Cablegate: France Reopens Monetary Debate

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E.O. 12958: N/A


1. (SBU) SUMMARY. Although the euro has come off its recent highs
against the U.S. dollar, President Nicolas Sarkozy is unlikely to
give up efforts to convince Eurogroup partners that European
governments should discuss European Central Bank (ECB) monetary and
exchange rate policy. France, which has argued that the strong euro
harms European exports, understands it is isolated on the issue, and
Sarkozy underscored his support for ECB independence following his
July 16 Toulouse meeting with Angela Merkel. But the GOF is likely
to continue to look for opportunities to bruit its "economic
government" idea, and to encourage discussion of currency and
monetary policy issues in various inter-governmental fora. End of

France's Concern: Strong Euro Harms Exports
2. (U) President Sarkozy has regularly complained that certain trade
partners of the EU practice "monetary dumping" by keeping currencies
weak to boost exports. During the presidential campaign Sarkozy
vowed to lobby for changes in the ECB's mandate so that it would
take economic growth issues into account when setting policy. While
he has toned down the rhetoric as president, he used his appearance
at the Eurogroup meeting of finance ministers in early July to
further stake out his position.

France Seeks to Convince its Partners on ECB Policy
3. (U) More recently the ECB was one of two topics discussed during
Sarkozy's meeting with German Chancellor Angela Merkel in Toulouse
on July 16. After the meeting, Sarkozy reportedly told his cabinet
that Merkel's views on the euro had moved "closer to his." He said
they both had agreed on the importance of maintaining the
independence of the ECB, but also on the need to put "monetary
dumping" on their common agenda.

4. (U) Sarkozy's spokesman Laurent Wauquiez explained that "the
president is not questioning the independence of the central bank,
but showing that monetary policy is a topic of debate and dialog."
While in Toulouse, Sarkozy had quoted article 111 of the Treaty
Establishing the European Community, saying the European Council
"may formulate general orientations for exchange-rate policy."
Sarkozy said then that it "isn't illegitimate for us to have a
discussion on a subject which doesn't call into question the
European Central Bank's independence. I'd even say that it doesn't
call into question the level of the euro, but rather monetary
dumping carried out by other parts of the world."

5. (SBU) Sarkozy appeared to back off from the issue in the run-up
to his August vacation, and ECB President Jean-Claude Trichet was
quoted in the press as saying he had had a "very good meeting" with
PM Francois Fillon on July 26. Nonetheless, European Affairs
Minister Jean-Paul Jouyet has picked up the cudgel, first in a press
interview and more recently before the National Assembly's Finance
Commission on July 31. Jouyet told the press that "when you are
evaluating a country's economic situation you have to consider the
whole picture," indirectly reproaching the ECB for its focus on
fighting inflation. He suggested that the Eurogroup might pursue a
strategy of "(influencing) the ECB's decisions by having a more open
discussion about the motivation behind interest-rates decisions. You
can have those discussions discretely and in the framework of the
Eurogroup." Jouyet told the National Assembly that existing
dialogue between the ECB and Eurogroup governments was at times
"simplistic" and needed to be expanded.

ECB Governor Promptly Reacts
6. (U) Already irritated by Sarkozy's repeated criticism, ECB
Governor Trichet has taken to the French airways to reject GOF calls
for greater political influence on the Bank. In an August 3 radio
interview Trichet said that the existing dialogue with EU
governments was "very well organized," that he saw his Executive
Board "three times per month," and the European Parliament "at least
five times per year." Trichet said the consultative process was
organized according to the terms of the Maastricht Treaty, and that
he would not deviate from that.

7. (U) Bank of France Governor Christian Noyer has also waded into
the debate. In his August 2 introduction to the Bank's annual
report (addressed to the president and to parliament), Noyer
recalled that price stability was the overriding objective of all
central banks "not by chance," but rather based on experience that
shows that attempts to stimulate growth using expansive monetary
policy "have always failed." Noyer wrote that the defense of the
value of the currency "is the preservation of our purchasing

PARIS 00003319 002 OF 002

power...which our compatriots understand, and is manifested in their
attachment to price stability."

8. (U) France's economic growth is forecast to lag behind the
eurozone for the second consecutive year in 2007, notably due to
insufficient export growth (reftel). France posted a record 26.8
billion euro (33.6 billion USD) trade deficit in 2006. In 2007,
French export growth has stagnated while German exports have
reportedly risen to a new high. Noting that France and Germany
share a common currency, EU Commission analysts put the blame on the
lack of competitiveness of French companies. (Note: Exports to
Europe account for 72.0 percent of French exports, of which 50
percent to the eurozone and 65 percent to the EU; exports to the
United States and Asia account respectively for 6.7 percent and 8.8
percent of French exports. Imports from the U.S. increased 11.7
percent in 2006. Imports from Asia were up 24 percent in 2006
compared with 2004. End of Note.)

Strong Euro or Weak Dollar?
9. (U) French private-sector analysts generally have pinned the
recent run-up in the euro on fears that the sub-prime mortgage
crisis in the United States may undermine U.S. economic growth.
Analysts here also expect the ECB, which has doubled its benchmark
interest rate to 4 percent from 2 percent in late 2005, to further
increase it to 4.25 percent in September and possibly 4.50 percent
thereafter, putting further upward pressure on the euro. Some
commentators suggest that a euro above USD 1.40 would begin to
seriously weigh on competitiveness. According to Morgan Stanley
senior economist (and member of the Prime Minister's Council of
Economic Advisors) Eric Chaney, in that situation "only the ECB
could break the vicious circle."

10. (SBU) President Sarkozy may have toned down the rhetoric, but we
do not expect this issue to go away (particularly if the euro
strengthens further). Although Finance Minister Lagarde has taken a
relatively low profile in the debate, she has been formally tasked
(in the president's "letter of mission" to her) to work with EU
partners towards an "economic government" that would encourage
economic convergence, build a "real dialogue" with the ECB in order
to give the euro zone a "monetary strategy," and to examine the
extent to which an accord can be reached between the ECB and the
Eurogroup on the "modalities" of implementing exchange rate policy.


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