former benign economic development went south (Howarth 2001, p. 141).

2. According to Le Monde (25 October 2011), they constantly informed each other and it was suggested that they contacted each other 15–20 times each day, to coordinate their positioning.

3. While The Economist (1 October 2011) derided Mr Baroin as ‘inexperienced', the journal cited French government officials who proclaimed that Mr Musca was ‘France's real finance minister'.

4. According to the Wall Street Journal (21 October 2011), analysts of the IMF had been among the first to pick up on the implications of a Greek default on the European banks. They simulated the effects and informed the IMF's managing director, Dominique Strauss-Kahn, about the implications for the French banks and doubted whether they could weather the effects of such a default. This enticed executives of French banks to intervene personally with their compatriot. They met with Mr Strauss-Kahn and persuaded the former French finance minister, to keep the exposure of the French banks under wraps, to avoid any gyrations and quell doubts about the French banks, although Mr Strauss-Kahn reportedly warned the heads of state and government in personal discussions (Wall Street Journal, 21 October 2011).

5. The analysts of the banks were unsure about the exposure of the individual banks and mused who was issuing the CDS contracts. According to reports by BNP Paribas, they could have been issued by Greek banks in a desperate attempt to make some profits (FT Alphaville, 29 January 2010). In this case, the CDS contracts would have been worthless, because Greece's bankruptcy would have certainly toppled down the Greek banks, as they themselves held the lion's share of Greek government bonds.

6. The leaked Geithner Files were quoted by Spiegel (2014). He is cited as having said:

It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who's exposed to Greece?

7. The German Finance Minister, Wolfgang Schäuble had championed the founding of a European Monetary Fund, to avoid the meddling of US-politics in the euro-crisis, while Mrs Merkel spoke out in favour of the IMF.

8. The Socialist presidential candidate, Mr Hollande, rode to power on a slew of electoral promises including the reduction of the retirement age, higher taxation of the rich and the abolishment of the hikes in the VAT rates, whose revenues were supposed to alleviate the cost of labour. In short, Mr Hollande pledged to roll back the incipient reforms by his predecessor.

9. This section coincidentally had been responsible for offloading the unwanted assets in Greece. The success of this operation had largely hinged on delaying the debt restructuring of Greek government bonds and the general financial stabilization of the Southern periphery.

10. The losses to be realized by the French banks according to the FBF-proposal promised to be very small indeed. According to Kopf (2011), the proposal mimicked ‘the form of the Brady plan, without accepting its economic substance, namely to provide debt relief to countries with a clear sovereign debt overhang'.

11. There was only one mishap, in which Christine Lagarde, the former French Finance Minister and now Managing Director of the IMF, was alarmed by IMF-analysts over the need for an ‘urgent recapitalization' of the European banks, which would be the only way to effectively halt the euro-crisis. Only when the banks would be able to withstand losses from sovereigns would the euro-zone stop unraveling. Mrs Lagarde voiced these concerns in August 2011 at the central bankers’ annual gathering in Jackson Hole. This left the French government officials gobsmacked. Her successor as France's Finance Minister, François Baroin, considered this an attack on the French banks (Baroin 2012, p. 236). Mr Baroin immediately organised a telephone conference, where the aggrieved French banks’ executives fumed at Mrs Lagarde, who promised to correct her proposals. Mr Baroin then reportedly spent the rest of the day to coordinate the French position, together with the banks’ executives (Baroin 2012, 237).

12. According to Spiegel (2014, p. 10), those responsible for crafting the SDR-plan admitted that it ‘was hastily thrown together'.

13. Le Maire (2014, p. 284) confirms that when he met with the State Secretary in the Federal Chancellery and the General Secretary of the CDU in Berlin on 30 November 2011, they all said that the German government would be ready to tolerate interventions by the ECB, but that France would have to refrain from public declarations so that they would not have to rescind their tacit agreement, in the face of the population's concerns over inflation.

14. Asked, whether they grasped what the European Stability Mechanism (ESM) was all about, 67% of those questioned, admitted that they either had never heard about this instrument (29%) or that they did not know what it was about (38%) (TNS Sofres 2012).