Analysis: Franco-German chill reshuffles cards in Europe

Reuters News
Posted: Dec 10, 2012 1:58 AM
Analysis: Franco-German chill reshuffles cards in Europe

By Paul Taylor

PARIS (Reuters) - A chill has settled over the Rhine seven months after the election of Socialist French President Francois Hollande, reshuffling the cards in Europe's perpetual power game.

The cooling of traditionally close Franco-German relations was partly an intentional step by Hollande to demonstrate that he is not in conservative Chancellor Angela Merkel's pocket but wants to change the policy direction of the European Union.

It also reflects a fraught process of rebalancing power to accommodate Germany's greater political heft and economic clout.

Despite vows of ever closer cooperation that are sure to mark the 50th anniversary next month of the treaty that sealed post-war Franco-German reconciliation, tension is likely to simmer at least until next September's German general election.

Hollande was keen to distance himself from his conservative predecessor Nicolas Sarkozy's exclusive alliance with the German leader, which became known as "Merkozy" because of the dominant role they played in steering the euro zone debt crisis.

Hollande and Merkel have differed publicly over the right mix between austerity and growth policies, the future of the euro area, a European banking union, and industrial policy.

A series of disputes over common euro zone bonds, the EU budget and the aerospace industry have exposed mutual distrust between German and French officials and business leaders, despite entrenched habits of cooperation.

"It's not an easy dialogue," said Bruno Le Roux, parliamentary floor leader of Hollande's Socialist Party. "It was on the wrong track for the last couple of years and the fact that France was in an electoral cycle for a year and now Germany is in an electoral cycle for a year doesn't help."

Le Roux, who is close to Hollande, said the president had set out to broaden the debate about changing the euro zone's course by including countries such as Italy and Spain that are closer to his approach of "integration with solidarity."

That had led Merkel to build bridges with non-euro Britain on issues such as the EU budget, at France's expense.

Whereas France and Germany cut a deal to preserve the level of agricultural subsidies - of which the French are the chief beneficiaries - in the last long-term EU budget, Berlin cold-shouldered approaches by Paris for a similar pact this time.

In last month's aborted negotiations on the 2014-20 budget, Merkel endorsed lower farm spending despite French pleas and backed British pressure for deeper cuts in total EU expenditure.

The chancellor has expressed public concern about the loss of competitiveness of Europe's second largest economy. Her Finance Minister Wolfgang Schaeuble last month asked a panel of economic advisers to consider reform proposals for France.

In private, senior German officials worry about Hollande's ability to secure support in his Socialist party for the bold shake-up of labor markets, welfare financing and public spending that experts say France needs after the anti-business rhetoric of his election campaign.

Berlin has watched aghast the national drama in France over efforts to save 630 jobs at steelmaker ArcelorMittal, featuring threats to nationalize an ageing steelworks shuttered due to chronic overcapacity in the sector.

In German eyes, the furor over Mittal's Florange plant epitomizes a lack of economic realism and a statist intervention reflex that run counter to Germany's business culture.

Berlin policymakers recognize that Hollande is making a gradual turn towards economic reform, but they have still to be convinced of his determination to stay the course if left-wing and trade union resistance mounts.

Franco-German tensions over power-sharing, industrial policy and the role of the state came to a head in the struggle over European aerospace leader EADS.

Berlin prevented a merger between the Airbus parent and Britain's BAE Systems last month, fearing Germany would be overruled by Franco-British defense interests. The Germans then demanded an equal shareholding with Paris' in EADS.

The result was a shake-up of the European planemaker in which the Berlin government paid more than $2 billion to buy a stake matching France's, only to see the role of state shareholders greatly reduced by new governance arrangements.

The Germans were "obsessed with parity because they are convinced the French want to take over the company, just as the French are convinced the Germans want to take it over," said a person involved in the negotiations, who spoke on condition of anonymity.

The age when Germany was willing to sign the cheques but let France take the lead in Europe - whether to atone for World War Two or to ease the way for German unification - is over.

EADS is a paradigm for wider difficulties in relations, both because of the mutual suspicion and because of Berlin's determination to assert its increased power in a venture in which the French previously had the upper hand.

Hollande argues that each step towards closer integration in the euro zone should be preceded by an increase in "solidarity" - code for Germany doing more to support weaker southern states.

In contrast, Merkel insists there must be greater central control of national budgetary and economic policies to ensure they respect EU rules before any sharing of liabilities.

The Frenchman advocates common euro zone bonds to help pay off those countries' accumulated debts. He also wants joint deposit insurance in which German depositors and taxpayers would underwrite shaky banks in other euro zone states.

Both ideas are anathema in Germany, at least this side of the election and probably for much longer.

Irked by Hollande's perceived attempts to isolate her, Merkel has reached out to other partners to strengthen her hand in European negotiations.

In an essay entitled "After Merkozy, how France and Germany can make Europe work" (*), Ulrike Guerot and Thomas Klau of the European Council on Foreign Relations recount how Berlin lines up support from the Dutch and Finns, fellow north European AAA-rated nations, before dealing with the French.

"We call the French only once we have established a common position among our group of like-minded countries," they quoted a German official involved in financial negotiations as saying.

"And we know that once we start speaking with the French, then the trouble starts."

* After Merkokzy, how France and Germany can make Europe work, policy brief, ECFR.

(Additional reporting by Tim Hepher; editing by James Jukwey)