Jean-Pierre Landau is a professor of economics at Sciences Po in Paris and a former deputy governor of the Banque de France. He is the co-author of “The euro and the battle of ideas” with German economist Markus Brunnermeier and U.S. historian Harold James.
Landau explains here how long-standing differences in economic philosophy between France and Germany explain the two countries diverging approaches to the euro crisis and eurozone reform.
What the current debate on the eurozone shows seems to be that France and Germany have radically different economic policy approaches. Has it always been the case?
We describe two antagonistic intellectual economic traditions dating back to the early 20th century, the German one summed up by the word “ordo-liberalism,” with its emphasis on rules which have to be strictly followed, and the French one, based on discretion and flexibility. With more predictability and a long-term focus on the German side, you dont change your view depending on circumstances, you accept temporary setbacks, complex and even painful situations, all in the name of the longer term. The French approach, on the other hand, is all about being able to react, to adapt, sometimes to the point of permissiveness.
But wasnt that already obvious throughout the talks that led to the monetary union in the 1990s?
Not really, because everything was done at the time to paper over those differences, to pretend they did not exist. And this was a sound approach: Everyone decided to focus on the common ground. Only the euro crisis forced everyone to look at the Franco-German intellectual divide.
So what happened?
What the French realized in 2010-2011 is that there was a whole aspect of German thinking they had failed to understand, most notably what the French call fiscal rigidity and Germans, fiscal stability … Wed thought that over the years there had been a meeting of the minds, but the crisis proved that it hadnt been the case.
Is that because there had been little debate on fiscal matters before?
Back in the 1980s and 1990s, you have to remember that France was seen as permissive in monetary matters, with higher inflation than in Germany leading to a series of devaluations. But it was not lax in fiscal matters. Today, everyone is very happy, of course, with a stable currency and low inflation.
Then came the crisis, and the French surprise that for strong intellectual reasons, Germany was not as ready as they thought to do what was necessary to keep the eurozone together. For French policymakers and, to a large extent, the [European Central Bank] it was a no-brainer. Everything needed to be done to save the eurozone. But we realized that this idea may have been incompatible with some basic tenets of German economic policy. Thats when we started hearing about moral hazard, and discussions soon started to be framed in those terms.
But how did the whole discussion end up being framed by Germany?
The turning point in the euro crisis was Deauville, when [former French President Nicolas] Sarkozy and [German Chancellor Angela] Merkel agreed to allow the possibility of restructuring sovereign debt for the future. That started the financial market attacks on Italy and Spain.
The conventional wisdom today is that it was a mistake — and you wont find anyone on the French side, for example, to claim responsibility for having ever suggested or agreed to the idea. From the moment you imply that eurozone debt is no longer secure, the only safe asset in the eurozone is German debt. And that is the moment that soon allowed Germany to dominate the eurozone debate — its impact is still being felt today.
Deauville happened in October 2010. The French understood quickly that it had been a big mistake and tried to row back, but Germany didnt want to.
But isnt it obvious that sovereign debt can be restructured? Whats wrong with indicating the rules under which it could be done?
I have a very strong view on this, which is that it is a black-and-white situation. You cannot let investors suspect that sovereign debt isnt safe. If you point their way to default, you make it possible. During market upheavals, thats how you transform temporary liquidity crises into permanent solvency crises.
Didnt [ECB President] Mario Draghis “whatever it takes” moment in the summer of 2012 end the speculation?
Interesting case in point. Draghi brought the proof that what Spain and Italy had gone through was a liquidity crisis: You dont end a solvency crisis by just talking it down, which is what he did. “Whatever it takes” was a vindication. It proved that wed only gone through a temporary liquidity storm. Even today, it is not clear-cut that Italy, which has run a primary surplus for many years, has a solvency problem. But ever since Deauville, the well has been poisoned. There is a doubt around sovereign debt that we should never have allowed.
This interview was edited for length and clarity.