France and Friends: Merkel Increasingly Isolated on Austerity

Published on Spiegel Online International, by Nikolaus Blome, Ralf Neukirch, Christian Reiermann, Mathieu von Rohr and Christoph Schult, Sept 3, 2014 (Photo Gallery).

The debate over Germany’s insistence on euro-zone austerity has flared anew as an ailing France continues to demand economic stimulus. The European Central Bank may now be siding with Paris, leaving Merkel looking increasingly alone … //

… French President François Hollande released his cabinet last Monday largely because Prime Minister Manuel Valls wanted to finally rid himself of his left-wing critics, Economics Minister Arnaud Montebourg first among them. Montebourg had loudly complained of European austerity and demanded that the French government cease taking heed of the “obsessions of the German right.”

The Money Pump:

  • The result: France now has a government that is more clearly than ever in favor of reforms. But at the same time, Hollande is seeking to increase pressure on Germany to fundamentally rethink its economic approach for the euro zone. He wants to convince Merkel to loosen the stability criteria. Last week, he even demanded a special EU summit to agree on measures to promote economic growth. In France, that has traditionally meant pumping more state money into the economy.
  • In essence, the dispute focuses on the question that has divided Europe since the beginning of the euro crisis. The Chancellery in Berlin has demanded that EU countries in crisis undertake far-reaching structural reforms coupled with biting austerity programs. Paris, meanwhile, has been the voice of those asking that the stability pact be made more flexible to make room for economic stimulus, with reforms coming later, if at all. Until recently, the two camps had been roughly equal in strength within the EU. But recently, Paris has unexpectedly won over new allies.
  • New European Commission President Jean-Claude Juncker has joined Hollande and Italian Prime Minister Matteo Renzi in promoting a flexible interpretation of the stability pact rules. The US government and the International Monetary Fund likewise support the position.
  • Plenty of outside experts agree. During a meeting of Nobel laureates on Lake Constance in August, the economists present unanimously criticized Merkel’s approach. Europe, they said, is threatened with lasting weak growth should the deficit rules continue to be strictly interpreted. Given the current 0.4 percent rate of inflation, many are warning of the perils of deflation. And the biggest pessimists even believe that the euro crisis could return.
  • Merkel and Finance Minister Wolfgang Schäuble, though, remain convinced that the euro zone remains unthreatened by a relapse and have no plans to deviate from the path followed thus far. Nevertheless, dearly held certainties are being called into question from all sides. Germany’s central bank, the Bundesbank, for example, is calling for higher wages. And the European Central Bank (ECB) seems to be in favor of some form of fiscal stimulus to boost growth.

A Curious Phone Call: … //

… More Numerous Detractors: … //

… Cuba without the Sun: … //

  • When Hollande named his new, reform-friendly government last week, German government members and senior officials were unanimous in their praise. “Hollande is finally taking a risk,” said one minister. Another spoke of “the last chance Hollande has.”
  • But even serial optimists in Berlin believe the chances for a sudden change of course to be low. Hollande’s Socialists, after all, only have a two seat majority in parliament, making it easy for the party’s left wing to block any controversial proposals.
  • “For France, it’s not five minutes to midnight, it is midnight,” says Gunther Krichbaum, the chair of the EU Affairs Committee in the German parliament and a member of Merkel’s Christian Democrats. There are many in the Berlin government camp who have largely written off the French president. “It is probably too late. Hollande has simply lost too much time,” says one senior government official.
  • Still, new French Economics Minister Emmanuel Macron has been widely praised in Berlin. Just 36-years-old, the former Rothschild banker attempted to steer Hollande toward reforms early on in his term. He also served as a vocal opponent of the 75 percent tax on incomes in excess of €1 million, a key campaign pledge of Hollande’s. France, he allegedly complained, was in danger of becoming a “Cuba without the sun.” Macron, who worked as an economic advisor in the Elysée prior to his appointment, is well-known and respected in the Berlin Chancellery.
  • But he too is critical of Berlin’s fiscal approach, despite being in favor of structural reforms. In an interview he gave shortly before his appointment last week, he suggested that the 35-hour-work week be loosened, only to be quickly censured by Prime Minister Valls. However, behind the scenes he has also repeatedly made clear his belief that Germany places too much emphasis on adherence to the deficit rules.
  • That can partially be explained by France’s fundamentally different approach to the state’s role in the economy. Like the left, French conservatives also support flexible monetary policy. Still, the constant criticism from France is nonetheless surprising. Contrary to countries such as Greece and Spain, which took advantage of EU aid programs, France has at no time suffered from anything that could be even remotely termed “austerity.” Since 2008, the country hasn’t once presented a budget that conforms to the deficit rules, and that isn’t likely to change this year, next year or in 2016.

Not Very Helpful: … //

… Cutting a Poor Figure:

  • The decisive question from the German perspective is whether France and Italy are serious about structural reform. Only then will they be able to impress Merkel. Renzi, for his part, has announced a far-reaching reform program, but it has already run into political difficulties. The French, meanwhile, continue to accumulate new debt and to break previous reform pledges — and remain trapped in political stasis.
  • The vicious circle which Hollande and his governments has yet to try to break looks like this: Paris insists it is aiming for “serious budgetary policy,” but since the economy has stagnated for years, French political leaders argue that significant spending cuts would be misguided and cite the risk of a recession. At the same time, though, they say they want to use caution when introducing structural reforms so as not to upset the Socialist Party base. The result has been measures that fall far short of what is necessary to stimulate the economy.
  • Leftist supporters of Hollande are angry nonetheless, put off by his expressions of support for what is seen as neo-liberal reform and austerity policies — even if he hasn’t actually applied any of them.
  • The result is that Hollande has managed to disappoint everybody: the one group with his announced intentions and the other with his failure to act. And everybody has been unimpressed with the poor figure he has cut in the process.
  • Now he is left with little else than the demand that formed a key element in his campaign. It was time, he said on the stump, to “reorient Europe” and demanded an end to austerity. The comment upset Merkel so badly that she refused to meet with him prior to his election.
  • Since then, Hollande has continued demanding the same — and has been rebuffed over and over again. Perhaps he has been hoping the whole time that he will be proven right if only he repeats himself often enough.

(full text).

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