If Only France Had a Word for La Démesure: The Euro’s French Problem

The euro was born with a structural heart condition. In theory, a currency union should meet Robert Mundell’s famous criteria: synchronized economies, free movement of labour and capital, and a central fiscal authority big enough to bail out regions in trouble. Europe launched the euro without any of those, declared victory, and, in true fashion, went to lunch, hoping everything was okay in the office.

Instead, the EU bolted together a diverse set of economies—Germany, Greece, Finland, Portugal, Italy, and France—into a single monetary regime with one interest rate, one currency, and no mechanism to deal with asymmetric shocks. No fiscal union. No common treasury. No orderly way to let the serial offenders step outside, devalue, and come back. Imagine putting 20 very different patients on the same medication, at the same dose, forever, and being surprised when some of them stop breathing.

Many economists said, quite loudly, that this would end badly.

Milton Friedman called the euro a mistake and predicted “very serious problems.” Paul Krugman said it had long been obvious the euro was a “terrible mistake” because Europe never had the preconditions for a successful single currency. Joseph Stiglitz later called it “flawed at birth,” arguing Europe had built a currency without the institutions that would have made it workable.

Other than winning the Nobel Prize these people agree on almost nothing, including probably lunch venues. When Friedman, Krugman, and Stiglitz are all standing on the same street corner waving flares, you might at least look up.

And it wasn’t just outside critics. The euro’s architects have been quietly backing away from the blueprint for years. For example, Jacques Delors—almost the embodiment of modern France, an elite, socialist central planner convinced of his own brilliance but with an almost impressive Gallic indifference to how anything was meant to work in practice—admitted the whole thing was “flawed from the start.”

Or Otmar Issing, the ECB’s first chief economist—a man who helped design the system—later warned that the eurozone was stumbling from crisis to crisis without fixing the basics, and that one day “the house of cards will collapse.”

Bernard Connolly, who ran monetary policy analysis for Europe in the run-up to the single currency, quickly realized it wouldn’t work, said it would end in crisis, and was promptly fired. Connolly sued and won in the British courts, but then lost in the European courts on somewhat dubious grounds that it was akin to blasphemy for employees to be publicly logical and honest.

This at least proves Europe is not stuck in the past, as many claim. We used to burn heretics; now we bankrupt them through our own highly partisan courts. That’s progress for you.

So why is the euro still here? Short answer: former ECB President Mario Draghi.

In 2012, with markets openly betting on a euro breakup, Draghi said the ECB would do “whatever it takes” to save the currency—and, more importantly, convinced everyone he meant it. That one-line compressed sovereign spreads, calmed panic, and kept the show on the road. He effectively replaced the missing fiscal union with the ECB’s balance sheet. Europe didn’t solve its design flaws; it just found a very large printing press.

Of course, this was all on very dubious legal grounds; some pointed out it was prohibited under the various treaties, but what is the rule of law when a “grande project” is at stake? And we have already seen that when it comes to self-interest, the European judges know which side of their brot their beurre is on.

Draghi is now out of Frankfurt and writing reports on Europe’s future. Those reports all say the same thing: Europe is falling behind, needs hundreds of billions a year in joint investment, needs a proper capital market, needs to finish half-built projects like banking union, and needs to treat industrial strategy like something more sophisticated than “please build a battery plant here”—after several thousand bureaucrats have studied the matter for years. In other words, the euro still doesn’t have the scaffolding it should have had in 1999.

Predictably, European leaders have thanked him for his “bold vision” and then carried on arguing about agricultural subsidies.

Which brings us to France — the delicious irony at the center of the story.

The euro, politically, is a French project. After German reunification, Paris pushed for monetary union as the price of letting Berlin get the Deutsche Mark writ large. The logic was simple: bind Germany inside a European (read: partly French) monetary structure so no one dominates Europe again. The French state’s fingerprints are on the DNA of the euro: sovereignty through institutions, politics over markets, and the belief that political will can overpower arithmetic.

And yet France is now the most acute near-term risk to euro stability.

Start with the numbers. French public debt is above 110% of GDP. The deficit is running well above the EU’s supposed 3% ceiling and shows no serious path back under it. France spends roughly 57 cents of every euro of GDP through the state. If socialism were the solution, then France should be one of the most successful countries in the world—but, oddly, it is not.

Then the politics. France now lives in a state of rolling paralysis: no stable majority in parliament, hostile blocs that agree on almost nothing except blocking each other, and a leadership forced to bet by improvisation and constitutional tricks. You don’t get durable budget repair out of that. You get noise, crisis cabinets, and markets starting to price the problems.

And then the structural drift. French manufacturing has eroded for decades, the demographic age burden is rising, and productivity growth has not been heroic. This is not a country obviously growing its way out of a 110%+ debt load; it is a country hoping that bond markets remain distracted.

Alas, the bond markets have, unfortunately, started to cough pointedly. Investors used to treat French government bonds as “German bonds with seasoning.” Not anymore. The spread to Germany has widened as investors apply a visible risk premium to French debt, driven by deficits, politics, and creeping doubt about who exactly is in charge in Paris. France, once part of the euro “core,” is increasingly seen as a fellow member on the Southern European naughty step.

This matters because France was never supposed to be the problem. The comforting euro narrative for 20 years was “virtuous core, wayward periphery.” The periphery could wobble; the core would keep the system stable. Well, if France isn’t unquestionably core anymore, what exactly are investors holding? A currency without a fiscal union, backed by states that themselves are now being questioned.

None of this means the euro falls apart tomorrow morning. Europe is very, very good at doing nothing right up until five minutes before disaster, and then doing just enough to kick the can “dans la rue” for a few more “jahre.” Draghi proved that.

But they should also stop pretending the house is structurally sound. There should also be recognition that this is unsustainable. Additionally, recent experiments to expand immigration to flatter GDP numbers and add youth to Europe’s ageing demographic appear not to be working economically and are also fueling nationalist populism.

As Friedman pointed out, you can have open borders or a welfare state, but you cannot have both. The calculation is pretty simple: Immigration + welfare state = fiscal pressure = political instability, and we are seeing the destruction of long-established political parties across Western Europe.

In summary, the euro remains a currency built on French political logic and German credibility. France is now visibly weaker, fiscally and politically. Germany is no longer willing—or maybe no longer able—to underwrite everyone else without conditions. The ECB can still buy time, but not solvency or legitimacy.

Markets are finally starting to price that reality. Frankly, it’s about time. So, for investors, whilst diversification is good, just because Florida vacations are expensive doesn’t mean one should take advantage of the discounts found in Crimean beachfront villas either. As in all things, a balance.

Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice and do not necessarily reflect the opinions of Rayliant Investment Research. Indices cannot be invested in directly and are unmanaged.