January 14, 2012
Arguably the main reason that France and the rest of the euro zone countries are facing recession and debt downgrades is the failure of the European Central Bank (ECB) to act as a lender of last resort and promise to back up the debt of its member states. This failure, coupled with its obsession to curb inflation even at the expense of growth, would seem to be the main source of the euro zone’s economic problems at the moment.
However the NYT sees it otherwise. In an article on Standard & Poor’s downgrade of French debt it told readers:
“France will have to work to restore its financial luster, especially if it is subsequently downgraded by other ratings agencies. French officials say their priority now is to demonstrate that the euro area is solid, while also showing that France is working to improve its own finances.
Mr. Sarkozy’s austerity programs, including higher taxes on items like some food and beverages that kicked in across France recently, are aimed at whittling the country’s budget deficit to 3 percent of G.D.P. by 2015.”
Austerity is of course one route, although if it leads to further weakness in the French economy, it is not clear that it will be a successful route. Another possible route would be for France to pressure the ECB to adopt sounder policies.
The NYT seems to have ruled this path out for France, but the French people might see changing ECB policy as preferable to tax increase and spending cutbacks that will have an uncertain impact on the deficit and France’s financial standing.
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