Only France can convince Germany to save the euro
OPINION:France is making a strategic error as great as any in the second half of the 20th century, writes DAN O'BRIENMERKOZY’ IS commonly used as a shorthand term for the supposed duopolisation of European decision-making by Germany and France during the euro crisis. But there has been no such two-state dominance. The two disagree on most issues, and Germany has almost always got its way.
Berlin’s way has been to do as little as possible at the latest possible moment. Germany has got its way despite its positions on almost every aspect of the response to the euro crisis putting it in a minority among the 17 members of the euro bloc. Sometimes it has been in a minority of one.
Internationally, Germany is even more isolated. In forums such as the G20, and in statements and analyses by organisations such as the IMF and the OECD, frustrations with its minimalist position have become so intense that they are often barely concealed.
The isolation of Germany has been masked by France’s willingness to support Berlin’s positions even when Paris has argued against those same positions bilaterally. The maintenance of Franco-German cohesion has been prioritised by French president Nicolas Sarkozy above all else. But alliances are only of value if they produce results. The willingness to toe the German line has not helped France and it has not helped Europe. A change of tack by France would expose Germany’s isolation and increase pressure on it to do what is necessary to prevent a break-up of the euro zone.
That this has not happened sooner is curious given France’s tendency historically to overplay its hand in international affairs: its resistance to decolonisation led to two of the bloodiest wars of that process – in Indochina and Algeria; its refusal to accept the hard facts of US leadership on security issues undermined the democratic world’s containment of the Soviet threat; and its blocking of Britain’s, and thereby Ireland’s, membership of the then EEC in the 1960s hindered the integration of Europe.
Under Sarkozy, France has underplayed its hand, and is making a strategic error as great as any of those made in the second half of the 20th century.
One reason explaining French timidity has been a miscalculation of the two countries’ relative economic strength.
Germany has been Europe’s largest economy for more than a century and it has many strengths, but these are now being exaggerated, just as they were underestimated in the pre-crisis period (even informed comment on economies tends to swing from one extreme to another, as it did on Ireland, pre- and post-crash).
Three issues stand out.
First, relatively high growth rates in Germany since late 2009 flatter to deceive. In large part these growth rates reflect a rebound effect after the German economy suffered an unusually steep decline during the “great recession” of 2008-09.
France, by contrast, suffered a much milder recession. A smaller fall has resulted in a smaller bounce. But the net effect has been almost identical.
Now, the German and French economies are both back to their pre-crisis sizes, and the difference in performance, as measured by GDP over the past four years has been negligible.
Second, and related to the first point, is export dependence. German excellence in manufacturing is rightly lauded. It has driven exports to 50 per cent of GDP. That is double the percentage of France. No other large industrialised economy anywhere in the world even comes close Germany’s exports as a proportion of GDP.
But being export-dependent is a vulnerability as well as a strength. The reason the recession in Germany was so deep in 2009 was because exports collapsed. Nobody has more to lose from a collapse in demand in Europe than Germany.
Third, Germany’s public indebtedness, at 81 per cent of GDP in 2011, is only slightly lower than France’s (86 per cent) and considerably higher than Spain’s (69 per cent). If the incipient European recession ends up being as deep as the last one, Germany’s debt position would move towards unsustainability.
The unassertiveness of France is surprising given that the German minimalist response to the crisis goes against every French instinct. French instincts are dirigiste and differ from those of more laissez faire Germany on all the most basic economic issues. This is reflected in the countries’ preferred responses to the euro crisis. France has argued for looser monetary policy, less tight fiscal policy, more aggressive bond-buying by the European Central Bank, the avoidance of a Greek default, the granting of a banking licence to the EU’s bailout funds and the ultimate measure of shared debt issuance (eurobonds). It has lost every argument.
Nor has France insisted on an acknowledgment by Germany that intra-euro area imbalances are two-sided and must be addressed by both sides. One reason the periphery over-borrowed is because the German financial system over-lent. This happened because German workers have not been given the pay rises their increased productivity warrants. That has meant that Germany has become too competitive, selling more to the rest of the world and buying less. The resultant “balance of payments” surplus that flooded back to German companies over the past decade was often unwisely invested by the banks at which the cash was deposited. These bad investments included US mortgage-backed securities and government and bank bonds in the euro area periphery.
The unwillingness of the German political class to articulate these truths to voters has heightened the sense of grievance Germans feel at having to bail out other countries and lessened their understanding that Germany is not blameless.
If the debate in Germany has been too limited, the nascent austerity-versus-growth in Europe is a distraction from rebuilding the foundations of the euro. It is also of limited relevance because the notion that growth can be flicked on like a light switch if politicians would only choose to do so is absurd.
The Germans are correct in seeking greater fiscal discipline and urging structural reforms, but these are only parts of a solution to the much bigger problem of the euro design flaws.
With Germany so isolated, France is the key player. Were it to end its unconditional support of German positions and ally itself with the euro zone majority in pursuing proportionately radical solutions, it could drag Germany more quickly to agreeing to the big fixes that are necessary, including, ultimately, fiscal union.
The euro will not survive without much bigger changes. If it fails, so too will the painstakingly created European order that has existed since the end of the second World War. Sooner or later Germany will arrive at or be forced to the point of making choices on whether to save both or let them collapse.
The Franco-German relationship has been the single most important relationship in that European order.
Only France can convince Germany to make the right decision, and to make it sooner rather than later, because if it is later it could end up being too late. Sarkozy has not exercised France’s influence. It is to be hoped that François Hollande, the likely victor in Sunday’s run-off vote, will exercise that influence, and do so quickly.
Dan O’Brien is Economics Editor