French comeback exposes rift in eurozone core
Unresolved tensions remain between France and Germany, writes Daniela Schwarzer
by: Daniela Schwarzer
Such moves were eye-catching. Until now Paris has largely, if reluctantly, quietly followed Berlin’s eurozone policy of providing aid but at the same time pushing hard for reforms to the governance of the euro area that follow German economic thinking. Now, by opposing Berlin’s position on how to deal with Greece, Paris has exposed a deep rift in the euro area about the very nature of monetary union itself.
Disagreement between the two main continental European powers — the fabled Franco-German motor — is nothing new. Over the past six decades, European integration has frequently been achieved through a process in which profound differences between France and Germany were resolved in hard-fought compromises that mostly worked because they were seen as a fair deal and accepted by other EU member states.
With regards to the euro, unresolved tensions remain between the two countries’ competing visions for the single currency and the interplay between politics and economics.
After a Grexit, Angela Merkel, German chancellor, and her finance minister Wolfgang Schäuble would have new allies for reform to add to Berlin’s traditional ones, such as the Netherlands and Austria. Eurozone members in central Europe and the Baltics, as well as southern countries such as Portugal and Spain that have undertaken tough structural reform programmes, would be likely to side with Berlin.
Thus, the French fear, the Germanic rules-guided co-ordination of policy would be strengthened, further institutionalising an orthodox economic approach. If that happens, Germany may be willing to cede more power to supranational institutions that could have a say on national budgets or to remove sovereignty when rules are breached.
That is not a model Paris would subscribe to. As an economy that largely relies on domestic consumption to drive growth, France has a much stronger inclination to favour policies that foster consumer demand. While no sensible politician in Paris denies the necessity of supply-side reforms, the basic assumption remains that a sound growth and investment environment is the prerequisite both for budgetary consolidation and reforms.
Moreover, while Germany’s rules-based model seeks to depoliticise policymaking, the French approach has politics at its heart: Paris has championed summits of eurozone leaders since the inception of the single currency.
Even when in a currency union, the French want to be able to make policy choices and conduct discretionary economic policy.
Finally, ideas for developing a eurozone budget that contains tools to smoothen business cycles automatically and can be used to support reform processes are much more prominent in French policy-making circles than in Germany. There is a different understanding of solidarity in Paris, even if this comes at a financial price for the eurozone’s second-largest lender to crisis countries.
Regardless of how the crisis over Greece plays out, there is a risk that the delicate balance between France and Germany on the euro could be disturbed further. It has already been under strain due to Germany’s dominant position since the sovereign debt crisis broke in 2010.
If Paris and Berlin cannot find a solid compromise on the future governance of the euro that is acceptable to national parliaments as well as electorates, there is a high risk of political fallout.
France is not the only country likely to challenge a currency union that it does not want.
Shifting political majorities in Spain, Portugal, Italy and other countries might rebel if faced with a single currency that excessively limits the self-correcting ability of democracy.
Once again, it looks as if a compromise between the German and French positions is what it would take to pull Europe through the Greek crisis. What is not clear is if they can find an agreement that is flexible enough for Paris and yet strict enough for Berlin.
The writer is drector of the Europe Programme at the German Marshall Fund