1/ France's fiscal crisis is not going away. Plans to cut pensions and other benefits are not serious politically or economically. Only one solution: dual currency system where the euro is used in domestic transactions and the 'nouveaux franc' is used in external transactions.🧵
2/ Back in August the French Finance Minister @Eric_R_Lombard said that the country would eventually need an IMF bailout.
3/ The fallout from the comments was so bad that @Lagarde had to say that France was not heading for a bailout.
@Lagarde 4/ But the reality is that French bond yields are now above Italian bond yields. France is barrelling toward a fiscal crisis.
5/ Cuts aren't going to work. They will not be big enough to fill the budget gap and they generate mass protests. The French won't tolerate it. Hence the constant political gridlock.
6/ We need a new way of thinking about this. Can the French economy be re-balanced without harsh austerity? Yes.
7/ Here are the sectoral balances of France. These show which sectors are borrowing and which sectors are saving. Here we see that the issue is that French households want to save an awful lot and this is offset by government borrowing. This is the deep problem in France.
8/ But French households have always wanted to save. In the past government deficits were modest because the foreign sector was borrowing. What this means is that the French trade surplus used to support high household savings rates!
9/ What happened to the trade surplus? The euro happened. France used to be able to devalue the franc to maintain competitiveness and have a trade surplus. But when it got locked into the euro it was no longer able to do this. Now it runs trade deficits!
10/ So, here is the idea: reissue the franc. But only use it for foreign transactions. Use euros domestically. But use the franc to clear trade. And allow its value to float at market price against the euro.
11/ Is this legal? A first glance at Article 128 of the Treaty on the Functioning of the European Union states that only the euro can be legal tender. But the law only applies to "legal tender". It is not clear what is and what is not "legal tender".
12/ According to a Report of the Euro Legal Tender Expert Group (ELTEG), ‘there is legal uncertainty at the euro area level with regards to a common interpretation of legal tender.’ Member states have ‘different national legislative provisions regarding legal tender.’
13/ Arguably a franc that was only used to clear trade would not be "legal tender". At the very least, this would be better legal reasoning than what the ECB presented to justify its obviously illegal QE program!
14/ So, there it is: a completely novel and actually workable way for France to solve its severe economic and political problems. Here is a link to the original article with more details: https://www.hungarianconservat...
@philippilk EU bureaucracy would scream bloody murder about this violating monetary union rules. You have to hope that when a nation's survival is at stake creative solutions must be allowed to override the ideology
@philippilk That never worked in history. Bad money will chase good money.
@philippilk That should have been done by all EU countries since the beginning until stabilized. China actually did something similar for some time