El Pais: France Threatened to Leave the Euro

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After a much-heralded breather, the euro is on the move again-downwards.  Spanish paper El Pais reported today that during the negotiations over the Greek bailout, Sarkozy won Merkel's reluctant support by "pounding the table" and threatening to exit the euro if Germany didn't go along.

French President Nicolas Sarkozy threatened to pull his country out of the euro zone unless other members promised to help Greece at the crucial meeting of ministers in Brussels last Friday, according to a report in Spain's El Pais. Details of the meeting were apparently revealed by Spain's prime minister, Jose Luis Rodriguez Zapatero, as he met behind closed doors with Socialist party leaders on Wednesday. An unnamed source at that meeting relayed Zapatero's account that at one point in Brussels, Sarkozy "banged his fist on the table and threatened to leave the euro, which obliged [German Chancellor] Angela Merkel to bend and reach an agreement." Another source at the meeting with Zapatero relayed that "France, Italy and Spain formed a common front against Germany and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."

If true, this is at least moderately bad news for the euro, for a couple of reasons:

  1.  It shows that the dissolution of the euro has become a possibility, even if a remote one.  You don't see Arnold Schwarzenegger threatening to secede, or abandon the dollar, if his state doesn't get a federal bailout; that just isn't on the mental list of possible solutions to his state's problems.  If this threat is credible enough for Sarkozy to make it, then the euro is shakier than we thought.
  2. If this was necessary to persuade the Germans, then political support for the Greek bailout is even weaker in Germany than previously thought.  Given that the German parliament still needs to approve any disbursement from the giant new pool of emergency funds, that bodes ill for any future crisis.
  3. Jitters about the euro can become a self-fulfilling prophecy; if creditors think the PIIGS are likely to default, they'll drive up interest rates to the point where they have to default.

On the other hand, Merkel, Sarkozy, and Zapatero (the leak is supposed to have come from a senior member of his party) are denying it.  It may have gotten garbled in the retelling.  And even if it didn't, in the end, Merkel went along.  So it's not clear how worried we should really be.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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