by Charles Grant

For the first time in the history of the EU, Germany is the unquestioned leader, and France is number two. Since the financial crisis struck in 2008, the economic inequality between France and Germany has grown. Although regular summits between Angela Merkel and Nicolas Sarkozy maintain the appearance of parity, France's higher levels of debt and public spending, its lower level of exports, its less well capitalised banks and its rising borrowing costs vis-à-vis Germany have forced it to accept German leadership on economic policy.

Last week I talked to officials in Paris about the eurozone crisis. The franker among them admit that on many of the key arguments – should the eurozone be run according to strict rules that minimise the scope for political discretion, should there be a treaty change, should the European Central Bank (ECB) intervene massively to support governments in trouble, and so on – German views have prevailed.

French officials fret about the sustainability of the euro. Their analysis is similar to that of the Anglo-Saxons: they worry that the German medicine being applied to the eurozone ignores the importance of demand and growth, and that few German policy-makers understand financial markets. But unlike the Anglo-Saxons, they think it better not to lecture the Germans in public on what they should do. The French think that the Germans will probably do what it takes to preserve the single currency, in the end. But several officials expressed the concern that, by the time the Germans decide to move, it may be too late to save the euro.

The French are reticent about the German plan to change the EU treaties. They assume that a new treaty will have to be preceded by a convention, as was the constitutional treaty. But when the convention – consisting of MEPs and national parliamentarians, as well as governments – meets, can the Germans ensure that it discusses only the euro, rather than every subject under the sun? Then there is the difficulty of ratifying a new treaty. The Irish, for example, would have to hold a referendum and in their current mood would probably vote no. But the French are going along with treaty change, because they hope that a new treaty with strict rules on government borrowing will make it easier for the Germans to change their current policies on the euro. In the short term that means accepting that the ECB should become a lender of last resort to eurozone governments.

In the forthcoming treaty negotiations, the French want to balance the German emphasis on budgetary discipline with some distinctively French thinking. Officials talk of treaty articles on economic growth and the co-ordination of macro-economic policy, tax rates and labour market rules. They also want to amend Article 136 of the Treaty on the Functioning of the European Union, which allows the eurozone countries to adopt new rules on budgetary discipline. The French want to broaden the scope of that article, beyond the Germanic preoccupation with budgets.

The French hope that the new treaty will pave the way for eurobonds, but know that collective eurozone borrowing only makes sense once budgetary policy has been centralised, which will take several years. In the meantime the French think that the eurozone needs a European Monetary Fund (EMF) to support countries in trouble. An EMF would, like the IMF, lend to countries that cannot borrow commercially, and set conditions. It would also lend preventively to countries that might face problems. It could be based on the European Stability Mechanism, the bail-out fund that is currently under construction.

Many parts of the French government would be happy to see an EMF become a rival source of expertise and power to the European Commission, though the Trésor has doubts about such duplication. France would like an EMF to take decisions by majority vote, so that it could move quickly and not worry about, say, a potential Slovak veto. But the Germans generally prefer unanimous decision-making on bail-outs.

The UK is in bad odour in Paris. Public lectures from David Cameron on what the eurozone should do have gone down badly (even though the French share much of his analysis). The French think the UK hypocritical: it says it cares about the single market but then wants special protection for the City in any new treaty – which as far as the French are concerned would be opting out of the single market. Would the French accept a special deal for the City in a new treaty? "Not if it erodes the concept of majority voting", said one official.

Like the Germans, the French say that if the UK asks for too many treaty opt-outs, they will go for a treaty that covers only the eurozone, or only countries in the euro plus those which plan to join it. The Germans are keen for the treaty to cover all 27 member-states, if possible, to make it easier for the Commission and European Court of Justice (ECJ) to discipline miscreants; the French, always sympathetic to the idea of a core Europe, are more relaxed about a treaty for fewer than 27. French officials disagree on whether it would be feasible for a eurozone treaty of 17 or 17+ to give the Commission and the ECJ a significant role. But they are all reluctant to see the ECJ involved in fining governments that breach eurozone rules.

At the moment, France and Germany are both hostile to the Commission but the French are even keener to minimise its role in managing the euro. They question its professional competence and worry about commissioners from non-euro countries voting on sanctions against, say, France. Paris wants such commissioners excluded from decisions on eurozone governance. The Elysée and the Matignon (the prime minister's office) are more negative about the Commission than the Quai d’Orsai or the Trésor – which think the Commission has a useful role to play in applying the recently adopted laws on budget discipline and eurozone imbalances.

But they are all critical of President José Manuel Barroso for his alleged "lack of vision". The French accuse the Commission of being invisible during the crisis and of not taking enough initiatives – though one official admitted that if it had been more active France would have complained. Among the criticisms I heard last week were that the Commission should have done more during the last decade to warn of the Irish and Spanish economies overheating; that it has pushed ahead with an EU-Mercosur trade accord, though this will harm French farmers and Mercosur has not offered reciprocity; and that although in July the EU asked the Commission to set up a task force to help Greece speed up reform, the task force did not start work till October.

François Hollande, the Socialist presidential candidate, has not yet said much of note on the eurozone crisis or the future of the EU. But he comes from the pragmatic, broadly pro-European wing of his party and his line on the EU is unlikely to be very different from that of Sarkozy. In fact Marine Le Pen, the leader of the Front National, brackets the Gaullists and Socialists together, saying that they are both - unlike her - for globalisation, the EU, the euro and immigration ( Marine Le Pen and the rise of populism). She is also an unremitting critic of the EU’s 'undemocratic' nature.

French policy-makers know that with national budgets likely to come under greater eurozone control, they will need to have an answer to those who claim that the EU is undemocratic. There is no love for the European Parliament in Paris. But officials talk of giving national parliaments a role in eurozone governance. They support Joschka Fischer's idea for a new committee of national parliamentarians to hold eurozone institutions to account.

The French government worries about Le Pen – who is currently polling between16 and 21 per cent. In past presidential elections the Front National has scored better than the polls predicted. If the euro crisis worsens, and requires France to adopt painful austerity measures, Le Pen's implacable hostility to the single currency could earn her extra votes. She could get through to the second round of the presidential election in May 2012, as her father did in 2002, though she could not win. The presidential election is unlikely to change the broad thrust of France's EU policy, but the euro crisis and the increasingly dominant role of Germany could push the French people in a eurosceptic direction.

By Katinka Barysch


Some of Germany’s European partners accuse Chancellor Angela Merkel of refusing, or failing, to lead properly in the euro crisis. Many Germans agree with that analysis and call for Merkel to guide the rescue efforts with a firmer hand and more vision. Just as many, however, think that Germany is actually leading well, and that this is not sufficiently acknowledged. As one opposition politician put it to me during a recent Berlin visit: “Germany is expected to lead, and if we do, we are criticised as arrogant – unless it’s in line with what others want.” I learnt that the way many Germans define leadership differs from the views that seem to prevail in other EU countries.

Recent remarks by Volker Kauder, head of the parliamentary faction of Merkel’s CDU (and the CSU), that Europe was now “speaking German” were crude – and treated as such by much of the German media. But the sentiment behind that statement is quite common. Many in the government say that leadership consists of spreading Germany’s ‘stability culture’ throughout Europe. They point to the fact that Greece is implementing reforms that were unthinkable until recently, that Italy is now run by a man who praises the strengths of the German model and that Nicolas Sarkozy is trying to get re-elected as president by promising to cut the French budget.

The Germans say they do not want to be the ones who impose austerity and reforms on their neighbours. They clearly do not enjoy being unpopular. And the experience of reunification has shown them how hard it is to salvage an ailing economy (in that case the eastern Länder) even if you can impose your own laws and practices. Merkel’s government therefore wants to construct new eurozone rules and institutions – but in a way that spreads and enforces a German vision of a ‘stability union’. (On how Germany should handle the euro crisis see 'Why stricter rules threaten the eurozone'.)

Accordingly, the German debate has shifted since the summer. The early debate had been focused on crisis management and blaming profligate South Europeans. Most Germans were spooked by the impression that market pressures were forcing their government into one U-turn after another. Opposition leader Frank-Walter Steinmeier liked to quip about ‘Merkel’s law’: the more fiercely Merkel rules something out, the more certain one can be that it will happen in the end.

In the last couple of months, the German debate has started addressing broader questions about the future of the euro and the EU. Political leaders are queuing up to make big European speeches. Now that the government talks about new treaties and institutions it looks more in charge. Politically, the strategy is working: almost two-thirds of Germans now approve of Merkel’s management of the euro crisis, up from 45 per cent in October.

However, the government’s vision for Europe is limited so far: a few ‘surgical’ amendments to the EU treaty to introduce automatic sanctions, take fiscal rule-breakers to the European Court of Justice and allow Brussels to intervene in the budgets of countries that ask for bail-outs. While Germany appears happy for the EU to curtail the sovereignty of countries that spend too much, it is reluctant to accept new constraints itself. During a recent Euro Group meeting, Finance Minister Wolfgang Schäuble obtained written assurances from his counterparts that the reprimands and sanctions of the new ‘imbalances procedure’ would apply only to countries with deficits, not those with surpluses. Spain in particular had called for more ‘symmetric adjustment’. Even economically literate Germans tend to react to such calls with simplistic statements such as “you cannot ask us to reduce our competitiveness and exports” or “we cannot increase our wages artificially to suit the eurozone because we also compete globally”.

A Germany in leadership mode would acknowledge that more German demand would help its troubled neighbours to export their way out of recession and that there are all manner of reforms (some of which the government is working on or contemplating) that can boost the German economy without ‘reducing competitiveness’. Here, Germany would do well to shed its Mittelstandsdenken (the conservative, inward-focused thinking deeply engrained in Germany’s small and mid-sized companies) and start behaving like a large country whose actions impact on the eurozone as a whole. (See also 'Why Germany is not a model for the eurozone'.)

One area, however, in which Germany will not lead is monetary policy. Observers from abroad often call on Merkel “to allow the European Central Bank to buy more Italian and Spanish bonds”. It is true that a majority of Germans is against the central bank buying government debt, mainly because they fear that ‘free money’ will allow South European countries to carry on borrowing, without implementing reforms and austerity.

However, most Germans do not think that they run monetary policy in Europe. They believe in central bank independence. There is no doubt that the ECB operates in a political environment that is substantially shaped by the German debate. But the idea that there could be a direct chain of command from the chancellery to the ECB or even the Bundesbank would be alien to most Germans.

In the eyes of most of the policy people I spoke to in Berlin, ECB bond-buying is dangerous, wrong, illegal … and inevitable. They know that the German political system cannot quickly come up with the sums that would be needed to finance Italy’s borrowing needs for any considerable length of time. First, Germany’s post-war political system was constructed specifically to prevent rash decision-making and strong leadership; a slow-moving, consensus-oriented political culture has developed as a result. Second, recent debates about bail-out laws have shown growing political opposition to committing more funds, in particular in Merkel’s own coalition. Any attempt to fill a ‘big bazooka’ bail-out vehicle with German taxpayers’ money could lead to political paralysis and early elections.

That only leaves the ECB. Berlin policy-makers shrug off the fact that Germany is routinely outvoted on the ECB board (votes are usually 17 against four). One person close to Chancellor Merkel said he wished the ECB was less hesitant in its bond-buying programme: “They should just announce that they stand ready to buy all Italian bonds, provided certain conditions are fulfilled.” Another told me it was “sad” that the Bundesbank and its boss, Jens Weidmann, were so dogmatic. But German leaders are very careful not to criticise central bankers openly and in public. (On what the ECB should do see 'The ECB must stand behind the euro'.)

No German government will instruct the ECB to “buy more bonds”. One government advisor says this would only prompt the ECB to defend its independence: “The more political calls there are for ECB intervention, the harder it gets for them to do what needs to be done.” Perhaps it is also time for German leaders to acknowledge that their routine statements about the wrongs of debt monetisation unsettle the markets, and just let the ECB get on with the job of stabilising the eurozone.