BONN AND PARIS FACE RECKONING

 

This is a year of reckoning for the Franco-German alliance that has been the driving force of European integration for several decades. The difficulties both states face in qualifying for economic and monetary union are well illustrated by the sluggish growth and rising unemployment identified in the publication yesterday of the German government's annual economic report. Were either state not to qualify this would be the end of the EMU project. Even if they do, several major disagreements about how it should be governed divide them, straining their relationship and making EMU more uncertain in a year that will be decisive for its credibility.

Unemployment is expected to increase in Germany this year to 11 per cent. This will push up the budget deficit to 2.9 per cent, just under the Maastricht convergence guideline. The government's room for manoeuvre is strictly limited, which helps to explain why the finance minister, Mr Waigel, has targeted tax regimes in Ireland and Luxembourg he has accused of bleeding revenue away from Germany. We can expect to hear more about this in months to come. There may even be attempts to link common tax policies with entry to EMU. This is part of the major effort being made by German politicians to convince a sceptical electorate that it is not too risky to exchange the deutschmark for the euro.

Their task has been made more difficult by the outbreak of argument between French and German leaders about how the single currency regime should be governed. A compromise was reached on part of this agenda at the European Council in Dublin last month when terms were agreed about when a political review would be permitted on relaxing fiscal rules during a recession. Renewed arguments this month between the French, who want a political means of overseeing the European Central Bank and the German preference for political independence, make it clear that this disagreement persists. It may be easier for critics of monetary union in Germany, a significant if not very influential minority despite the sceptical popular attitudes, to aim their objections at the dangers of French intrusiveness rather than at the principle of monetary union itself; the same applies to their hostility to early participation by Italy and Spain.

In France the government faces similar problems in qualifying for EMU and convincing the electorate that its administration will be in the country's best interests. But there is little sign that the French policy elite is willing to abandon the deep-seated and longstanding commitment to the alliance with Germany that has driven European integration. In the Inter-Governmental Conference the two states are pushing the proposals for a flexible method of decision-making that would allow a core group to press ahead faster than more reluctant partners. They have committed themselves to closer defence co-operation. Despite tension across the span of their alliance the best judgment must be that the French and German leaderships will persevere and compromise in order to deliver EMU on time, insofar as it is within their gift to do so.