Tuesday, July 24, 2007

Back to Economics

The last few posts have been about social issues. Now, while I'm eating lunch, let me get back to economics (on the theory that there is no such thing as a free lunch). In a number of posts I've alluded to Sarkozy's differences with Merkel and many Euroland finance ministers over the independence of the central bank. Sarko wants intervention on the matter of exchange rates. The others feel that any intervention in currency matters diminishes the ECB's credible commitment to price stability. I've said that this difference reflects in part a traditional split between Germany, which for historical reasons fears inflation above all else, and France, which for historical reasons of its own has a certain obsession with exchange rates (though traditionally the French wanted a "strong franc"; now they want a weaker euro) .

But the difference is more than one of ideology or psychology. Sarko's concern about the euro is twofold: against the yuan and other Asian currencies, and against the dollar. The concern about the Chinese is shared with the United States, but the concern about the United States is probably more intense in France than anywhere else--and, again, for structural, not ideological/psychological reasons.

Consider the following (I take the figures from a lecture by MIT economist Olivier Blanchard: pdf of PowerPoint here, see slide 13--but the whole lecture is worth perusing). The figures compare the composition of exports for Germany and France:

Share in high-tech exports (in percent):




Precision inst

Transport equipmt











Both countries are doing reasonably well in their production for export and enjoy a comfortable trade balance. But note the lack of diversification in the French export portfolio, the heavy reliance on transport equipment (such as high-speed trains and jet airliners). Germany exports a lot of high-quality goods for which there are no substitutes. France is heavily dependent on the export of, say, Airbuses, which compete directly with American products. The strong euro means higher prices for jet airplanes, and this is a direct threat to sales on which France relies for its trade balance. True, the strong euro also decreases energy costs, but the transport equipment manufacturers and their subcontractors employ large numbers of skilled workers, so Sarko is particularly sensitive to anything the threatens cutbacks in that sector. A weaker euro would lower Airbus prices relative to Boeing's prices and help to compensate for the sales lost through mismanagement at EADS.

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