French protests reflect the dysfunctional architecture of the common currency

The social instability in France is now spreading throughout Europe. Already there are mass protests in Spain and Portugal, Belgium, Italy, and Albania. In France, initially students began protesting over conditions in the schooling system, but the grievances and parties involved have broadened out and the increasingly chaotic scenes in Paris have spread out to the main cities of France. I was a teenager when the 1968 protests spread across the world and part of the anti-war movement at the time. We had great hopes that we would overthrow the Western capitalist model and while some positive outcomes came out of the widespread unrest, the protests failed to achieve the primary aim, and, in some cases, increased oppression (for example, they helped Nixon split the Democrats, prompted the Warsaw-Pact invasion in Czechoslovakia, and saw hundreds of students in Mexico slaughtered by the state forces at the – Tlatelolco massacre – to name some of the negative outcomes). It was a different time and the issues were somewhat different. What the current social unrest tells me is that segments of the population are rebelling after the years of dysfunctional government policies constrained by the unworkable fiscal rules that were designed to support the common currency. In 1996, I was invited as a guest of the European Commission to speak at a conference in Firenze about the plans for currency integration. I predicted at that meeting that the design outlined in the Maastricht Treaty was unworkable and would collapse in time. I was vilified by the other participants and the EC technocrats. I think what is going on now tells me that the predictions were accurate.

Last week I attended a workshop at the university here that was focused on geopolitics.

I met a person there who had previously worked for Jacques Delors and was very sympathetic to his contribution even though she acknowledged that the European Union had become a dysfunctional nightmare.

My point was that Delors deliberately stacked his committee that finally reported in 1989 with Monetarists and conservative economists because he knew that he would get support for his preferred monetary union architecture, which would embed neoliberalism in the very legal framework of the system.

Neoliberalism in Europe is a political preference that can be abandoned if the electorate choose a party that is not enamoured with the ideology.

The ideology is part of the treaty structure, which is nearly impossible to alter given that all 27 nations would have to agree on a progressive alternative at the same time.

I thus consider Delors to have ‘blood on his hands’ given his central role in the design and establishment of the union.

The alternative view that the person presented was that Delors was an ‘instrument’ of the elites and was deeply unhappy with what was happening and tried to modify the outcomes to emphasise a vision of social well-being.

The evidence doesn’t really support that view and after he left his official positions and worked within his own institute he had plenty of opportunities to criticise the system he created but didn’t.

None of his written material or public speeches indicate that he thought the ‘creation’ was a mistake.

In his last written statement – Thinking Europe as ours (Penser l’Europe comme la nôtre) – that was read out on December 6, 2021 at the Odéon Theatre in Paris by Pascal Lamy, given that Delors was getting very old, there was no hint of mea culpa.

I wrote at length about all of this in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

Nothing I wrote about then has been shown to be inaccurate.

All of the mainstream commentary on the protests seem to be missing the point.

For example, this UK Guardian article (October 10, 2026) – France’s dilemma: protesters demand spending as markets require fiscal restraint – pits the concerns of the protesters against those in the financial markets.

For the bond markets the problem is clear and directly related to the chosen architecture of the common currency.

When France (or any of the Euro-using countries) chose to scrap their own currencies and adopt the euro, the currency in use became equivalent to a ‘foreign’ currency for them.

At that point, they lost their currency sovereignty and could only spend if they raised taxes and if they wanted to spend more than they generated in tax revenue, then they had to rely on issuing debt to the private markets.

Importantly, unlike the debt issued, for example, by the Australia, US, Japanese, UK governments (and any government that issues its own currency under monopoly conditions), the debt issued by the Eurozone countries suddenly carried credit risk.

The bond markets knew that such governments could run short of euros and potentially default on their outstanding liabilities.

We went close to that during the GFC, first in May 2010 and then again in June 2012 when several governments came under pressure as rising bond yields were being demanded by the bond investors.

It was only the fact that the ECB effectively funded the fiscal deficits of the nations under pressure – through the large-scale secondary bond market purchasing programs – that the Eurozone survived intact.

If the ECB had not have introduced those programs and bought up all the debt being issued then several Eurozone countries would have become insolvent and probably would have had to exit the common currency.

The problem of the ECB intervention was that severe austerity conditionality was imposed on the nations which made it very hard for them to exit the deep recession that accompanied the financial market chaos.

What we learned from that crisis was that the Eurozone governments had very little fiscal room to move when confronted with a major crisis.

Some might say that the pandemic experience refuted that assessment.

But the only reason the governments were able to run large deficits during that period was because the fiscal rules were effectively suspended and the ECB purchased most of the debt that was being issued.

Under the – Pandemic Emergency Purchase Programme (PEPP) – and the existing – Asset Purchase Programme (APP) – the ECB purchased over 95 per cent of the debt issued within the Eurozone during 2020.

For some nations, the proportion was much higher – for example, for Italy it was 117 per cent of the debt issued (meaning they also bought debt that had already been issued prior to the pandemic.

By the end of the period, the ECB owned more than 25 per cent of all the outstanding debt that had been issued by Eurozone Member States.

In other words, the private bond market was really given no discretion and the investors knew that if they purchased in the primary bond market (the place where the debt is first issued), they could offload it quickly in the secondary market to the ECB and make a profit (as the ECB demand pushed up the bond prices and lowered the yields).

So for the bond investors the fact that the debt carried intrinsic credit risk was irrelevant as long as the central bank was ultimately buying the debt.

Further, on March 23, 2020, the Council of the Europeran Union issued this statement – Statement of EU ministers of finance on the Stability and Growth Pact in light of the COVID-19 crisis – which announced that the Commission was invoking “the general escape clause of the EU fiscal framework” which meant that “the preventive and corrective arms of the Pact” were suspended until 2020.

The import of that decision was that, unlike the experience during the GFC, the Member States could run higher than usually allowed fiscal deficits and not face the austerity impositions under the ‘corrective’ arm.

At least, not until 2023, when the regular fiscal surveillance resumed and the technocrats in Brussels once again started demanding major cuts in government programs.

Some progressive economists claimed that this relaxation meant that criticisms of the Euro architecture were misplaced and the common currency system could deliver sound outcomes.

They were wrong.

First, several countries were reluctant to take full advantage of the temporary flexibility that the relaxation provided because they knew that the larger the deficit the worse would be the resulting austerity that would be imposed by the technocrats in Brussels once the general escape clause was deactivated.

Second, most countries used the pandemic flexibility for health care and temporary income support but the ingrained consequences of the two decades of austerity bias preceding the pandemic were not addressed.

Taking the opportunity to restore the quality of the public infrastructure, the education and health care sectors, etc was ignored and the degradation of those essential areas of social and economic life continued apace.

Fast track to 2026 and the citizens in many Eurozone countries have had enough.

Students are sick of having to undertake education in poorly equipped schools with teacher shortages and worse.

Their grievances have generalised into ‘cost-of-living’ angst, poor wages growth, housing inadequacies, energy prices.

Not all of these problems can be traced back to the dysfunctional architecture of the common currency.

For example, energy prices are solely due to Trump and his cronies and will resolve once the crisis they created resolves in some way – how? I don’t have a clue.

But the rest of it is directly the result of the fact that the Eurozone governments are highly restricted in their expenditure and have taken decisions to starve capital expenditure because from a political perspective the direct impacts of that are not easily visible.

Until they are!

It is much harder cutting recurrent spending like welfare support etc because the visible impacts are immediate and the victims are identifiable immediately.

However, it takes some time for a bridge to start collapsing or roads or schools to deteriorate.

But eventually, an extended period of austerity becomes visible and the consequences of that are playing out in France and beyond now.

Research by Mathieu Plane and Francesco Saraceno – Financing Public Investment in France – shows that:

After a long period of sustained growth during the 1960s (5% of GDP on average … public investment remained at a relatively high level during the 1970s and 1980s (4.4% of GDP on average). The first break took place during the 1990s, a period during which priority was given to reducing the public deficit to meet the Maastricht criteria and join the euro. This resulted in an adjustment to public investment that, on average, fell below 4% of GDP from the mid-1990s to the beginning of the 2010s, when a second shock occurred. Following the sovereign-debt crisis, the fiscal stance changed, and a substantial part of the fiscal adjustment was achieved by reducing capital expenditure. Indeed, the reduction of public investment during that period has contributed to almost a third of fiscal consolidation even though investment represented only 6% of public expenditure. The share of public investment-to-GDP from 2014 to 2022 fell to 3.5 % on average and, during the period 2015–2018, reached its lowest level since 1952.

Moreover, the French government pushed the funding responsibilities down to the local government authorities, which led to a further stagnation in capital expenditure.

For example, we learn from the International Transport Forum article – Evolution of transport infrastructure investments since before the financial crisis – that:

The most significant declines in share of spending on roads when comparing 2017 to 2007 were Slovenia decreasing by 37 percentage points (91% to 55%), Denmark by 33 percentage points (82% to 48% in 2016) and France by 24 percentage points (74% to 50%).

As a result of deferred maintenance, the capital value of roads in France fell by 7 per cent between 2007 and 2017.

I could recount similar statistics for other aspects of essential infrastructure including school capital investments etc.

My conjecture is that human societies are malleable but only up to a point.

Eventually, if a population is pushed too far, then rebellion results.

There was a reason that trade unions formed and discussions about welfare states accelerated in the late C19th.

The years of abuse by industrialists of their workers and their families went too far and citizens demanded changes.

The current social instability should, I think, be seen in that context.

The UK Guardian article cited above correctly notes that the years of austerity has left France in a non-viable state.

Business investment is weak and many businesses have indicated they will “become vulnerable or even go bankrupt if economic policy remained deadlocked for the next five years.”

The outlook for France within the common currency is very bleak.

The government does not have the fiscal capacity under the EU rules to do what they should be doing – restoring confidence, redressing the years of infrastructure neglect, helping low income families get better housing, supporting the next generation with a best-practice and well-equipped education system and more.

The bond markets simply won’t let them run the fiscal deficits necessary to achieve those necessary outcomes.

And when the bond markets finally turn on France, the ECB will certainly step in and buy up the debt again but only at a price – of even more damaging and unsustainable austerity requirements.

France is trapped because it uses a foreign currency and the issuer of that currency (the ECB) is part of the problem.

The only viable path is for France to exit the common currency and restore the franc and the powers of the Banque de France.

Then it would have the flexibility to ease the tensions among its population.

Is that likely to happen?

Unlikely unless the current social instability becomes so threatening to the state that the mainstream populace seeks an alternative political solution.

The problem with the UK Guardian article is that the journalist gets ahead of himself and demonstrates how little he understands the situation.

He writes:

There is much about the economic situation in France that mirrors what has happened in the UK and the US.

As I have previously noted – when a journalist conflates the fiscal prospects of a Eurozone Member State with those for a currency-issuing government such as the UK and the US, you can conclude one thing immediately.

Clueless.

There is even confusion in his article.

After claiming all these countries with high debt ratios are in trouble because investors want higher yields, he writes that “Japanese investors, typically strong supporters of France as a haven for their savings, have been instrumental in the panic after they found better returns on home turf, heaping further pain on the French treasury”.

If the high public debt was the reason for the higher yields and investor concern in the UK and the US, why would the same issue not be felt by Japanese investors who are flooding back into JGBs, despite the nation having the highest growth public debt as a percent of GDP?

No clue is provided by the journalist to that inconsistency.

The rising bond yields in many currency-issuing nations at present has little to do with their fiscal situations.

The investment boom in the AI bubble is distorting capital markets in a huge way and is driving funds that would normally go into government debt into the hands of the speculative AI firms.

That shift will probably come to grief but that is a separate issue.

When the demand for a bond falls (because funds are going elsewhere), the yield rises.

It is as simple as that yet many journalists appear stuck on the public debt causing rising yields angle and they are thus misleading their readers.

Some of the French bond issues are AI related as well.

But there is also genuine concern among investors that the capital risk attached to French government debt is rising and so they want a higher yield to compensate for the increased risk exposure.

Conclusion

The problems facing France and its Euro Member State partners is that they are boxed in fiscally and the longer-term consequences of being boxed in for a few decades are now manifesting.

There is no way out while they persist with membership of the common currency.

Turning to the Far Right is not the answer given that Marine Le Pen is now proposing harsh austerity as the answer while claiming to want to improve the health and education system.

It seems that only Jean-Luc Mélenchon, leader of La France Insoumise offers a solution yet how far the European elites will go to stop his (unlikely) election in next April’s Presidential runoff is anyone’s guess.

And, mean while the place is burning.

That is enough for today!