Mercosur is the public humiliation of France

In the wake of the Trump tariffs, European leaders have loudly proclaimed the merits of free trade, often pointing to the stupendous increase in general prosperity that came in the wake of the post-war reduction in tariff barriers around the world.  Countries mired in abject poverty climbed into the global middle class after they abandoned autarky and embraced export-led growth.  The engine of free trade, comparative advantage, is often cited as a rare social science theory that is both true and significant.  What economists are less eager to admit is that while all may benefit from free trade, the best absolute outcome for any given state is coupling exploitation of a free trade regime with protection of key industries at home.  South Korea guarded its steel, shipbuilding and car industries as they acquired the skills and scale needed to conquer foreign markets.  China took note and exploited its developing economy status under WTO rules to protect its internal market as it seized market share from domestic producers in Europe and North America.  

Europe played this game in its own way. Free trade rules opened lucrative overseas markets to German car and machine tool makers, but the EEC walled off European farms from agricultural imports.  It was a nice trick: Europe could freely export where it had a technological advantage and use the earnings to subsidise its archaic agricultural sector. That poor countries couldn’t exploit their comparative advantage in agriculture with exports to the wealthy European market was simply “bad luck” to the guardians of the European project, who cheerfully dumped their farm surpluses on the Third World. As long as German export prowess spun off revenues sufficient to keep French farmers fat and happy, Europe would not need to confront its self-serving interpretation of free trade.

These happy times are now over for Europe. The Mercosur deal agreed last week shows an EU forced to choose between protecting its farming sector and opening new markets for its industrial exports.  As in any business, earners take precedence over the laggards, and so the EU agreed to crack open its agricultural sector in exchange for access to South America’s car markets. Germany no longer holds a technological advantage in cars or machine tools and needs new markets for its goods outside North America and China if it is to revive its export dependent economy.  Brazil is a huge market for cars, and thanks to the Mercosur deal Europe now has a low tariff advantage over Chinese auto exports. 

The EU Commission has had designs on the Common Agricultural Programme (CAP) honeypot since the days of its first president Walter Hallstein. Opening European markets to agricultural superpowers Brazil and Argentina should lower food costs for consumers and ultimately turn Europe into a food importer, much as it transitioned into an importer of textiles after the abolition of the Multi-Fibre Agreement.  While Ursula von der Leyen bought off Georgia Meloni with additional subsidies and a quota scheme for beef and poultry, her long term goal of reducing the political power of European farmers remains intact.  The prospect of integrating Ukraine’s massive farming sector into the EU is likely focusing minds in the Commission. The EU cannot afford to extend current subsidy levels to Ukrainian farmers, even adjusted to local cost of living.  Introducing competition from South America is likely the first step in a long term plan to rationalise the CAP and redistribute funds to more pressing needs.

The political significance of the Mercosur deal outweighs its likely impact on the average European farmer.  It marks no less than a public humiliation of France. Unlike Charles de Gaulle, who literally shut down the EEC rather than give the Commission power over agricultural subsidies, “Jupiter” Macron found himself out of thunderbolts and unable to muster a blocking minority in the Council.  The days when the European project served as a multiplier for French foreign policy objectives are clearly over.  That France has been demoted from the top tier of the EU is clear to all outside the Élysée Palace.  Ursula von der Leyen sacrificed French farmers to save German autoworkers and France, the very progenitor of the European project, could do nothing to stop her.

One may blame monetary union for France’s humiliation. Francois Mitterrand saw it as a means of constraining the power of a united Germany and protecting France from the dictates of the all-powerful Bundesbank. What the Euro accomplished in practice was fiscal profligacy as states were able to borrow as if they were as credit-worthy as Germany. After the near-death experience of the Euro-crisis, the EU resolved into a tacit division between the fiscally responsible and those incapable of meeting Eurozone deficit targets. France now counts as one of the latter, but is also far too big to bailout like Greece. A run on her bonds would likely collapse the Euro. Despite this obvious hazard to the common currency, Macron has been unable to tame his staggering government deficits or impose any serious reductions in social spending on his citizens.

In the eyes of the fiscally prudent member states, France has borrowed at the sufferance of the credit-worthy and has now lost political standing in the Council on a matter of supreme national importance to her. The Mercosur agreement is just the latest stop on Macron’s Via Dolorosa. He came to office determined to earn his place beside Angela Merkel by reforming state programmes and controlling spending. Instead, France’s long flirtation with deficit spending became a destructive addiction under Macron.  The volatility of the French electorate combined with an obstinate Parliament suggests that only intervention by the European Central Bank and the finance ministers of the Eurogroup could impose significant spending reductions.  They are certain to act if the alternative is the loss of the common currency. An austerity regime imposed at the behest of the bean-counters in Frankfurt would be as momentous a shock to the French electorate as the Algerian crisis that birthed the Fifth Republic.  

Since the inception of the European project, French voters have assumed the protection of a French President able to bend the EU to his will.  With the passage of the Mercosur deal, Macron has now failed this political test.  Jordan Bardella will offer himself as exactly the sort of leader who can save his farmers from deals imposed by the EU, even if it requires the repatriation from Brussels of the powers needed to protect his citizens.  Free traders cite the redeployment of capital from less productive sectors as a distinct benefit. What they often fail to recognise is the political utility of the less productive to populists. Farmers and workers across Europe seek protection when market competition turns against them. If traditional parties are unable to do so, they will look for politicians who will. By opening a sector traditionally shielded from imports to competition from Argentine mega-farms, the EU may soon get an education in the political limitations of economic theory.