VZCZCXRO2460
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #3319/01 2181529
ZNR UUUUU ZZH
R 061529Z AUG 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9357
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 003319 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE 
TREASURY FOR DO/IM 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB PGOV FR
SUBJECT: FRANCE REOPENS MONETARY DEBATE 
 
REF:  PARIS 2791 
 
¶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 
Summary. 
 
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." 
 
Comment 
------- 
¶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. 
 
 
PEKALA