Franco-German harmony faces fresh challenges

Fresh into her third term, Angela Merkel was anxious to get back to business in Brussels yesterday. Europe would remain a priority in her third third, she told the Bundestag on Wednesday, prompting Berlin wags to ask why it was relegated to page 156 of her coalition’s 185-page programme for government.

She arrived at the summit room with French president François Hollande, determined to present a united front and banish talk of Franco-German discord. The two capitals want to see progress on a Franco-German initiative for so-called “contractual arrangements”, granting extra financial incentives to states that commit to an additional timetable of economic and social reforms negotiated with the European Commission.

But the push for Franco-German harmony was disturbed on two fronts: by Merkel’s revival of demands for treaty change and Hollande’s demand for a permanent military fund to finance European military interventions.

For the French, treaty change demands from Berlin summons up the memory of their failed 2005 European referendum that helped kill off Europe’s constitutional treaty. But Berlin insists the current Lisbon Treaty is not sacrosanct and that treaty change, likely to require a referendum in Ireland, is essential for further, meaningful integration steps.

Defence fund
On defence issues, meanwhile, Germany is cool on a French idea of financing a defence fund to fund joint European military interventions. Dr Merkel is more comfortable with the idea of Germany training other people's armies rather than deploying its own, telling reporters: "We cannot solve problems all over the world but have to enable them solve their own problems."

Looking ahead, spats over trade and the European elections will dominate Berlin’s EU narrative in 2014. Berlin has faced accusations from EU partners of allowing its trade interests, and those of its domestic car industry, to stall new, lower car exhaust standards.

Last month the commission raised hackles in Berlin by opening an investigation into whether Germany’s trade surplus was hampering growth elsewhere in the euro zone. Then on Wednesday, a day after Merkel was sworn in, the commission announced another investigation, this time into exemptions extended to German heavy industry from a national surcharge to promote green energy.

Germany introduced the levy on all energy bills in 1999 to subsidise the development of renewable energy sources. But in 2012 Berlin widened eligibility to some 1,700 companies, saving collectively €4 billion, after industry complained of the cost of adapting to Germany’s nuclear energy shutdown in a decade’s time. Merkel says the exemptions are a crucial instrument to keep German heavy industry competitive – and in Germany.

Lobby watchdogs
Critics in other member states say the discounts distort competition. Lobby watchdogs, meanwhile, expect massive efforts from a who's who of German industry, from BASF to ThyssenKrupp, that benefit from the exemption.

“Ten years ago Berlin was more pragmatic and consensus-seeking on issues like this, with more attention for the pan-European consensus,” said Olivier Hoedeman, research and campaign director of the Corporate Europe Observatory watchdog. He suggests Berlin’s increasingly combative approach on trade issues in Brussels mirrors the rise in economic importance of exporting firms, now responsible for one in four German jobs.

“If there was a downturn in the success of exports that could have quite serious consequences for other parts of the German economy,” said Hoedemann.

Banking union
Beyond the trade spats, June's European election could bring some interesting twists in the Berlin-Brussels relationship. The debate over the banking union moves to the European Parliament, allowing another airing for German concerns about exposure to liability of neighbours' banks.

Due in the first half of next year, meanwhile, is a final constitutional court ruling on legal challenges to the ESM bailout fund. In a September 2012 preliminary assessment, the Karlsruhe court came out in favour of ESM. But its final ruling will also bring in subsequent challenges filed against the ECB’s sovereign bond-buying programme, known as OMT. Though both are highly controversial in Germany, the court is unlikely to pull the emergency brake on either ESM or OMT.

However the verdict could deliver arguments critical of the EU bailout strategy, putting wind in the sails of Germany’s new bailout-critical party: the Alternative for Germany (AfD). After polling 4.7 per cent in last September’s general election, narrowly missing the Bundestag, they hope to enter the European Parliament to start reshaping Germany’s Europe debate.