Tags: France | Germany | Euro

France, Germany Still Out of Synch on Euro

Tuesday, 08 Jun 2010 02:11 PM

 

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You don't have to be Einstein, or Hercule Poirot, to work out that there was more behind the last-minute cancellation of Monday's Franco-German summit than a little scheduling problem.

True, Chancellor Angela Merkel had just wrapped up a 36-hour marathon coalition negotiation on budget cuts when President Nicolas Sarkozy's visit to Berlin was postponed by one week.

But the underlying problem is that Germany and France, the founders and driving forces behind the single European currency, do not see eye-to-eye on the future of the euro zone, nine days before a crucial European Union summit on the issue.

Behind the scenes, what the French call the "Franco-German couple" are having one of their periodic tantrums. So much so that they cannot even agree who called the meeting off. A French statement said it was Merkel. A German government official said: "It was the French side that canceled, not the Germans."

Berlin sees budget discipline as the central priority and is pressing Paris to follow its hair-shirted example and implement tougher austerity measures.

The German Finance Ministry has circulated a 9-point plan demanding stiffer sanctions against governments that flout European fiscal rules, including suspending repeat offenders' EU voting rights, and an insolvency procedure for states.

Despite a deficit expected to hit 8 percent of national output this year, Sarkozy refuses to let his government utter the R-word: "rigueur," the French term for austerity.

Facing a tough battle for re-election in 2012 and protests against a planned pension reform, he has so far refused to go beyond a three-year freeze on public spending at current levels.

France's top priority is to create an "economic government" for the euro zone, with regular summits of the 16 leaders and a dedicated secretariat, to coordinate economic policy and focus on rebalancing the European economy and boosting growth.

"It's clear there is a tug of war," said Jean Pisani-Ferry, director of the Bruegel economic think-tank in Brussels.

While the French were comfortable with committing billions in taxpayers' money on "solidarity" with euro zone partners in financial trouble, "the Germans were traumatized by having to bail out Greece and rescue the euro zone.

"Now they want stricter rules to prevent any repetition of the Greek crisis, and an insolvency procedure for states to make a managed default possible," he said.

France is unwilling to envisage any debt restructuring in the euro zone, fearing panic in the financial markets, knock-on problems for its own banks and wider risks to the euro.

Former French Prime Minister Dominique de Villepin said there was a clear divergence in at least three areas -- the economic model, with Germany looking more to Asia and the east; the need for budgetary rigor, with Germany immediately tightening its belt; and the broader vision of Europe.

"Germany has lost its faith in France. Germany sees France handing out lessons without applying the basic rules of good management," Villepin, a personal foe and potential conservative challenger to Sarkozy, told Europe 1 radio.

German officials privately fret that the French "still don't get it" about the need for austerity at home. Some of the public pressure Berlin has applied to Greece, Spain and Portugal was meant to shock Paris into savings measures, they say.

Joachim Pfeiffer, economic policy spokesman for Merkel's conservative bloc in the lower house of parliament, said the subject of how improved euro zone coordination might work was at the heart of ongoing discussions with the French.

Germany has hitherto resisted calls for an "economic government" out of fear that France's agenda was to promote a Keynesian state-led economic expansion policy, force a softer euro exchange rate and exert pressure on the European Central Bank to keep interest rates low.

"In the past we were certainly skeptical and cautious on this. Now with the rescue package and other things, there is a chance to bring some momentum into the European process," Pfeiffer told Reuters.

"That means there could and should be greater coordination and consultation. But this doesn't mean there should be a bureaucratization or even some kind of planned economy as has been envisaged (by the French)," he told Reuters.

It was still unclear if a secretariat would be responsible for the 16 euro states or the 27 EU members, he said, adding the structure and tasks of such a body were also still open.

Patrick Devedjian, the minister in charge of France's fiscal stimulus program, denied there were serious problems between the two states, saying they were simply debating the best course and blaming some of the delay on internal divisions in Germany.

"We have discussions, which is normal because we don't always have the same approach. The German government is a coalition and they themselves, inside that government, have discussions," Devedjian told France 2 television.

© 2014 Thomson/Reuters. All rights reserved.

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