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posted on 20 May 2015

Time for France To Exit the Eurozone?

Written by , GEI Associate

The euro will be a great source of problems, not a source of help.

- Milton Friedman

The crisis that hit the European Union in 2008 put the Eurozone into the limelight. Indeed, the Eurozone seems to be like a house built on a weak foundation—the Monetary Union, which led to the adoption of a single common currency. Between repairing and destroying, Eurozone's choice seems obvious: repairing by investing money into the house in order to save it.

Meanwhile, the people in the house (Eurozone's citizens) suffer restrictions (austerity.) Many turn to extremist wing parties that do not want to be part of the Eurozone. By considering that France is under ECB's thumb, The Front National, a right wing extremist party, gained popularity. While being a possibility that is perfectly feasible for some, a Frexit-- in analogy with the Grexit evoked in 2012-- is completely rubbish for others.

The lack of economical sovereignty is a popular reason given against the membership of the Eurozone since it allegedly impeaches France to devaluate its currency. In the meantime, France suffers increasing export prices only partially offset by falling import prices, leaving a still sizable balance of trade deficit.

Historical Data ChartHistorical Data ChartA think-tank from Paris, the Montaigne Institute, projected that if France were to exit the Eurozone, 19 % of the GNP could be lost. Considering that a reduction in growth is typically accompanied by wage decreases, French' net income would be affected, and debt would increase—a French public debt that is already significant. An increase in debt will likely lead to austerity measures that are known to include tax increases, lower social state benefits, growing job cuts, and a later retirement age.

According to the French economist Hans-Kristian Colletis-Wahl, the transition from the euro could cause a bank run. Informed about the recently developed depreciation, investors will withdraw their capital from French banks; they will prefer other Eurozone countries where they can make more profit-- where the currency is stronger. Also, having in mind that the stock exchange of Paris is supported by approximately 70% of foreign investment, a diminishment of the stock exchange index is expected. Colletis-Wahl thinks that complementary with the new adopted currency there will be a credit crunch provoked by an increase in exchange rates, hence causing a slowdown in production.

Another issue that devaluation could create is inflation. Why? Oil is solely traded in dollars, but the new currency is going to be cheaper than the dollar (and the euro), which will make oil's price higher in France's currency. This is a principle of causation relationship: if oil prices go up, end products that need oil in their production or maintenance will also go up.

Some economists are positive about France exiting the Eurozone. For example, J.J Rosa, a professor at Science Po, thinks that a cheaper currency will lead to more jobs, exports, and investments. He alleged that French' purchasing power will increase because devaluation will actually make goods that are produced in France much cheaper than foreign goods. And, attributable to the stimulation of production, more jobs will be created.

Author of the famous The Final Fall (1976,) Emmanuel Todd hitherto predicted the collapse of the Soviet Union; nowadays, Todd puts in question the architecture of the Eurozone. Will Todd be right again?

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