Could an Ultimatum from Nicolas Sarkozy Resolve the European Debt Crisis?

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The European debt crisis has reached its chiche moment—or what should be its chiche moment. That’s chiche, the French for “I dare you”, “I’m calling your bluff”, or even “make my day”—something often used in situations that somehow seem too formidable or fearsome to simply give in to without an audacious (albeit long-shot) challenge. Now could be that time for Europe. Less than 24 hours ahead of Wednesday’s critical EU summit on the debt crisis, it appears improbable the gathering will produce the kinds of decisive actions by governments capable of bringing the chaos under definitive control. That lack of resolute, bottomless-pocketed response will fail to calm market fears that excessive European debt is leaving the future of the euro in serious doubt, and in turn leave the single currency once again exposed to the building pressures threatening to blow it apart. The table, in other words, seems set for still more dithering that will only further darken an already bleak outlook in Europe—making it a perfect occasion for someone to step up, break ranks, and stun everyone watching with an unexpected, do-or-die growl of chiche.

Perhaps the best person to provoke that monumental game of economic chicken amid the debt/euro crisis is French President Nicolas Sarkozy—a politician in desperate need of a Hail Mary achievement to revive what increasingly looks like a doomed re-election bid in six months time.

The New York Times has an excellent article today  on where things stand ahead of Wednesday’s EU summit, so I’ll defer to that piece for context and expectations. The Times’ Paul Krugman also sets the dilemma out in more general terms in his typically brilliant (albeit relentlessly euro-hostile) column. So rather than detailing how things have come to this grim point here, this post will look at how an unexpected and dramatic initiative of chiche could pull the euro back from the brink it’s been pushed to.

Why Sarkozy as detonator? First off, France has continually lobbied for more radical responses to the crisis—including the creation of euro bonds covering all euro zone sovereign debt, and altering the European Central Bank’s (ECB) mission to allow it to play a central role in resolving the situation by guaranteeing euro zone debt. Many of Paris’ partners—especially Germany, the Netherlands, and Finland—have opposed those more federalist ideas in favor of coordinated action at national levels. Meanwhile, as we’ve noted in other posts, Sarkozy’s leadership is rejected by a record number French voters; a variety of polls show 2/3 of public opinion having no confidence in his management abilities–especially regarding the debt and euro crises–and virtually all surveys project him getting thrashed in next spring’s elections. Sarkozy would therefore have little to lose personally by staking his political future on using mind-blowing chutzpah to save euro (whose own future is also looking pretty stark just now). A closed door threat to ditch the summit and tell the world the euro is toast because other member nations are too stingy to pony up enough money–and too wimpy to make institutional changes to allow the ECB to do the heavy crisis lifting—just might be sufficiently ruthless blackmail for Sarkozy to obtain game-changing measures to overcome the emergency, and improve his own image at the same time.

Would outraged EU leaders cave in to such a shocking scam? Given the aversion (if not terror) of politicians to eat big time blame publicly, it’s possible. Because even if Sarkozy would go down in history as the wigged-out nutter who pushed the button by carrying out his threat when his demands were rejected, his European peers would still be known to posterity as the losers who stood firm on their futile positions and watched him send the euro—and member economies—right down Thomas Crapper’s contribution to humanity. Which touches on the even more crucial point: none of Sarkozy’s fellow leaders would be able to afford to let him unleash the furies of the euro’s demise given the unspeakable damage that would inflict on their societies, and the world economy. With a collective GDP of over $13.5 trillion, the euro zone is not only an economic area too big to fail—it’s even too big to contemplate going down. The decision to let Lehman Brothers go bust would look like a wrong turn in light traffic compared to allowing the world’s largest single (albeit still to fiscally disorganized) economic bloc go break apart and sink back into last century. The internal cost of some or all euro countries downshifting to pre-union national currencies—and newly re-divided economies–is almost as unthinkable as the panic and costs that doing so would involve. Then there’d be the negative impact on U.S., Asian, and other economies as trade to and from Europe ground down under plummeting consumer demand. And just the renewed hassles of having to deal with 17 national economies instead of the single euro zone market would cost governments and companies billions.

Indeed, the heavy, heavy hit of losing the euro and reintroducing old national currencies and rules wouldn’t be limited to government and taxpayers alone. The gains in efficiency, visibility, savings, and profits that companies have realized in being able to use a strong, single currency across most of Europe has been nothing short of phenomenal—and all that would be lost. That obviously also holds true for non-European companies  (primarily U.S. and Asian groups) that similarly saw accounting, purchasing, and investing transparency and predictability across Europe rise dramatically since they began using the euro. Meanwhile, the very banks and financial markets (and linked-up, euro-denominated stock markets they trade in)–ie. the voices now kvetching loudest about the pinch on profits they’ll suffer if they’re forced to help resolve the debt and current crisis they helped create–probably have most to lose if the euro winds up going down for the count. In fact, given the long-term business stakes–and profits–at risk in possibly losing things most groups operating in Europe now take for entitlement granted, it’s astonishing there hasn’t already been a veritable riot of banks, hedge funds, and non-financial companies alike to pressure governments into taking decisive action to ensure the euro’s safety, future, and business-enhancing conveniences.

But there have been no riots–mostly because the focus of governments, investors, and average businesses have remained implacably selfish and short-term. The enduring euro crisis has limped on at greater risk of final collapse in part because European leaders have been too worried about their own national accounts and personal political futures to unite and act in bold, decisive, and doubtless painful manner to get the problem under control. It has also continued on because while EU officials have been repeating their increasingly unconvincing determination to protect the future of the currency, bankers, hedge fund managers, traders, CEOs of non-financial companies, and everyday consumers have all refused to actually contemplate the consequences of what will happen if their leaders don’t make good on pledges to safeguard the euro. Parts of the condo are ablaze, yet most owners remain convinced the fire is really only a threat to the poor chumps currently feeling the heat most.

As long as the fiery death of the currency—and nightmarish results that would have for all—remains the stuff of can’t-possibly-happen denial, no one central to the crisis will take the necessary steps to resolve the emergency swiftly and definitively. Though he’s more than unlikely to do so, Sarkozy would do the world—and his own sickly re-election hopes—a lot of good by calling bluffs all around, and finally placing all actors before a do-or-die ultimatum for action. Each successive failure to throw down a chiche up till now has raised the prospect of “die” prevailing as the increasingly tattered hopes of “do” got kicked farther down the road. An adept of swagger and machismo, Sarkozy would be wise to defy his EU peers with a bit salutary blackmail and brutality Wednesday. If he doesn’t, neither his future nor that of the single currency may be worth betting a euro on.