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French-British Debt Squabble Points Out Euro’s Flaw

December 28, 2011 | Daily Capital

Bickering between France and Britain over debt levels accomplishes nothing. The fact that borrowing is more costly for France, despite Britain’s larger debt-to-GDP ratio, highlights the inherent problems of a single currency in Europe. The economies of Eurozone nations, as well as fiscal policies, are all different. But with the establishment of the Euro, these countries are unable to react to changing economic conditions individually. It is this lack of flexibility that makes French debt riskier. Britain can simply print more Pounds.

The French Don’t Get It

The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries. French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France. French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.

Read more at Project Syndicate.

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