By David Marsh, MarketWatch
LONDON (MarketWatch) — The extraordinary statement questioning Britain’s credit rating by Christian Noyer, the mild-mannered but highly experienced governor of the Banque de France, has quickly become a cause celebre in the U.K. Indeed his interview in the obscure Le Telegramme newspaper in Brittany could become the monetary equivalent of the celebrated Daily Telegraph affair before the First World War when Kaiser Wilhelm in 1908 gave an inflammatory interview to the London newspaper that contributed to the conflict that broke out six years later.
What looks like an imminent loss of France’s AAA credit rating is certainly setting nerves on edge in Paris. For reasons which are not entirely clear, Noyer told the Brittany newspaper that not France but the U.K. should be downgraded by rating agencies because Britain had bigger deficits, more debt, higher inflation, lower growth and shrinking credit. All very true of course — but beside the point.
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One wonders why Noyer made such a statement — perhaps, like all most infamous central banking declarations, this was unauthorized — since it could only reverberate against him.
Noyer is a pleasant and erudite man who makes a splendid dinner-time conversant. He normally gives the impression that he believes, as I do, that central bankers should be seen but not heard. Noyer has been in enough dogfights to know that creating a stir about someone else’s credit rating can never be a good thing. He is now one of the only two members of the European Central Bank Council to have sat on that body since it started 13 years ago, the other being Yves Mersch, governor of the Luxembourg central bank.
In his plaintive querying of Britain’s credit status, Noyer revealed much more about France’s frustrations and fragility than Britain’s. The short answer to his poignant question: ‘Why is Britain safe from downgrading and not France?’ is that Britain still has its own money whereas France has effectively adopted a foreign currency. The longer answer would take longer to elaborate: it would lie in an explanation of how France sought to break the mold of European money, and instead became trapped in it.
A series of nervous statements from leading French policy makers demonstrates that the full horror of France’s position in the economic and monetary union is now starting to dawn in Paris. Membership in the euro /quotes/zigman/4867933/sampled EURUSD -0.24% has not made France stronger and Germany weaker, which was the initial calculation behind the French drive to implement a single currency after the fall of the Berlin Wall in 1989.
Instead, it has been the other way around.
Because France no longer has control over its own currency, it can no longer bluff or bludgeon others to get its way, as was often the case during the 1980s and 1990s. Because France does not run the European Central Bank, as it hoped it would earlier on, it cannot inaugurate the kind of quantitative easing to protect local bond markets that has been enacted in the U.S. and U.K. Because France is shackled together with Germany and 15 other countries in EMU, its credit rating and the performance of its bond markets are linked to the prowess not of the strongest but the most feeble in EMU.
Finally, because the Germans have rediscovered the seemingly lost arts of Bundesbankism under the central bank’s young and surprisingly hard-headed president Jens Weidmann, France finds itself trapped in the same vice of German orthodoxy and obduracy from which it thought it had escaped with the establishment of the euro in 1999.
Some people of course saw this coming.
President Francois Mitterrand, who was responsible for driving the Germans toward monetary union after the fall of the wall, confessed when he was close to death in January 1996 that he had made a mistake by granting full independence to the European Central Bank — because the Germans would ultimately get their way. The admission, made to Miitterrand’s old confidant and Socialist comrade-in-arms Jean-Pierre Chevenement, was all the more revealing because Mitterrand had a track record of being right about Germany.
The implication of Noyer’s statement Is that the old fox Mitterrand got it right — belatedly — yet again.
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David Marsh is co-chairman of the Official Monetary and Financial Institutions Forum.