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Franco-German Relations

An Unlikely Couple

December 11, 2012 | by CRAIG J. WILLY

German Chancellor Angela Merkel and French President François Hollande © European Council

The future of the Eurozone is deeply entwined with the political and economic relations of France and Germany. Craig J. Willy analyses the governance and public policies of the two countries and finds the Franco-German consensus essential – yet elusive.

As early as 1842, Victor Hugo could write in the conclusion of his book on the Rhine (Le Rhin): "Let us summarize. The union of Germany and France would be the break on England and Russia, the salvation of Europe, the peace of the world."

This statement may seem pretentious, and the bit on England and Russia is now politically incorrect, but it rings true today: Throughout the ongoing eurozone crisis the concord of Paris and Berlin is and has been absolutely necessary to finding any resolution and to preventing, as threatened to occur on occasion, a collapse of the European economy which would spark yet another global economic crisis.

A lucid assessment of convergences and divergences between France and Germany in areas such as economics, social equity and political culture is then crucial for determining whether and how Europe can overcome the crisis. This article offers a brief yet comprehensive comparison and concludes on the necessary conditions and likelihood of the Franco-German consensus.

Monetary and Fiscal Policy: Partial emulation

The most pressing, and ambitious, effort of convergence is in the economic sphere. In the early 1990s, President François Mitterrand and Chancellor Helmut Kohl took the momentous, indeed revolutionary, decision to fuse their currencies together into what would become the euro. Being in a currency union implies that its sub-units have a great deal of economic integration or even similarity (requiring "convergence" in European jargon) as well as joint and/or coordinated economic decision-making.

In this respect, contrary to what is sometimes affirmed by both French leaders and various media, France has not been incapable of "reform" in recent years. As the SGI’s France report notes "There is a real contrast between the profound changes instituted during the past 25 years in France and the image of a nation still reluctant to change". The report in particular cites significant reforms in the areas of European integration, decentralization, privatization and opening to foreign markets.

In particular, the French made very significant and largely successful efforts to emulate German monetary and fiscal policies, even if it meant some periods of economic underperformance and high unemployment.

The creation of the euro has locked the two countries into a common monetary policy determined by the European Central Bank which, like its model the German Bundesbank, benefits from German-style independence and a mandate focusing on the fight against inflation. This was not an insubstantial reform given that it meant that the French State lost legal control over its monetary policy.

Fiscal policy remains largely non-Europeanized despite having common targets. However, French and German national debt nonetheless were remarkably similar for 15 years, going from 55.5 per cent in 1995 to 82.5 per cent in 2010 (most of this increase occurred following the 2007 financial crisis).

Contrary to frequent portrayals of France in the media as a country with a uniquely acute debt problem, French debt and deficits are typically smaller than those of most other major developed countries and France’s debt outlook is currently better, often significantly better, than those of the United States, Great Britain, Japan and Italy – although these countries might not be the best examples for fiscal prudence.

There has been, however, a decoupling between French and German performance in this respect since the onset of the euro crisis. Germany practically eliminated its deficit last year while France’s remained above the 3 per cent limit prescribed by the European Treaties. In addition, Germany’s debt-to-GDP stands at 82.8 per cent while France’s is 89.1 per cent.

This imbalance is dangerous insofar as a further deterioration of France’s position would mean even greater inequality of decision-making between Paris and Berlin on eurozone affairs, already much remarked upon. As one senior EU official told The Economist put it, the partnership now serves "to hide the strength of Germany and the weakness of France."

The immediate danger should not be exaggerated. The famous "bond spread" between France and Germany, the difference in interest which financial lenders demand of the two countries, remains but has declined. For investors, France under Hollande remains a "core" country which, like Germany, is benefitting from capital flight from the peripheral countries. However, the divergence is real and will prove problematic if lasting.

Competitiveness and Social Equity: Diverging trends

Relative French success in instituting German-style monetary and fiscal policies has unfortunately not led to similar results in terms of overall economic performance. French leaders continue to struggle with the vexing issue of economic inferiority relative to Germany.

While French and German GDP per capita are similar, one has to bear in mind the challenge that Germany faced (and continues to face) in raising standards of living in the former East Germany after decades of Communist "misdevelopment." French competitiveness relative to Germany has collapsed since the late 1990s, leading to a staggering and unsustainable increase in France’s trade deficit.

However, France has also been one of the few developed countries in recent decades to have broadly avoided a deterioration in economic conditions for the broad mass of the population. As the OECD has noted: "France is one of only five OECD countries where income inequality and poverty have declined over the past 20 years."

In Germany in contrast, as its SGI report notes, "social inequality and poverty risk is increasing." Economic inequality has increased from near-Scandinavian lows to overtake France and almost reach the (already increasing) OECD average. Poverty has also been consistently increasing in Germany over the past three decades from just over 6 per cent in the mid-1980s to over 15 per cent today, including sharp and continuing rises in urban and child poverty.

Paris­/Berlin: Is the necessary consensus possible?

These two trends of Germany’s growing social inequity and economic competitiveness relative to France, highlight the principle obstacles to harmonious Franco-German relations today concerning the Eurozone: With the introduction of the euro, the past option of rebalancing competitiveness through devaluation of the franc (and/or revaluation of the D-mark) is no longer available. France then logically must, if it wishes to remain prosperous within the euro, adopt reforms.

As the SGI note, Germany has been enjoying a "job miracle" and "is now reaping the fruits of the controversial but ultimately successful Hartz reforms, which reduced structural unemployment." However, it is highly uncertain whether the French public and unions would be willing to tolerate similar reforms in the labor market if they are perceived to have antisocial consequences or would further limit France’s democratic sovereignty.

There is also an understated but fundamental difference in democratic political culture between the two countries. In France, according to the SGI, there is "the understanding that political will (endowed with democratic legitimacy) primes all other considerations, or in other words, that the budget is the servant of politics – a principle difficult to accommodate considering the rules of the European stability pact."

In contrast, Germany – following the strong constraints on its sovereignty after the Second World War and the creation of a strong constitution – is far more comfortable with the idea that elected officials and the popular will of a particular moment be tightly bound by constitutional law. Indeed, German and European officials frequently talk of the benefits of "market discipline", meaning the power of financial actors in forcing national governments to adopt "correct" policies, an idea absolutely horrifying to the French. All this is difficult to reconcile with the French Jacobin and Gaullist Republican traditions.

This contradiction must be resolved if the two economies are to converge and the euro is to function well. Legally, there is no question that the German interpretation is correct. As the SGI note, in France "there has been a constant gap between real (if limited) change and immobile concepts, between liberal reforms and traditional statist discourse."

The French may be attached to absolute democratic national sovereignty but the fact is they have already ceded a huge amount of it to Europe. According to European law, and by design, the French National Assembly has no role to play in the elaboration of the independent European Central Bank’s monetary policy and France is already bound to respect the famous Maastricht criteria on limiting budget deficits. These remain the case regardless of the campaign promises of whomever they happen to elect. The only question is whether the French finally realize what they signed up to and whether they decide to follow through with these commitments.

Craig J. Willy can be reached via Twitter @craigjwilly.