Monday, July 27, 2015

National fiscal discipline or European solidarity

Jonathan Eyal
Europe Correspondent

20 Jul 2015

It's not just Greece at stake in the crisis. It's also the rival visions of Germany and France on what the European Union means: individual fiscal discipline or 'solidarity', with the rich helping the poorer nations.

LONDON • Greece was spared meltdown, at least for the moment. But only at the risk of opening up a much bigger dispute in Europe, between the European Union's two core nations: Germany and France.

As the crisis reached its peak, the French were adamant that everything should be done to avert Greece's bankruptcy, while the Germans argued that no great harm will come from Greece's eviction from the euro currency zone, and no further cash should be wasted on a Greek state which has elevated bad governance and ingratitude to the level of art.

In a classic European way, a compromise was eventually found: the French succeeded in keeping Greece in the euro zone, while the Germans succeeded in imposing on Greece some of the toughest and most humiliating economic conditions ever recorded in modern Europe.

Yet the tussle between Germany and France is far from over. For it is not actually about the fate of Greece but, quite literally, about Europe's future political shape. And it's one confrontation which will sorely test the already fraying patience of both French and German leaders.

The EU project would have never succeeded without the historic reconciliation between the Germans and French, the two nations whose enmity tore Europe apart, unleashing two world wars. The reconciliation, begun hesitatingly in the late 1950s by French President Charles de Gaulle and German Chancellor Konrad Adenauer, was heartfelt and deep. And it spearheaded the other historic reconciliations which followed on the continent, providing the bedrock of the EU as we know it today.

The British, constantly jealous of the Franco-German "axis" - as they often preferred to call it - never seemed to comprehend that Britain's own relations with most other European countries was rendered easier and calmer by the Franco-German alliance.

Smoke and mirrors

But, like most political alliances, it was also gradually overtaken by events. Germany resumed its position as Europe's biggest economic power as far back as the 1960s. Yet, divided by the Cold War, the Germans remained content to leave political leadership to the French who, of course, can never be accused of modesty. The Franco-German link ended up disguising rising German strength and relative French decline, and the game could have continued as long as Germany's division did: as French diplomats once liked to joke, they liked Germany so much that they wanted as many Germanys as possible.

But the Berlin Wall did come down, and German unification proved unstoppable. The 1999 launch of the euro as the continent's single currency was a French-led attempt to shackle Germany in a myriad of economic knots in order to prevent this reality from having a political impact.

The euro was an explicit trade-off which allowed Germany to become whole, in return for the Germans giving up their currency. And, for a while, it allowed the French to continue pretending that they were leading in Europe, while the Germans continued to pretend that they were following the political lead from Paris. The snag is that this game of smoke and mirrors can no longer continue.

Two views on Europe

In one sense, the current Berlin-Paris spat over the management of the euro is neither new, nor surprising. Germany's political leaders have always vigorously defended the independence of the Frankfurt-based European Central Bank and sought a strong and stable currency backed by strict fiscal and monetary discipline, while French governments have pushed for closer coordination of fiscal and monetary policy and some form of "solidarity" among euro zone countries, by which the French essentially meant subsidies from the richer to the poorer EU countries.

The only difference is that, while over the past decade both countries claimed that their vision of Europe was winning, no such claims can now be made.

For the current showdown over Greece can either be resolved with Germany finally admitting defeat and undertaking to bail out a bankrupt EU member state, or with France accepting that at least one EU country can be ejected from the euro zone.

For the French, this is not just a theoretical issue, but a practical matter of supreme importance. For, if the German view prevails, this will signify the end of the French dream of using the euro as an instrument to diminish German influence in Europe; in effect, the euro will become the old Deutschemark, the German mark in disguise, precisely not what the French intended when they put forward the currency union proposal.

As seen from Paris, therefore, the current diplomatic battle in Europe is not about Greece at all, but about the survival of the French view of Europe. That's why French President Francois Hollande staked everything on averting a Greek bankruptcy, going as far as sending his own official to Greece to help in drafting the country's request for a new bailout.

The strength of the Franco-German link should never be underestimated. Historically, Franco-German links actually tended to flourish precisely when the leaders of the two nations belonged to the opposite ends of the political spectrum. The bond between the two countries is, as political scientist Stanley Hoffman once put it, a perfect example of the "symmetry of asymmetry": two nations united not by joint interests but precisely because they had diametrically opposed ones.

And although the Germans are beginning to lose their inhibitions about flexing their muscle, they still hate to be isolated in Europe: Chancellor Angela Merkel continues to claim, for instance, that "if the euro fails, Europe fails". So, frustrated as she may have been with both the Greeks and their French champions, she had to accept yet another Greek bailout.

Still, the gulf which has opened up between the two nations is increasingly becoming a zero-sum game in which there can be only one winner and one outright loser, precisely the situation which both Germany and France sought to avoid in their relations. The two nations remain far apart on free trade, which the Germans embrace but the French detest, on broader economic policies and, ultimately, on Europe's future destiny.

And, as Paris knows only too well, it's the German vision on all these things which is gaining hold in Europe.

German steamroller

Should the rest of Europe fear the German steamroller? Not in the slightest. There may be a great deal of argument on whether Germany's insistence on tight fiscal policies is good for the rest of Europe, but there is no doubt that the German model of economic development is successful, and countries which emulated it did well.

It is wrong to claim that the continent is being "dictated to" by the Germans, as some left-wing commentators - particularly those based in the US - now like to say: A whole group of countries apart from Germany now supports the German position in Europe.

It is also nonsense to suggest that, in their behaviour over Greece, the Germans are allegedly displaying their old imperialist tendencies and are no longer to be "trusted", as the American economist Paul Krugman put it last week in a particularly ill-advised column for the New York Times. Few nations have been as generous to Greece as the Germans. And few nations are as constantly racked by a deep sense of guilt and introspection about their actions as the Germans.

And although Germany is Europe's single largest economy, its dominance over the continent is nowhere near as decisive as commonly assumed.

The country accounts for 30 per cent of gross domestic product in the euro zone, but France accounts for 21 per cent of the euro zone's GDP, followed by Italy with 16 per cent and Spain with 11 per cent.

All these nations differ in their approach to Europe's economic priorities. In short, the Germans are hugely important, but cannot lead the continent without continuing to offer concessions to their partners.

Ultimately, if the French want to retain their position of equality with the Germans, they will need to do it the hard way, through economic performance which matches and even exceeds that of Germany. And until that happens, the only choice facing France and the rest of Europe is to join the Germans, increasingly on Germany's terms.

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