Euro Slide not Sufficient for French Prime Minister

Earlier today, French Prime Minister Fillon reiterated recent remarks by other French officials bemoaning the euro's strength against the dollar. The euro has slid almost 6.75% against the US dollar since late November. The euro's setback means that over the past six months it is essentially flat (-0.71% according to Bloomberg data).

Fillon's remarks were reportedly made in the context of a broader discussion of French competitiveness. France wants to attribute the sharp widening of its trade deficit to the euro's strength. France's trade surplus has deteriorated sharply in recent months. The Nov trade deficit was well above expectations at 5.3 bln euros, nearly a 20% worsening on the month. Barring a dramatic improvement in December figures, which will be reported on Feb 5, trade will be a drag on Q4 GDP.

It is not immediately clear how much of France's loss of competitiveness is a function of the euro's appreciation and how much is a function of broader range of policies, including indexing and unit labor costs relative to Germany.

That said, it is difficult to attribute the euro's weakness to French desires. We argue that the main driver of the euro is fiscal strains reflected much acutely by Greece, which stands out only in the extremis. That is fudged the entry rules is broadly applicable. That its debt to GDP ratios are high and rising is also true of many others in EMU. Nor does there seem to be a satisfactory mechanism to address the situation. Members have not levied fines to past transgressors and fining a debtor seems counter-productive, for example.

Much to their chagrin, French officials may find that a weaker euro, driven by fiscal woes and credibility issues, does not really boost France's competitiveness.