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Analysis
Berlin takes line of least resistance on France

Berlin takes line of least resistance on France

Sense of déjà vu for Paris finance minister

by David Marsh

Tue 26 Aug 2014

The German government is likely to take the line of least resistance over the latest European discord on its policies of budgetary rigour, allowing some extra fiscal leeway for the embattled French and Italian administrations, while at the same time maintaining a longer-term drive for reforms and orthodoxy.

Yet, beneath the surface, tensions are building up that point to a deep-seated schism among these three principal members of economic and monetary union (EMU), which make up two-thirds of the GDP of the euro bloc. 

Angela Merkel, the chancellor, and Wolfgang Schäuble, the finance minister, have little choice but to acquiesce in renewed pro-growth calls. These are particularly virulent in France, where President François Hollande is looking ever more vulnerable after he was forced on Monday to sack Arnaud Montebourg following the former economy minister’s assault on Hollande’s budget consolidation plans.

At the same time, opposition in Berlin to quantitative easing (QE) in the form of full-scale European Central Bank (ECB) purchases of government bonds appears to be softening, even though deep scepticism about the utility of such measures remains in force. Any eventual ECB decision on QE – which could still be months away – will need to be coupled with cooperative action with governments on structural and fiscal reforms, a point made by Mario Draghi, the ECB president, in his speech at the Jackson Hole monetary conference in the US last week.

Hollande’s unexpectedly speedy ousting of Montebourg over what the latter claims were German-inspired austerity policies is being greeted in Berlin as a positive clarification of France’s determination to press ahead with reform efforts. Schäuble is likely to maintain a show of public solidarity with Michel Sapin, the pro-reform finance minister, who held the same post 22 years ago in the ill-starred government of Pierre Bérégovoy (who committed suicide in May 1993) under President François Mitterrand (who died in January 1996). 

Sapin’s position has been reinforced in the short term by the departure of his outspoken rival Montebourg, who has blamed Merkel for launching ‘absurd’ policies that have unleashed ‘the most destructive crisis in Europe since 1929’. However, the French finance minister could be forgiven for being haunted by a sense of déjà vu, for the parallels with past European monetary turbulence are disturbing.

Sapin is a veteran of the upsets between France and Germany in 1992 that almost forced the devaluation of the French franc within the European exchange rate mechanism (ERM), the forerunner of EMU. He was preparing for a breakdown of Franco-German monetary ties when antagonism between the German and French monetary authorities was overcome by a secret telephone intervention from then Chancellor Helmut Kohl, cajoling the Bundesbank to acquiesce in a statement supporting the franc’s ERM parity, in the midst of talks in Paris with President Mitterrand. At the height of the crisis on 22 September 1992, Mitterrand told Kohl, ‘I am aware of the independence of the Bundesbank. But what does it want? To remain the last one standing on a field of ruins? Because it will be a field of ruins.’

The problem for present decision-makers in Paris and Berlin is that the relationship between Hollande and Merkel is nothing like as intense and sympathetic as that between the two French and German leaders in the 1990s. On the other hand, Merkel and Schäuble have no option but to try to eke out as much goodwill as possible from the strained relationship with Paris, in view of the perennial uncertainties about dealing with Rome and the tortuous debate about whether Britain will end up inside or outside the European Union.

There is likely to be similar pragmatism in Berlin over Draghi’s Jackson Hole speech in which he called for a more flexible approach on budget deficits in Europe, seen as a veiled bid to persuade Germany to cut taxes, boost public sector spending on measures such as infrastructure and tolerate short-term overshooting of deficit targets by other countries. The Berlin line will be to urge continued action by Paris and Rome to bring down structural deficits, while not insisting on counter-productive tax increases next year to meet pre-set fiscal targets that are now being unhinged by the economic slowdown.

In reality, the political and economic position in France is parlous. Hollande will now be under simultaneous attack from two sides: from the right-wing, both his traditional conservative rivals and the revitalised far-right Front National, and from his own socialist party, where Montebourg and his allies, unencumbered by government office, will be quick to regroup and start fresh criticism.

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