On recent visits to Berlin, I have been surprised at how negative people are about France. Key officials regard the country as incapable of controlling spending or enacting serious structural reform. They do not show much understanding of the political constraints that limit President François Hollande’s freedom of action. The officials add that, so long as the mistrust between Berlin and Paris persists, they cannot strike a bargain to strengthen eurozone governance. In any case, they say, there is no urgent need to do so, because – in their view – the eurozone as a whole is not in crisis. There are just specific problems in a few countries like France and Italy, caused by politicians lacking the courage to do what is necessary.
So I went to Paris to discover what the government thinks about Germany and the future of the euro. In Paris there is a sense of urgency about the stagnation of the eurozone (which is likely to grow at less than 1 per cent this year and to do not much better next year), the deflation afflicting parts of it (prices are falling in France) and the negative impact that these problems will have on French growth, job-creation and debt sustainability. Even French officials who are life-long believers in Franco-German amitié admit that the relationship is now ragged and horribly unbalanced: on the big questions, Germany sets the agenda for the eurozone.
Among the questions being considered by the French government are: what is the best way of influencing the Germans; whether the economic thinking in Berlin and Frankfurt may evolve to become less anti-Keynesian; whether the presence of the SPD in the German government could prove helpful; and how eurozone governance should be improved.
There are divisions on how to deal with the Germans. The predominant view is that France has a credibility problem with Berlin. Therefore it should show some results on implementing reforms and controlling spending, before taking on Berlin on eurozone governance. The other view is that the economic situation in France and in the eurozone is so dire that the Germans need to be confronted right away.
Everyone in the government is upset that Commissioner Günter Oettinger in the Financial Times and Chancellor Angela Merkel in the Welt am Sonntag criticised France for neither reforming nor complying with EU budget rules. This finger-wagging reinforces the narrative in France that Hollande and Prime Minister Manuel Valls have to reform to keep Berlin happy – whereas their line is that reform is good for France. Some of those close to Hollande think the criticism unfair, given that, as they see it, France is doing a lot to reform: the Loi Macron promises to deregulate professions, shopping hours and coach services, while the social partners are due to hammer out new labour market rules in January. But others point out that many Socialist deputies – and even some ministers – oppose these reforms for being too libérales and may well succeed in watering them down.
French officials worry about the intellectual gulf that separates the thinking of Germany’s financial and political elite – which emphasises the supply side to the exclusion of demand, and rules rather than macro-economics – from most of the rest of the world. In particular, they worry about the Germans’ reluctance to analyse the eurozone economy as a whole, rather than as a series of national economies; about their indifference to deflation; and about their rejection of the principle that an economy can suffer from a lack of demand that requires a macro-economic stimulus. They lament that so many key officials in the Chancellery and Ministry of Finance are lawyers rather than economists.
The French find the Germans more uncompromising on their economic philosophy than they were a few years ago, and less prepared to accept that they might be wrong (the recent downturn in the German economy has not been harsh enough to prompt many Germans to reconsider their views). Therefore when Germany has to compromise in the EU, for example on budget deficits, it does it out of political necessity, not because it admits to any chinks in its argument. As one official puts it, “the Germans don’t think economically, but judicially and in terms of rules and the rapport de forces”.
This intellectual divergence makes it hard for Berlin and Paris to agree on the next steps for the euro. At a time of supreme German self-confidence, the French are particularly unwilling to contemplate a new treaty or revision of the eurozone rules – because they think the Germans would write them.
Economy Minister Sigmar Gabriel, the SPD leader, has disappointed Paris. Intellectually, he doesn’t follow the hard line of Finance Minister Wolfgang Schäuble on the need for austerity in the eurozone. But he is not prepared to argue for a softer line in public, lest the SPD alienate German voters.
Some French officials credit Gabriel with helping to persuade Schäuble to make a small shift by accepting the case for more investment in Germany. Other officials think they have succeeded in changing the thinking of their opposite numbers in Berlin on the need for more investment at eurozone level. But they recognise that this supposed intellectual shift has not yet led to significant new policies for the eurozone or Germany. The Germans still think structural reform is the only really effective way to revive growth. And they have ensured that Commission President Jean-Claude Juncker’s €315 billion plan to boost investment contains little new money (the idea is to lever €21 billion from the EU budget and the European Investment Bank).
As always, there are frequent gatherings of French and German ministers and officials, but these are not bringing about a meeting of minds. Recently, the four ministers of economy and finance produced a joint paper on the need for more investment in the EU, France and Germany, but it said little that was new. Gabriel and Macron also commissioned Henrik Enderlein and Jean Pisani-Ferry, two eminent economists, to write a report on ‘Reforms, investment and growth: An agenda for France, Germany and Europe’. This called on each country to take a series of steps, for example for the Germans to boost public investment and the French to introduce more flexible labour markets. But the ministers have only weakly endorsed the report, given that its recommendations are controversial, and for now it is not being translated into political action.
October’s European Council asked the ‘three presidents’ (of the Commission, European Council and European Central Bank) to prepare a report on the future of the monetary union. This will put eurozone governance on the agenda in 2015. Given the strained state of the Franco-German relationship, however, there is not much optimism in Paris about what this exercise may achieve. In any case, the French do not currently have a set position on eurozone governance. Nevertheless they are mulling over a number of ideas. These include:
- Inserting more economic analysis into the EU’s process of vetting national budgets. Officials are vexed that when the Commission recently looked at the French budget, it carried out no analysis on the economic impact of different possible budgets. The decision-making is purely rule-based and political. The French think that the appointment of a high-profile chief economist would help to correct this deficiency in the Commission. Some officials think that the French committee which examines the national budget – looking, for example, at the credibility of forecasts and figures – could serve as an example for a similar committee at EU level. Such a committee could also cover structural reform. The French also want the EU’s budgetary process to take into account the eurozone’s aggregate fiscal stance.
- Reviving old ideas such as establishing a full-time Eurogroup president and giving the EU a role in national unemployment schemes. As one official put it, “the emphasis should be on carrots, not sticks – so no to Merkel’s reform contracts”. For the past few years the chancellor has been pushing the idea that the Commission should negotiate binding accords with each eurozone member, committing them to structural reform. But the official thought that a similar idea could work if given a positive spin: “Germany won’t agree to counter-cyclical policies at EU level, but why not incentivise structural reform in say Spain with a eurozone contribution to its unemployment benefits?”
- Producing a ten-year plan for converging the eurozone economies. Like the Maastricht treaty scheme for the euro, this could have three phases, which would help to mobilise support. Politically, this would be an easier sell than Merkel’s contracts. To keep Germany happy, the plan could cover labour markets and the single market in goods and services; to keep France happy, it could cover tax (harmonising corporate tax bases) and social issues (how minimum wages are calculated). The plan could also deal with other prerequisites of growth, such as co-operation on industrial policy, digital markets, energy and R&D. Apparently the Commission is not enthusiastic about this convergence plan, though President Donald Tusk and the ECB are supportive. Some French officials are hopeful that the Germans – aware of the long-term challenges to their own growth model of high exports and low investment and consumption – could back such ideas.
French officials say it is not clear whether any of this may in the long run need treaty change, though they are adamant that for the time being they will resist attempts to revise the treaties.
The French do not expect the new Commission to be particularly helpful vis-à-vis the Germans. Many of them have a positive view of Jean-Claude Juncker, seeing him as more understanding of their problems than his predecessor, José Manuel Barroso. But they worry that so many of the Commission president’s chief advisers and senior colleagues (such as Valdis Dombrovskis and Jyrki Katainen) are ‘German’ in their thinking. Nobody is yet sure whether Pierre Moscovici, the French Commissioner for Economic and Financial Affairs, will prove influential. French officials are not particularly worried by the prospect of EU fines for their budget deficit; they assume they can go on negotiating with the Commission, making little adjustments to stave off punishment.
There is a lot of unhappiness in Paris about the ECB’s deference to Germany
. Officials are frustrated with its inconsistency: it criticises in public the governments which borrow too much, yet although President Mario Draghi believes that Germany should adopt an expansionary fiscal policy, he will not say this unambiguously in public.
Amidst all this gloom, what strategy should the French pursue? They would certainly gain credibility in Berlin if they could show that they were controlling spending and implementing structural reform. But they believe they are caught in a vicious circle: Germany’s austerian policies – for both the EU and Germany – make it harder for France to grow, which worsens the fiscal position and makes painful reform politically more difficult.
The eurozone probably has to face a much deeper crisis before anything gets better. The Germans still believe that either fiscal or monetary easing would remove the pressure on countries like France to reform. But there may come a point when even the fiscal hawks of the German finance ministry have to acknowledge that the eurozone faces systemic difficulties (and not just policy errors in a few member-states). Negative growth and high unemployment, perhaps prompting social unrest, may impact on German thinking. If the current governments in Greece, Spain or Italy – all of which have more or less tolerated Germanic economics – were to collapse, bringing to power politicians opposed to the euro or to the German view of it, Berlin would have to compromise.
Charles Grant is director of the Centre for European Reform.