Analysis: France now seems to be jealous of Britain’s fiscal autonomy

THE French government just doesn’t seem to understand the real implications of the euro.French officials recently reacted to the prospect of a credit rating downgrade by lashing out at Britain.

The head of the Central Bank, Christian Noyer, argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, declared that: “You’d rather be French than British in economic terms.” French prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.

French officials apparently don’t recognise the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British debt come due, the UK can 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 – France 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 is 8.8 per cent of GDP.

Furthermore, 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. That is precisely what Britain has been doing: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.

The eurozone fiscal deficits 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 eurozone banks, may be even more important. Unemployment differentials within the eurozone are a reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.

President Nicolas Sarkozy and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration. The French regarded the creation of the euro as an important symbol of progress toward that goal. In the 1960’s, Jacques Delors, then the French finance minister, pressed for a single currency with a 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 financial 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.

• Martin Feldstein, Professor of Economics at Harvard, was chairman of US President Ronald Reagan’s Council of Economic Advisers