France could destroy the euro, says Christopher Pissarides

25/1/2014

By Szu Ping Chan, in Davos

Nobel laureate believes the ability of France to reform will decide the eurozone's fate

France could destroy the euro if the government's gamble on supply side reforms fails to pull the economy out of its chronic malaise, Nobel laureate Sir Christopher Pissarides has warned.

Sir Christopher, who won the the 2010 Nobel Prize for economics, said the ability of Europe's second largest economy to implement sweeping changes would decide the fate of the single currency.

He warned French president Francois Hollande's special blend of “supply-side socialism” would leave the fragile economy vulnerable to shocks for several years.

“France’s fundamentals are not very good and they cannot implement policy now to reform quickly, he told the Telegraph. “Supply side reforms take time to have an effect, and I don’t know what will happen in the mean time.

"Twelve years ago, Germany was the sick man of Europe, and now France is looking like it's letting itself go in that direction. If the reforms [don’t succeed] then I would be very worried about what would happen to the euro."

France is in danger of slipping back into recession in the fourth quarter, after contracting 0.1pc in the three months to September.

Earlier this month, Mr Hollande announced €30bn of fresh spending cuts by 2017 that would pave the way for lower business taxes.

Sir Christopher, who backed the euro when it was created but has since called for a break-up, said he feared more optimistic sentiment around the bloc was premature.

"I don’t think we're safe yet," he said. "European leaders such as [German finance minister Wolfgang] Schaeuble are saying we're coming over the crisis [and] the euro is safe. I’m not confident yet."

Mr Pissarides also warned the single currency bloc could be sucked into a deflationary spiral that could exacerbate already high debt levels and drag down Britain's economy.

"When there is deflation, debt becomes a much more serious problem," he said. "And you don’t want to be in a partnership in a single market with other countries that are on a deflationary spiral when you’re trying to come up.

"The EU is [Britain's] biggest trading partner and when there is deflation and falling demand there you lose your export market because your partners are not doing well and inevitably its going to affect you."

Some parts of southern Europe are already in deflation, while the eurozone's inflation rate, at 0.8pc, is well below the European Central Bank's target of 2pc.

Sir Christopher also rejected the idea that Britain was “booming” and warned raising rates too quickly could “choke off the green shoots of recovery” and throw millions of mortgage borrowers into default.

"If the official interest rate is down to zero, and we see a very large rise in loans because banks can offer mortgages at between 2pc and 3pc, you should get worried because maybe five or six years down the line when interest rates have risen substantially, those could become bad loans.

"We’re having a imbalanced recovery and investment hasn't recovered. If you want new investment, but hit [the economy] with higher interest rates now [you] could choke off the green shoots that are coming."

He said he expected the first interest rate rise in 2015.

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