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Why euro zone resolve is cracking under a strong currency

The dollar is too powerful; the dollar is too weak. You can't have it both ways but the contradictory complaints about the greenback are coming from two pillars of the French establishment. French Finance Minister Michel Sapin this week called for and end to the dominance of the U.S. dollar in global trade while the chief executive officer of Airbus's civil aircraft business, Fabrice Brégier said the euro-dollar exchange rate was "crazy" and urged the European Central Bank to take action to weaken the euro.

Airbus prices its planes in dollars, which have depreciated by 7 per cent over the past year and the loss against the euro was as high as 10 per cent a couple of months ago. With most of its overhead costed in euros, Airbus is suffering a double whammy to its margins, a competitive disadvantage against Boeing, which pays its workers in the same currency in which it sells aircraft. The U.S. dollar exchange rate is an everyday issue for Canadian exporters and, indeed, European exporters, too. But the strength of the euro is beginning to test the patience of the European business and political establishment, not just the weak countries of the EU's periphery but core nations, such as France and Italy.

That is part of what lies behind the Mr. Sapin's plaintive wish that more trade was denominated in euros. He is calling for a "rebalancing" of global reserve currencies to include not just more euros but Chinese yuan, too. And it is no accident that Mr Sapin is today seeking common cause among fellow European finance ministers; the French government is fuming over the $9-billion fine imposed by U.S. authorities on BNP Paribas for its violation of American currency sanctions against Sudan and Cuba.

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Not for the first time, America's extraterritorial judicial reach is infuriating foreign multinationals. The dollar's global success as the denominator of countless transactions that have no connection with the United States gives U.S. foreign policy an extra tool that enables it to meddle in the affairs of others. There were no relevant EU sanctions against Cuba and Sudan, but the need to clear dollar transactions through U.S. banks, placed the French bank in violation of U.S. law.

This is an old story; efforts to create alternative reserve currencies to the dollar have surfaced periodically, especially in the Middle East among the Arab oil exporters, with talk of a gold-backed dirham. All have foundered, due to lack of market credibility. There is nothing that the French government or even the collective will of the euro zone finance ministers can do if more people want to be paid in dollars than in euros, yuan or loonies. Unfortunately, what lies behind the complaint of the French Finance Minister and the Airbus boss is a dysfunction more fundamental than loose monetary policy at the Federal Reserve in Washington. It is the euro itself and the iron-clad European Central Bank that is once again pulling the rug out from under the efforts of EU member states to stimulate economic recovery.

We could soon find ourselves in yet another euro zone crisis. The French economy is floundering with a quarter of young people out of work. The IMF is forecasting miserly growth of 0.7 per cent and it is clear that France will fail to meet its commitment to bring its budget deficit into line next year with the euro zone limit of 3 per cent, even after securing two years' grace from the European Commission.

Italy's new superstar politician, Matteo Renzi, is jubilant, having secured Angela Merkel's backing for more growth-oriented policies but this is unlikely to change the tone at the European Central Bank. Germany has already nixed Mr. Renzi's other big idea, EU government bonds issued with the collective backing of all the euro zone states. Italy's debt is expected to reach 135 per cent of GDP this year, making the nation hugely vulnerable to shocks and the need for a weaker euro all the more urgent.

The single currency is an appalling burden even for those countries, such as Ireland, where government has burned its social commitments on the pyre of fiscal rectitude and the public have accepted pay cuts in preference to job cuts. For France, the outlook is more painful because the ruling class of politicians, unions, civil servants and employees of state industries still lives in a separate world of privilege and protection.

Earlier this year, President François Hollande bowed to the inevitable and undertook to trim the state, which accounts for a staggering 57 per cent of the economy, proposing to cut €50-billion ($72-billion) of public spending and reduce taxes on businesses by €40-billion. It amounts to no more than a pin prick in the bloated body of the French state but it represents a beginning. Yet, at a conference this week, organized by the President to bring together the "social partners" (unions and employers) in a "social dialogue," Mr. Hollande spoke of public investment, seemingly oblivious of the mounting public debt and the need for investment by employers in training and apprenticeships. His efforts at forging a German-style employer-union consensus were in vain as the main French unions threatened to boycott the talks. Meanwhile, lawyers and actors joined a summer of labour unrest, launching strikes to protest against public sector cutbacks, forcing cancellations of court hearings and disruption to the Avignon Theatre Festival.

It will take more than street protests for the French government to rethink its commitment to the euro. After all, it was a French idea, imposed on Germany which the latter is now using to enforce fiscal discipline on its unruly and improvident neighbours. The question no one wishes to ask is what it will take for Paris to tell Berlin that it has changed its mind.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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