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Eurozone crisis: who will be next?

France has strongly denied that it could become one of the next countries to be threatened

FRANCE has strongly denied that it could become one of the next countries to be threatened by the eurozone crisis that has struck Greece and Ireland.

However, new figures revealing the country’s exposure to Spain and Portugal, widely considered by traders to be the weakest links, have prompted concerns of a severe knock-on effect on France if either country gets in trouble.

New data from the Bank for International Settlements has revealed that France holds €201bn in Spanish debt and €42bn in Portugal, more than initially thought.

However, finance minister Christine Lagarde has insisted that a front-page report in the Journal du Dimanche claiming France was “in danger” is inaccurate. She said it was “economically unfair” to compare France with Ireland, which received an €85bn emergency EU bailout in an attempt to halt the spread of the debt crisis.

“When I look at all the charts and the refinancing rates applied in France today, we are among the leaders,” Ms Lagarde said. “We have some of the lowest interest rates in Europe.”

A source at the Elysée Palace said the International Monetary Fund had raised no serious concerns about France’s situation.

“We are not in the same category [as Ireland], thank God,” the source said. “Some countries’ economies have been kept going by a property bubble. France is not in the same situation.

“We have one weakness: public spending, which in the past has tended to increase constantly, but thanks to the efforts we have made in the past three years, there is no risk. Our overall macroeconomic situation is better than the UK, but certainly not as good as Germany.”

France is the second biggest contributor, behind Germany, to the EU’s €440bn rescue fund for countries in financial trouble.

Each rescue reduces the safety buffer for others and tests political patience and public support for the euro.

A poll in July revealed that 62 per cent of French people believed being part of the eurozone was worsening the effects of the economic crisis on France.

Another survey, a few months earlier, found 38 per cent of French people thought it was time to ditch the single currency and go back to using the franc. In Germany, 57 per cent of respondents in a recent ARD TV study said they would have preferred to have kept the mark.

The former president of the German Federation of Industries, Hans-Olaf Henkel, has called for Germany to quit the euro and create a new economic union with the Netherlands, Belgium, Austria, Finland and, possibly, France.

“I was a strong campaigner for the single currency, but politicians have not kept their promises,” he told the Journal du Dimanche. “France and Germany have become financially responsible for other countries’ bad policies. This was not the project that we voted for.

“I support the idea of leaving the euro to countries in the south of Europe. The countries in the north will have their own money and each currency will reflect the economic reality of that area.”

On France’s involvement in the new union, Mr Henkel said: “We were friends before the euro, we can stay that way afterwards.”

Shortly before Christmas, EU leaders agreed to create a permanent mechanism to help avoid future debt crises, including more cash reserves for the European Central Bank.

President Sarkozy and Angela Merkel, the German chancellor, have publicly renewed their commitment to the euro, but they are both against proposals to increase the size of the EU emergency rescue fund.

Who's next?

PORTUGAL
The Portuguese Central Bank says its financial system is facing “serious challenges”, with banks there finding it increasingly difficult to raise funds. The country’s national debt is 112 per cent of its GDP and its budget deficit 9.5 per cent, way above the three per cent maximum imposed under eurozone rules.
French exposure to Portugal: €42bn

SPAIN
Traders fear Portugal’s problems will spread to Spain. The country represents 12 per cent of the eurozone economy and has struggled through two years of recession, with unemployment at 20 per cent and an 11.2 per cent budget deficit.
Spain says that structural reforms mean it will not need to seek emergency help.
French exposure to Spain: €201bn

ITALY
Italy’s banks have been under pressure since the €85bn Irish bailout. The cost of borrowing has soared and analysts say Italian banks look under-capitalised. Public debt is 118.5 per cent of GDP.
French exposure to Italy: €355bn

Leave the euro, leave the EU

WHAT would happen if a country were to try leaving the euro? Until now no one has tried.

Neither the Maastricht Treaty, signed in 1992, nor the Lisbon Treaty in 2007 contains any clauses explaining how to exit the single currency.

Joining the European Monetary Union is supposed to be a one-way procedure: Maastricht described it as “irrevocable”.

Article 50 of the Lisbon Treaty allows a member state to withdraw from the European Union as a whole, but there is nothing contemplating a country withdrawing from just the single currency.

In a snappily titled 2009 report “Withdrawal and expulsion from the EU and the EMU: some reflections”, the European Central Bank said: “In the unlikely event that a member state withdraws voluntarily or is expelled from the EU, [it would have to] restore its old currency or adopt a new one.

“Restoring a member state’s old currency or adopting a new one would inevitably involve considerable risks and difficulties and entail substantial legal complications.

“Successfully resolving the issues arising would necessitate very close cooperation between the departing and the remaining member states."

Jeff Golden, a visiting law professor at the London School of Economics, told Risk magazine in the UK last May: “The prevailing view has been that a country cannot unilaterally legally exit the euro, so we might just as well worry about a member country announcing it would not honour any other treaty commitment.”

If a country were to leave the euro, international support for the currency would weaken further and investors would fear a domino effect on other members. The country pulling out would also face a significant risk of “capital flight”, when investors get nervous and look for safer places to transfer their holdings, negating the initial object of the exercise.

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