Conflicting visions at core of eurozone crisis

Since the inception of the euro, France and Germany have pursued divergent visions of European economic and monetary union. In two decades, the French have become a little more German, the Germans a little more French. But the gulf remains.

With the fate of the 17-nation single currency at stake at a summit this week, 20 years almost to the day since the Maastricht summit at which European leaders agreed to merge their monies, the same battles are still being fought out.

Between sovereignty and federalism; between «stability» and growth; between more solidarity and stricter discipline; between a directorate of big states and a more democratic organization for the continent; and between a tightly-knit «core Europe» and a broader but looser union.

The outcome of Friday’s 27-nation European Union summit may determine the course of the world’s largest trading bloc.

One road leads to a core group of euro zone states forging ahead with closer integration; another to a continuation of the current, multispeed Europe limping along at the pace of the slowest in the convoy; and a third toward a potential breakup of the currency and disintegration of the Union.

Compromise proposals outlined by Chancellor Angela Merkel and President Nicolas Sarkozy on Monday to anchor stricter budget discipline in the EU treaty owed more to Germany’s drive for fiscal virtue than to France’s push for more «solidarity».

The issues that divided Paris and Berlin were all too familiar – whether to give supranational EU institutions the power to overrule national budgets and punish deficit offenders; whether to mutualize European debts; whether to let the European Central Bank act as a lender of last resort to states and banks.

As always, the French want elected governments calling the shots with political discretion in taking decisions and a subordinated secretariat role for the European Commission, while the Germans want community bodies to have automatic powers to uphold the rule of law.

“European integration will have to advance through intergovernmentalism because Europe will have to take strategic political decisions,» Sarkozy said in a major speech last week.

To the French, monetary union has always been a political project – to regain a share of sovereignty over their currency instead of being dominated by an overmighty Deutsche Mark; to anchor a reunited Germany to Europe after the fall of the Berlin Wall; and to strengthen Europe’s political power in the world.

Helmut Kohl, German chancellor at the time, saw the euro as a stepping stone on the way to a federal political union, but the French were reluctant to cede sovereignty then as now. Kohl was the last German leader to espouse a United States of Europe.

His successors, Gerhard Schroeder and Angela Merkel, grew up after World War Two and saw the EU more pragmatically as a vital forum for advancing German interests. But they did not want «Brussels» interfering in their own conduct of government and no longer felt a moral duty to pay for Germany’s historical guilt.

Like the French, they are today closer to President Charles de Gaulle’s vision of a Europe of nations, than to EU founding father Jean Monnet’s supranational community method.

“France and Germany make no secret of wanting less Monnet and more de Gaulle,» Charles Grant, director of the Centre for European Reform, wrote in an essay.

As a result, the European Commission has been weakened, its sole right to propose legislation effectively bypassed, and its president, Jose Manuel Barroso, reduced to complaining about the inefficiency of intergovernmentalism to make the euro zone work.

“To come out of this crisis we need to work with and through the European institutions. We need a true Community approach … It is the only way to build a Europe that guarantees efficiency, fairness and legitimacy. Intergovernmental cooperation is not enough,» he said in a September 28 State of the Union address.

To many Germans, the euro was and remains primarily about economics – to lock in exchange rate stability with Berlin’s main trading partners; to achieve economies of scale; to impose budget discipline on Europe; and to have an independent central bank run a currency «as strong as the mark».

Kohl insisted on a «no bailout» clause in the Maastricht treaty to avoid a «transfer union», in which Germans were forced to pay for the debts of less prudent partners.

When the euro zone debt crisis struck, the German reflex was to tighten enforcement of the budget rules, and for each state to make savings to cut its deficit and debt.

“When the euro was introduced by the Maastricht treaty in 1992, there was a historic compromise,» Peter Altmaier, parliamentary business manager of Merkel’s conservatives, told Reuters in an interview.

“1) The awfully strong Deutsche Mark was abolished, and 2) German stability culture would be implemented Europe-wide. The first part was implemented. The second part is still valid and binding in the treaty, but it hasn’t yet been implemented.”

The German discourse carries heavy moral overtones. «Deficit sinners» have to «atone» for their sins and «do their homework» by cutting public spending, wages, pensions and benefits and working longer and harder.

The French believe the right response is for member states to show «solidarity» with the weaker members of the European family and for the European Central Bank to put a floor under all national debt by acting as lender of last resort.

Although Paris is the second largest contributor to the euro zone bailout fund after Berlin, there has been hardly any debate in France on the cost of rescuing Greece, Ireland or Portugal.

Enabling resolutions have slipped almost unnoticed through parliament by consensus in contrast to the fierce debates and cliffhanger votes they have engendered in the Bundestag.

This is partly because the French have a centuries-old tradition of a strong unitary state, entitled to spend «public money» in the national interest, with a weak legislature, a craven judiciary and few checks and balances.

The French, in the words of Thomas Klau, a historian of the euro, are latecomers to fiscal discipline although they have become «a bit more German» in recent months as fear of losing their top-notch AAA credit rating has mounted.

“The French are now at least paying lip service to moving away from deficit financing as the norm. But while the words are there, action is less certain,» said Klau, a German who heads the Paris office of the European Council on Foreign Relations.

He compared the French approach to deficit-cutting with Madame du Barry, the last mistress of King Louis XV, who pleaded on the scaffold for «just one more moment, Mr Executioner».

“The problem is that moment has been going on since 1974 and the executioner is getting a bit impatient,» Klau said.

Germany too has had its lapses. Berlin and Paris conspired to tear up the EU budget rules in 2003 to avoid being subjected to disciplinary procedures for exceeding the deficit limit of 3 percent of gross domestic product for the third successive year.

Both countries have a public debt of more than 80 percent of GDP, well above the Maastricht treaty limit of 60 percent.

But Berlin returned to budget rectitude after Merkel took office in 2005, while France has continued to go astray.

In Germany, the state’s powers are strictly circumscribed by the federal system, a strong parliament, an activist constitutional court and an independent central bank to prevent any repetitition of the abuses of the Nazi era.

These differences have been projected onto Europe. The Germans believe the answer to the euro zone’s policy mistakes is a stricter application of the rule of law, with the European Commission empowered to reject budgets that breach agreed EU rules and the European Court of Justice to punish offenders.

Under the Sarkozy-Merkel compromise, deficit offenders will face automatic sanctions unless a supermajority of euro zone states votes against their application.

The court will be able to rule on whether euro countries have implemented a «golden rule» on balancing their budget properly in national law, but will not sit in judgment on individual national budgets.

Some critics say the proposed treaty changes will weaken democracy at both national and European level, and give bigger member states a veto right denied to smaller countries.

Sylvie Goulard, a French member of the European Parliament’s economic and monetary affairs committee, said Sarkozy’s insistence on intergovernmental control in the euro zone weakened Europe’s institutions and sapped their legitimacy.

“What legitimacy are we talking about?» she asked. «If there is no supranational legitimacy, why should the Greeks or the Portuguese obey what Mr Sarkozy and Mrs Merkel decide, since neither of them was elected to govern in Athens or Lisbon.”

Merkel and Sarkozy already stand accused of having forced out the leaders of Italy and Greece last month by summoning them for public reprimands that caused markets to lose confidence.

Now they want decisions in a future permanent euro zone bailout fund taken by a supermajority – 85 percent – instead of unanimity, to prevent small states or parties in those countries’ governments from blocking joint action.

That happened when Finland held up an expansion of the euro zone rescue fund agreed in July to demand collateral on loans to Greece, and when a junior coalition partner in Slovakia’s ruling coalition opposed boosting the rescue fund, delaying approval of the measure and bringing the government down.

The nearly three-month delay in approving the agreement was cited by analysts as a key cause of markets’ loss of confidence in the euro zone’s ability to get on top of the debt crisis.

French efforts to sideline the European Parliament have a long tradition, partly because France’s own parliament was reduced to a largely rubber-stamp role by the 1958 Fifth Republic constitution, which enshrined a powerful executive.

Roland Dumas, the French foreign minister at the time of the 1991 Maastricht treaty negotiations, told Reuters later that then President Francois Mitterrand had instructed him to concede «as little as possible» power to the EU assembly.

On that point, Germany has become more French. The German Constitutional Court, in a landmark 2009 ruling on the EU’s Lisbon treaty, declared that the EU is not a democratic state and the European Parliament is not a proper legislature.

Hence it enjoined the German parliament to take more of a supervisory role over European affairs and barred it from ceding budget sovereignty to Brussels.

That has placed tight restrictions on the direction in which the euro zone can develop. Government lawyers interpret that judgment and a more recent one on the euro zone’s rescue fund as ruling out common euro zone bonds as unconstitutional.

On some other points, the French have become more German. They have a history of inflating their way out of crises and traditionally prefer their currency weak enough to help sales of their airplanes, cars and cereals on world markets.

Yet there has been a striking absence of calls for the ECB to let the euro depreciate, or soften its approach to inflation, among mainstream French politicians since the crisis began. Only the far-left and far-right have aired such views.

In deference to Merkel’s domestic problems, Sarkozy publicly rejected the idea of issuing common euro zone bonds again this week, but many French officials privately see them as part of a longer-term solution to the debt crisis.

But in one crucial way, at least, the two different visions of Europe have come closer. Both Paris and Berlin agree there is far too much at stake to let the euro fail.

That is already leading both of them to do things that are not in either country’s political tradition – bailouts for Germany, austerity for France – to save the euro.


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