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Saturday, December 17, 2011

Calming down the French

Just as I have argued that the British veto on a new European Treaty has not isolated us within Europe, so it seems it must it be pointed out that those on the other side of the argument need to calm down and start acting like adults.

Nick Clegg has felt it necessary this week to chastise the French Prime Minister for his rhetoric and that of his government, in baiting the credit rating agencies to take their revenge on the UK.

French prime minister Francois Fillon the head of the French central bank had suggested Britain was a candidate for a downgrade amid fears in Paris that France might lose its coveted AAA rating. His finance minister Francois Baron further inflamed the situation by calling the UK's situation "very worrying" and suggesting France was better off.

The credit rating agencies do not seem convinced. They are still focussing on the Euro currency countries because they do not believe that there are credible governance arrangements in place. No matter how stable France is, it is part of a Euro zone that remains teetering on the edge of a precipice.

In such a situation, it is hardly in France's interests to further inflame a difficult situation by inviting sanctions upon a country that could still be a useful ally in putting this right, even if Britain does not want to sign up to what we consider to be an unacceptable solution.

This is not diplomacy, it is desperate name-calling by politicians who fear for their own survival in forthcoming elections.

Meanwhile, those naysayers who predicted that the Cameron veto was the beginning of the end for Britain's European adventure must think again. The fact that British officials will take part in "technical discussions" on new eurozone arrangements as well as second thoughts on the part of some of the non-Eurozone countries as to what they are signing up to, indicates that Britain is still very much a player.

Europe needs us just as much as we need Europe and it does nobody any good to continue to overreact to last week's veto in the way that many on both sides of the fence are doing.
Oh dear technical , never mind I'm sure you will keep third place at the next election just.
The Eurozone was an arrangement between certain countries to benefit amongst themselves by facilitating trade. Not least Germany gained hugely as its exports grew strongly. Who was buying their output - countries and individuals borrowing huge sums. They did not seem to complain then!

Why should countries not party to those benefits now be vilified for not wanting to clear up the mess? Britain not getting involved in euro tussle - sensible. Britain's isolation and failure to build bridges - deplorable!
The strange thing about the French name-calling is that they seem to forget it is not their current economic situation but their future economic prospects that decide their credit rating.

And with Greece set to default, Spain and Italy under heavy pressure and Germany doing a passable impression of an ostrich, the French prospects are pretty dire. Why? Because their banking system is grossly over-exposed to the sovereign debts of these nations, as a result of them being good Eurozone members who lent money to these basket cases in the belief that because they had the same currency as France they had the same credit risk. By contrast, the only British bank with significant exposure is RBS (thank you Fred the Shred for your brilliant decision to take over ABN Amro) which is already state-owned.

When (I am afraid it is no longer "if") Greece defaults, the French banking system will have to be rescued, which will cost mind-bending sums of money. At this point we can stop talking about France's genuinely low deficits (or Italy's, or Spain's) because it will be the crashing banking sector that will destroy them, as it did in Ireland. Just on a much, much larger scale. And that is why every hedge fund in sight is attacking these economies, which superficially are no worse off, in the case of Italy at least perhaps are rather better off, than we are.

While it is not hard to imagine our own banking system will also suffer horrible losses in such a scenario, given how interlinked the banking system is, they are much less exposed to the Eurozone and with a little judicious shoving from Osborne and Cable should ride out the storm in the end.

My personal point of view is that we should let the French call us names - if it makes them feel better. After all, it makes zero difference to us in practice. They certainly need all the feel-good they can get right now.
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