France has launched a feverish campaign to shore up the euro before the next global downturn, warning that monetary union is not strong enough to withstand another crisis and faces disintegration without fiscal union.
Bruno Le Maire, the French finance minister, said there are just weeks left for Germany and the Dutch-led "Hanseatic League" to grasp the nettle on long-delayed reforms. “Either we get a eurozone budget or there will eventually be no euro at all,” he said.
“If there was new financial and economic crisis tomorrow, the eurozone could not respond. It is really urgent that we build-up the eurozone’s defences. We have been talking for too long,” he told the Handelsblatt.
Time is running out before the EU’s make-or-break summit on the future of the euro next month. The global expansion is looking tired and fragile.
Mr Le Maire said Europe’s leaders had failed to learned the lessons of 2008 and the 2012 debt crisis. They had not completed the banking union, or broken the "bank-sovereign doom loop" with full help from the bail-out fund (ESM).
Nor had they completed the capital markets union, or established a fiscal entity to bind EU economies closer together. “I am not being pessimistic, I am facing reality,” he said.
In extraordinary comments, Mr Le Maire said Europe must become a “form of empire, like China, and the US”, willing to deploy its full economic, monetary, technological, and cultural power on the world stage to confront the two great superpowers.
“I am talking about a peaceful empire, based on the rule of law. I use the term to sharpen awareness that we are going into a world where power matters. Europe should no longer shrink from deploying its power,” he said.
It is the first time that a top EU politician has admitted openly that the logic of European integration is imperial, rather than a hybrid treaty club of nation states.
Eurosceptics have long made this case, arguing that an imperial EU will necessarily become authoritarian. Their critique is that there is no unified people or "demos" that can plausibly form the foundation of an authentic pan-European democracy, and that the locus of accountable government must remain the nation state.
The euro ultimately requires an EU treasury, debt union, social security system, and tax authority, eviscerating the national parliaments by depriving them of their democratic lifeblood: the power of tax and spending. Economic and Monetary Union (EMU) therefore tends towards a technocrat imperial structure, akin to the medieval papacy.
A recent book by Belgian historian David Van Reybrouck said the EU had already come to resemble the interwar colonial empires of the Belgian, Dutch, British, or French, with their show-piece "councils of the people" while real power resided in a remote imperial executive. Mr Le Maire may come to regret opening this can of worms.
The French government is alarmed by the abrupt slowdown in the eurozone over the last seven months, and by signs that Italy may be slipping into recession. The darkening picture makes the budget showdown between Brussels and the insurgent Lega-Five Star alliance in Rome much more dangerous, with echoes of events before the Italian bond crisis of late 2011.
Both Barclays and Citigroup say Italian GDP is heading for contraction in the fourth quarter, with ugly implications with for the country’s debt dynamics.
Incipient capital flight has pushed up risk yields on 10-year Italian bonds to 306 basis points. This erodes the capital buffers of the banks, which hold €380bn of Italian bonds. Shares of Genoa lender Carige were suspended on Monday pending a €400m recapitalisation from Italy’s bank rescue fund.
Mr Le Maire will have his hands full if Italy spins into crisis. French bank exposure to the country is 12pc of France’s GDP, six times Greek exposure in 2010. BNP Paribas holds Italian sovereign and private debt equal to 47pc of its CET1 core capital, and Credit Agricole is at 29pc, mostly through subsidiaries. The figure for the nationalised Franco-Belgian bank Dexia is 556pc.
“The risk of contagion is huge. Italy is so big that it clearly represents a systemic threat to the whole euro area. The crucial problem is that the euroze still has no lender-of-last resort,” said Eric Dor from the IESEG business school in Lille.
The European Central Bank is already committed to winding down quantitative easing. It will halt its bond purchase scheme in December, leaving Rome nakedly exposed to the markets. The ECB has soaked up the entire net debt issuance of the Italian treasury over the last two years. There may be another round of long-term loans to euro area banks (TLTROs) to cushion the blow.
France’s Emmanuel Macron has staked his presidency on a grand bargain with Germany, pledging deep reform of the French economy in exchange for an overhaul of the euro.
Chancellor Angela Merkel offered him some comfort with the Franco-German Meseberg Declaration in June, agreeing to establish a “eurozone budget” to enhance competitiveness, and opening the door to an unemployment fund in acute crises (but in the form of loans, with no fiscal transfers).
Momentum has since faded and the text was in any case hedged about with caveats and conditionality. It also called for sovereign debt restructuring, a potential disaster for Italy. Lorenzo Codogno from LC Macro Advisors said this is playing with fire and could inadvertently prove the trigger for a systemic financial crisis. Yet France is clinging to Meseberg. “It is time for Germany to decide,” said Mr Lemaire.
The French pitch is that a timid vacillating Europe is being squeezed - or devoured - by the strongmen regimes of Donald Trump and Xi Jinping. The task is to turn the eurozone into a “sovereign economic power” able to stand up to this Hobbesian world order, and to resist Mr Trump’s extraterritorial sanctions and abuse of dollar financial hegemony.
“To meet this challenge, there is no other possible way than an accord between France and Germany. All else is an illusion,” said Mr Le Maire.
Whether Germany sees it that way in the post-Merkel era is an open question. The EU centre of gravity has shifted east. Many in Berlin suspect that the real French objective is to lay hands on the German credit card.
France has been in breach of the EU Stability Pact for most of the last decade and its debt has climbed to just under 100pc of GDP. Germany has gone in the opposite direction, running budget surpluses and cutting its debt to the Maastricht limit of 60pc. Sweet rhetoric cannot disguise this yawning divergence in interests.
Ashoka Mody, once German desk chief for the International Monetary Fund, said there is a core axiom in Berlin: Germany will not pay the bills of other member states. “My reading of 70 years of history is that no German chancellor will cross that line,” he said.