Restarting the Franco-German Motor

Tuesday 15 May 2012 15.23

By Tony Connelly, RTE Europe Editor, in Berlin

What kind of bond will Angela Merkel and François Hollande forge?

Until recently the chemistry between French and German leaders provided plenty of chin-stroking for European policy wonks and academics. But these days the unemployed, struggling businessmen, mortgage-holders and families from Cork to Corfu have an anxious interest in how these two get on and what they decide is best for Europe’s economy.

“Both are very pragmatic, very inclusive politicians, they are not too spontaneous when it comes to making decisions, so there seems to be a good basis to get along,” says Dr Ronja Kempin, head of EU External Relations at the German Institute for International and Security Affairs in Berlin.

However, the two have never met personally and on the face of it they’ve said and done plenty behind each other’s backs.

Chancellor Merkel openly backed Hollande’s rival Nicolas Sarkozy and more or less said having to deal with the Socialist Party leader would be a nightmare.

Hollande has made Merkel-driven austerity the bête noire of his election campaign, and in the early days of the campaign no shortage of Socialist Party apparachiks awakened the ghosts of Bismarck and the Franco-Prussian War of 1861 in their sniping against German policy.

In the interregnum between his election victory and inauguration both sides have reverted to diplomatic niceties. Merkel said she would welcome Hollande to Berlin “with open arms”.

Although contacts between the Socialists and the German government increased as Hollande’s victory neared, there is certain to be a robust clash of views.

Angela Merkel has made fiscal discipline the cornerstone of Europe’s handling of the debt crisis. She has the support of her finance minister Wolfgang Schauble, now tipped to become the next chairman of the eurogroup of finance ministers, and more importantly the German public.

There are two significant realities which morally underpin that position: German public sector and structural reforms have (partly) turned its economy into the pre-eminent competitive force in Europe, and German taxpayers pay by far the most money into bailout funds going to countries perceived (rightly or wrongly) to have sinned in the past.

François Hollande made growth and spending the cornerstone of his election campaign, but his election promises have been nuanced. He wants 60,000 new teaching posts, but there will be no net increase in public sector employment; he wants to lower the retirement age from 62 to 60, but only for certain categories of workers and those who started work at 18.

Significantly François Hollande has signed up to fiscal discipline. He promised to bring France to a 3pc deficit limit by next year, although that looks certain to be missed according to the European Commission’s Spring Economic Forecast. He has also pledged to balance the budget by 2017, the first time that will have happened since 1974.

So there could be a bridgeable gap on the need for avoiding a further ballooning of European debt.

But political realities could complicate things. François Hollande is hoping for a decisive victory in the legislative elections on June 17, so he will need a prize to bring back to Paris.

Angela Merkel has just lost badly in North-Rhine Westphalia, but national opinion polls say she is on the right track when it comes to austerity for Europe.

One ace President Hollande carries is that the opposition German Social Democrats have made common cause with their French allies and are pressurizing Merkel to add a growth dimension to the fiscal treaty. The Social Democrats, emboldened by their victory in Sunday’s regional election, will only support the treaty in the lower house of the Bundestag if such a plan emerges.

That puts some pressure on Merkel, but in reality the SPD haven’t spelt out entirely what they want on growth. While they appear to agree with Hollande’s plans on growth, they are unlikely to alienate mainstream opinion in Germany and call for massive deficit spending.

What are Hollande’s actual ideas?

Some, like more funds for the European Investment Bank (EIB), a financial transaction tax (FTT), project bonds and greater use of structural funds, are all things which Merkel could probably live with. His other ideas – like eurobonds, or giving the ECB power to buy government bonds and bank debt directly – are a much tougher sell.

But in the heat of his fresh mandate, and the growing calls for a more imaginative response to the now three year old eurozone crisis, Hollande has a real opportunity.

“Hollande has every right to tell Merkel that the strategy in to which Germany has pushed the EU needs amending,” says Charles Grant of the London-based Centre for European Reform (CER).

“By imposing too-rapid reductions of budget deficits on problem countries, it is decreasing their ability to repay their debts. According to the IMF, the ratio of gross public debt to GDP in Spain, Italy, Ireland and Portugal will rise every year between 2008 and 2013. The EU’s strategy is also stimulating waves of political populism, extremism and anti-EU sentiment in many parts of the Union.”

Hollande may well seize that theme, especially given that deficit France’s targets are likely to be missed this year and next, with an extra €24 billion needed to bridge the gap. If he declares that deficit targets in problem countries should be extended, he will be cheered from the sidelines by such major European member states like Italy and Spain, especially the latter whose deficit next year is likely to be more than double it should be under the Growth and Stability Pact.

These are anathema to Merkel, but even the powerful economic and academic establishment in Germany appears to be having second thoughts.

“Even very conservative economists have been saying austerity might have been a little overdone at the moment,” says Sebastian Dullien from the European Council on Foreign Relations (ECFR), “and we might have to make that less damaging while keeping confidence in the medium term consolidation path.”

Could this mean Ireland’s deficit targets might be relaxed?

“For programme countries it might be a little more difficult. Ireland has a better chance of getting concessions than Greece. Greece is seen in Germany at least publicly as a country which has not done its homework… Ireland in contrast is seen as a poor small, country which made a few mistakes but has tried to clean things up, so concessions to Ireland might be easier.”

But Merkel will have hard questions for Hollande too.

While he sees growth through spending, she sees it through making structural and labour market reforms to make Europe’s economies more competitive, especially relative to emerging markets. Yet nowhere in Hollande’s election campaign did he admit to the need for reforms to France’s rigid labour market

A key truism for the Franco-German relationship is that often leaders from opposite sides of the ideological fence end up forging historic alliances: Helmut Schmidt and Giscard d’Estaing, Helmut Kohl and François Mitterand, Gerhard Schroder and Jacques Chirac all attest to this.

Indeed because French and German leaders often start at the opposite end of the spectrum on a given issue, once they meet in the middle the effect is to bring the rest of Europe along with them.

That is no forlorn hope in the current crisis.

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