The Growing French-German Rift

Martin Schulz, the President of the European Parliament, does not mince words. Speaking before a German audience in Berlin, the German politician says that it is time to wake up and face reality: “It has become acceptable to accuse all Southern Europeans of being lazy, it has become acceptable to show German politicians dressed up in Nazi uniforms (…) the seeds of distrust and anger are producing results.” Schulz is visibly angry and sees the danger of a continent sleepwalking into catastrophe.

On his first visit to Berlin as French Prime Minister, Jean-Marc Ayrault is slightly more diplomatic, but the essence of his message to Germans is similar: stop lecturing us. The stuttering Franco-German engine is back in the spotlight as mutual frustrations are growing on both sides of the river Rhine. Germans believe that the new French President Francois Hollande is showing unwillingness to reform his country; the French are frustrated by what is perceived as a persistent German attempt to turn the whole continent, including France, into Germany. The debate between austerity and growth is back where it was a few months ago. But the simmering tensions between Germany and France go deeper. Germany and France have to find a new balance. The crisis management of the former French President Nicolas Sarkozy and German Chancellor Angela Merkel clearly did not work to France’s advantage. Merkel has to understand and accept that France is looking for alternatives to reestablish some sort of equilibrium. The recent debate in Germany does not help to strengthen the ties to the new government in Paris. Here it is in a nutshell:

The German political elite seems to think that in order to avoid the wrath of financial markets, France’s economy needs to reduce the size of the public sector, reform the labor market, and create the conditions for small and mid-sized companies to grow. Higher taxes and deep spending cuts are unavoidable. France could quickly become the sick man of Europe if it does not act decisively. In other words, Germany and many economists are suggesting to France to swallow the same bitter medicine that other big European countries such as Italy and Spain are taking to cure themselves from past sins.

President Hollande recognizes that he and his country have a problem. However, he is still struggling to find the right balance, and any outside intrusion makes his job more difficult. So far, France has been rewarded by financial markets not because of its stellar economic performance, but because of its closeness to Germany. Even at the height of the euro crisis, financial markets thought that Germany would stick with France and vice versa, even in the event of a partial breakup. Hence, Paris’ political elite fears that rising tensions between Hollande and Merkel could spook investors and turn them against France. Things could unravel very quickly. Any lectures from Berlin increase the risk for Germany as well as for France.

The euro zone can ill afford another attack on one of its main member countries. The European economies and the German economy cannot afford for France to be gripped by sudden and steep austerity. A French recession can quickly become a German recession, right in a German election year. A French recession would only deepen the contraction in other countries, such as Spain or Italy. It is true that France needs to be reformed, but it is a mistake to think that 400 years of “dirigisme,” or centralized economic policies, can be reversed overnight. In the short term, reforms always lead to recessions. If all countries reform in lockstep, potential export markets wither. That will only deepen the austerity.

It is time to understand that timing matters. The right reforms implemented at the wrong time don’t help. They risk making matters worse. France’s economy should start to move in the right direction, but it should also resist any pressure to go full throttle. Germany’s government should finally understand that it is in its best interest, as well as France’s and Europe’s, to tread very carefully.

AICGS

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