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The Growing Franco-German Divide

Interviewee: Jacob Funk Kirkegaard, Senior Fellow, Peterson Institute for International Economics
Interviewer: Christopher Alessi
October 24, 2012

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As European leaders continue to hash out policy responses to the ongoing eurozone debt crisis while facilitating further EU integration, divisions between the EU's traditional pillars of Germany and France have intensified. French President FranÁois Hollande has publicly opposed German Chancellor Angela Merkel's strict austerity approach to the crisis and has resisted German proposals for a so-called EU budget tsar, even as Merkel has rejected Hollande's call for euro bonds. Still, both sides recently reached an agreement at the EU leaders' summit in Brussels, held on October 18-19, to move ahead with plans to develop a banking union (Guardian). The Peterson Institute's Jacob Funk Kirkegaard says that while Hollande may rhetorically oppose Merkel's measures, he has acquiesced to many of her policy prescriptions, including austerity, since his election in May. Moreover, "until Hollande develops a coherent vision for where France would like Europe to go, and how he foresees that process developing, the Franco-German relationship is going to be less important than it was in previous periods of European integration," Kirkegaard says.

Can you sum up the German and French approaches to the eurozone crisis? What are the key issues that are dividing Paris and Berlin, and how have they been exacerbated since the election of Hollande earlier this year?

The German approach to the crisis is quite straightforward: tough love. Germany is entirely willing to provide significant financial support to other euro area countries, but only in return for fiscal austerity and structural reforms in these countries, as well as commitments to deeper political integration in the euro area. There's a very clear quid pro quo here between Germany and the peripheral countries in the euro area. It is an approach that, by and large, is in line with many of the demands of the European Central Bank. One of the reasons why the German view has tended to prevail almost invariably throughout this crisis is because there has been on many of these issues a very strong alliance between Germany and the ECB.

With respect to how that compares to France, I don't think there really is a succinctly crystallized French view of the crisis. Certainly Nicolas Sarkozy's crisis management technique was to basically align himself with Merkel, while Hollande, during his election campaign [in 2012], very forcefully, and in direct response to Sarkozy's close alliance with Merkel, articulated that France needs to be more independent of Germany. He [argued for] fiscal stimulus [over] more austerity. At least rhetorically, he is viewed as being much more confrontational vis-ŗ-vis Germany and Merkel. It's not really clear what the practical implications of this have been. Hollande may have campaigned on [policies] to end to austerity and return to fiscal stimulus, but the reality is that once he was elected and once the French parliamentary election was over, he actually reverted back and has just pushed through an austerity budget in France with the consolidation of about Ä30 billion. And he has just pushed through the fiscal compact, which was, of course, very much Merkel's idea.

What are some of the main takeaways from last week's EU leaders' summit? And what's to be made of the tentative agreement on moving forward with a banking union/supervisor?

The EU summit got it about right on the banking union. They have committed to reaching a political agreement on how to do it by the end of this year, which is very rapid.

The EU summit got it about right on the banking union. They have committed to reaching a political agreement on how to do it by the end of this year, which is very rapid. We have to remember that that means it has taken the European Union only six months from when the political need for significant financial banking regulatory reform was acknowledged at the EU Council in June. On the substance of the banking union, the European Council was very positive because it basically endorsed the European Commission's earlier proposal, which calls for a banking union that includes all European banks, and is as open as possible for non-euro members. Both of these things mean that there are short-term political obstacles. How are you going to accommodate non-euro members at the ECB? As a regulator, what is the role of the European Banking Authority versus the ECB? So there are a lot of institutional and political challenges here. European leaders also [enabled] the European commission [to] proceed with making proposals for the other overall components of the banking union, including a joint resolution scheme [or an agreed-upon method for winding down failing banks] and deposit insurance.

Can you speak to the issues that weren't touched upon, or were postponed, like the idea of greater EU control over national budgets?

Germany basically said we should have a super commissioner in the European Commission with the authority to overrule national government's budgeting, which is essentially another version of political union--a longstanding German demand for the European Union. It is completely wrong to believe that a budget tsar, or a European Commission super commissioner for national budgets, would have any credibility if that person was merely a bureaucrat. [European Council President Herman Van Rompuy and High Representative of the European Union for Foreign Affairs and Security Policy Catherine Ashton are unelected officials--Ed.] That simply would not be democratically legitimate. So what the Germans are really saying is that this person needs to have direct, democratic legitimacy. [It] needs to be an elected official, which is another way of saying that you need to [construct] in Europe entirely new political institutions in order for this to work. What [Germany is] proposing is political union, hand-in-hand with fiscal union, for the euro area.

Why are the French resistant to German calls for a so-called budget tsar?

French opposition to German proposals for more political union is essentially a reflection of very long-standing positions and clashes between France and Germany that we have seen over many decades in the EU.

This basically is a reflection of are very long-standing opposing positions of France and Germany. Germany has always had this quid pro quo position that it wants much more political union and fiscal union [in exchange for] financial assistance.

Germany is a federal state, [and] quite comfortable with multiple layers of elected government. In that sense, the European political union would just be another layer. In France, the historical positions on EU integration have been very much the opposite. France has always advocated the need for more fiscal integration, ultimately culminating in euro bonds and those types of measures, but has always resisted handing over national sovereignty and joining a political union. The French domestic political system is very different. The French president is a president that has much more power than the U.S. president, [and] the French parliament has absolute authority over all policy areas in France and can dictate what regional governments do. Therefore, sovereignty in France is a much more touchy issue and it is much more difficult for the French to give it up in return for more fiscal and financial integration in the euro area. French opposition to German proposals for more political union is essentially a reflection of very long-standing positions and clashes between France and Germany that we have seen over many decades in the EU.

What are the potential areas for compromise between Germany and France in terms of next steps in managing the euro crisis and facilitating further EU integration?

The areas of compromise are very large. The big project for next year that has practical implications is the banking union. That is where the actual changes and regulatory shifts will be focused. That will first focus on integrating supervision. After that, you will have an integration of the resolution and deposit insurance components of the banking union, which essentially means that there is sequencing here. But there's also a sequencing in the banking union and the other building blocks [European Council President Herman] Van Rompuy and others identified in his interim report for the Council about the need for further fiscal integration. Van Rompuy's report talks about the creation of an independent eurozone budget and the introduction of things like euro bills or short-term joint debt in the euro area. It is very clear that the broad focus is going to be about more integration in the euro area.

The affiliated question to that is, where does that leave the non-euro members of the EU? I believe quite strongly that ultimately all of the EU members [that are not currently part of the] euro area will [adopt] the euro, except the UK. So the real question is, what relationship is the UK going to have with the European Union as the euro area expands and integrates, while the UK is not a member?

More broadly, how central is the Franco-German axis to the European project and to the eurozone?

The actual influence of France is a lot smaller than it has been in the past, because Germany is the financial and economic anchor of Europe and has a more important role to play.

There's no doubt that the Franco-German axis is absolutely critical for European integration to move forward. And that has historically been the case; it's always been the locomotive. But there is an important element that is quite different this time around, relative to earlier periods of euro area integration. The earlier European processes of European integration and institutions were reflecting a political vision of a unified Europe. That was a vision that was ultimately the outcome of Franco-German compromise. But the process that we're in right now is quite different because the [current process] is not an integration that is driven by political vision; it is an integration that is driven by political, economic, and financial necessity. It's the recognition that the euro area needs to reform its basic institutions in order to survive, in order to be viable. In that process, it is perhaps less obvious that France and Germany need to agree before anything can happen, which is another way of saying that in this process the actual influence of France is a lot smaller than it has been in the past, because Germany is the financial and economic anchor of Europe and has a more important role to play. Germany is a sort of veto player in Europe right now. Germany is the country that has a much more developed, long-term vision for where they want to take the euro area when you compare it to France. Until Hollande develops a coherent vision for where France would like Europe to go, and how he foresees that process developing, the Franco-German relationship is going to be less important than it was in previous periods of European integration. In its place is going to be a much more dominant Germany.

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