As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the  BIS central bankers’ speeches  3  recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement. A few words on the banking sector, and, of course, French banks. I would remark, first, that banks have been hit in all advanced economies by the downward revision of growth prospects. Since August, CDS premia on major banks and BOR-OIS spreads have risen in all regions, although to a larger extent in Europe, displaying everywhere a sharp rise of counterparty risk. By the same token, banks’ share prices fell in all major economies, with French banks being particularly hit. This overreaction of share prices can be explained by a simple amplification mechanism: slower growth means lower profits, thus lower projected dividends. At the same time, banks are required to build additional capital buffers, which further constrain their pay-out ratio. So dividend prospects are doubly affected and that explains why, in the current period, share prices are reacting so strongly to negative news on growth.
Now that this certainty is gone, debt sustainability may well rest on a more fragile and volatile basis. As we all know, debt sustainability depends on three variables: the primary surplus, the growth rate and the interest rate. The relationship between those three parameters and debt can be expressed through a simple equation, the famous “unpleasant arithmetic”. Assessing sustainability seems therefore relatively straightforward. Many economists and market analysts on sovereign European debt simply assume low growth and high interest rates forever in peripheral countries – which enables them to conclude categorically that debt is not sustainable. A (slightly) more sophisticated and developed version of that story takes account of the impossibility, for Euro economies, to depreciate their exchange rates, therefore locking them into a low competitiveness and no growth equilibrium. I see three major problems with those analyses. First, the competitiveness story does not hold. Take the UK, for instance. Its effective real exchange rate has depreciated by 23% over the last four years. And its exports have grown by a healthy 15%, in nominal terms, over the first six months of 2011. But Italy, Spain and Greece have done even better, with exports growing respectively by 16%, 19% and 37% during that same period, and, of course, no exchange rate adjustment. Equating competitiveness with exchange rate depreciation is therefore overly simplistic. This does not mean that efforts to improve competitiveness in many parts of the euro area should not be strengthened.