France and Germany Face Delicate Talks Over Economy

Christophe Ena/Associated Press

President François Hollande of France and Chancellor Angela Merkel of Germany in Chicago last month.

June 21, 2012 1:06 pm

By STEVEN ERLANGER / The New York Times

PARIS -- Armed with a new mandate and a solid legislative majority, France's François Hollande is off to do battle with Germany in the name of growth, prosperity and human decency. Or that's the popular image, at least, of what is in fact a more delicate and nuanced relationship between the new French president and the German chancellor, Angela Merkel.

The partnership between Europe's two largest economies has been vital to the functioning of the European Union and the 17-nation euro zone. And it has thrived under leaders from similar parties or different ones; the euro itself is a French-German confection.

But the marriage is now under considerable strain, and France is very much on the defensive, not just because of the endless euro crisis, which is now undermining its southern European allies Spain and Italy, but because of the growing weakness of the French economy as well, which makes the French-German couple less than equal.

Pascal Malville, 49, selling pastries at a Paris market, said he thought the Germans had it essentially right. "Hollande will be obliged to yield to German power," Mr. Malville said, "because it's Germany that's on the good path."

On Friday, Mr. Hollande will go to Rome to meet with Ms. Merkel and the Italian and Spanish prime ministers, Mario Monti and Mariano Rajoy, to discuss the euro zone crisis before next week's European Union summit meeting. On the agenda are plans to develop cross-border banking supervision and a proposal from Mr. Monti to use the union's bailout funds to buy sovereign debt to help hold down interest rates for countries like Italy and Spain.

It is not a new idea -- there are not many of those -- and Ms. Merkel has been reluctant to accept the proposal because it could be another form of blank check signed by German taxpayers. Mr. Hollande is determined to show the French that he is willing to stand up to Berlin, to push Ms. Merkel to contribute even more than before toward a lasting solution of the euro mess, which is both financial and institutional. He believes that the German prescription -- heavy on fiscal discipline, light on new spending -- does not fit the euro disease in a recession. And he sees himself as the leader of what he hopes will be a new wave of left-leaning social democratic governments in Europe after a long period of right-wing leadership.

The problem for Mr. Hollande is that Ms. Merkel, while expressing support for some of his milder growth initiatives, is pushing back in a way that challenges France to the core.

Mr. Hollande brings to the table an argument for collectivized debt, or so-called euro bonds, and for the European Central Bank to be able to loan directly to banks and to the European bailout funds. In general, he wants the bank to operate more like the United States Federal Reserve, able to act as a lender of last resort to guarantee the debts of euro zone countries.

In response, Ms. Merkel contends that these steps must be a result of a closer political and economic union, not a precursor to it. Shared debt can work only if there is shared decision-making over budgets, taxes and pensions, she says.

That is why Ms. Merkel is pushing to move ahead with the long-stalled process of European integration. As Joschka Fischer, a former German foreign minister and Green party stalwart, said, "You can't mutualize the debt without mutualizing sovereignty; you can't have the financial benefits of a state without having one."

But "more Europe" would mean a considerable loss of French sovereignty over its national budget and the French financial system, an extraordinarily delicate issue for Mr. Hollande and his Socialist Party, which split badly on a similar issue in 2005.

"Merkel's call for fuller political, fiscal and budgetary union in the euro zone, though without details, creates problems for Hollande," said Thomas Klau of the European Council on Foreign Relations. "Hollande will have to accept or reject a course to euro zone integration sooner rather than later, and that will revive the French debate over how much sovereignty to transfer to Brussels."
In his tango with Ms. Merkel, Mr. Hollande is seeking support not just in Rome and Madrid, but even in Ms. Merkel's backyard: last week, he invited leaders of Germany's Social Democrats to Paris for talks.

By inviting her opposition, Mr. Hollande was judged to be sending a barbed message to Ms. Merkel, who openly supported his predecessor, President Nicolas Sarkozy, and refused to meet with Mr. Hollande while he was campaigning this year.

There are dangers, of course, in too much antagonism. "Without a partner in Paris ready to cooperate, overcoming the crisis is not conceivable," a front-page editorial in the Frankfurter Allgemeine Zeitung said this week.

So at the same time, Mr. Hollande has sent softer signals, wanting to modify the French-German equation, but not destroy it. His first visit, within hours of taking office, was to Berlin -- despite a lightning storm that threatened to stop his flight. He has named German speakers to major posts, including Jean-Marc Ayrault as prime minister, and he has spoken often of the need to work with Berlin. And his actual proposals for a "growth pact" to go alongside the German-inspired fiscal treaty are modest, making it easy for Ms. Merkel to accept most of them.

But any moves toward a deeper union within Europe will require constitutional change. Because Mr. Hollande does not have the necessary three-fifths majority in Parliament, he would face an almost irresistible demand for a public referendum. "That's the one scenario where the French president loses his power to French politics and the voters," Mr. Klau said. The Gaullist center-right would attack him, and it would reopen the political arena to more extreme anti-European voices on the far right and far left.

The issue of sovereignty is real for France, in part because it is so much weaker economically than Germany, which has emerged bigger and stronger than ever, having overcome many of its problems from creating a united Germany after the collapse of the Berlin Wall.

France has always wanted what Charles de Gaulle called "L'Europe des patries," or the Europe of homelands or nations, which keeps important decisions firmly in the hands of national leaders. But "more Europe means more centralized institutions with more power, and that means more Germany," said a senior diplomat, who spoke on the condition of anonymity because of the delicacy of the issue. "To agree to a more supranational Europe is also to agree to more German leadership in Europe."
Despite all the attention on the growth versus austerity debate, Ms. Merkel has already signaled she will accept the major elements of Mr. Hollande's modest proposal for a "growth pact" at next week's European summit meeting.

And it will not cost her much to do so. The total spending in the program is about 120 billion euros, or $152 billion, but it involves very little new money. The French package redirects 55 billion euros in existing European Union funds, or about $70 billion, for job creation, calls on the European Investment Bank to make an additional 60 billion euros or $76 billion in loans to private businesses and creates five billion euros or $7.3 billion in "project bonds" for infrastructure.
At best, the sum represents less than 1 percent of annual European Union economic activity, too little to make much of an impact.

More important will be proposals pushed by the European Central Bank and the European Commission for European-wide banking regulation and deposit insurance. But as with the Italian plan to allow Europe's bailout fund to buy sovereign debt directly, it is not clear whether Germany will accept either one.

At their first press conference in Berlin, Mr. Hollande and Ms. Merkel said that they would come forward with joint proposals before the June 28-29 summit meeting. So far, they haven't.
But there is still time. On Monday, Ms. Merkel's deputy, Georg Streiter, said that "she does not associate France with concern, but with hope." Ever since the end of World War II, Germany has enjoyed "very close, trusting and friendly relations" with France, Mr. Streiter said. "That is not going to change."

Melissa Eddy and Nicholas Kulish contributed reporting from Berlin, and Palko Karasz from Paris.

This article originally appeared in The New York Times.
First Published June 21, 2012 1:02 pm