Franco-German rift in eurozone

This Perspective column was first published in today’s edition of Fund Strategy.

Are France and Germany having a slight tiff or are they heading for a break-up? The answer has important implications for the future of the eurozone.

France’s last president, Nicolas Sarkozy, was so close to Angela Merkel, the German chancellor, they were known by a combined name: Merkozy. The German leader even made a misguided public offer to support her French counterpart in the presidential elections.

But relations have soured since the election of François Hollande, the socialist candidate, to the French presidency in May. It is not immediately clear why the connection has become more tense since Hollande is a technocrat rather than a strong believer in left wing ideas. Nevertheless disagreements have emerged on several fronts.

In essence the dispute is about which one takes the first step in the moves towards further integration of the eurozone. Germany, Europe’s strongest economy, wants other countries to cede control over much of their economic policy to Brussels before it agrees to common debt issuance. France wants Germany to accept a common front first before other countries agree to more centralised budget control by the EU.

The disagreement also extends to the debate about banking union. This is how El Periódico de Catalunya, a Barcelona-based newspaper, described it:

“Germany does not want to play the banking union card (possibly because its banks are like Swiss cheese) and prefers to play the card of Europe-wide supervision of national budgets by a European Union super-minister. France opposes that, as it has no desire for German hegemony and is demanding that the banking union be in place first. In this new Franco-Prussian war, the kicks the combatants are meting out to each other are falling on Spain’s behind.”

There were also angry words over the abortive merger between BAE Systems, a British defence contractor, and EADS, the Franco-German company that makes the Airbus airliner. Merkel reportedly vetoed the deal even though both companies were keen to merge. For anyone with any sense of history this new Franco-German tension is worrying. Strife between the two countries tore Europe apart for over seven decades and three military conflicts. This was recognised in the recent announcement that the European Union was being awarded the Nobel peace prize:

“In the inter-war years, the Norwegian Nobel Committee made several awards to persons who were seeking reconciliation between Germany and France. Since 1945, that reconciliation has become a reality. The dreadful suffering in World War II demonstrated the need for a new Europe. Over a seventy-year period, Germany and France had fought three wars. Today war between Germany and France is unthinkable. This shows how, through well-aimed efforts and by building up mutual confidence, historical enemies can become close partners.”

It is disingenuous to attribute peace in post-War Europe to the EU – apart from anything else the organisation did not come into existence until 1993 – but there is some truth to the Nobel committee’s claim. The pan-European forerunners of the EU did help maintain stability by providing advantages to both sides. They gave France a way to contain German power while they provided Germany with an acceptable route to re-enter European affairs.

There is clearly no military conflict on the horizon but the economic crisis and the drive towards European integration are shaking things up. Germany in particular is becoming nervous that it might have to pay a disproportionate share of bailing out troubled European states.

Its policies, although clearly undermining the sovereignty of other nation states, are more akin to those of a nervous bank manager than an old-fashioned dictator. It is driven by an anxious pragmatism rather than any desire to create a Fourth Reich.

This is not to deny that the drive towards European integration is problematic. But it is wrong to see it as in some ways a repeat of earlier German attempts to dominate Europe.

What it does do is create the possibility for rapidly shifting alliances within Europe. So Germany can be best friends with France one month and the two can fall out the next.

It also means that new alliances become possible. For instance, two well informed experts from the European Council on Foreign Relations, a pan-European think tank, have speculated that Poland could replace France as Germany’s key ally in Europe (Ulrike Guérot and Konstanty Gebert “Why Poland is the new France for Germany”, Opendemocracy, October 17 2012). They point to many examples to illustrate their point including a joint letter in the New York Times by Guido Westerwelle and Radek Sikorski, the foreign ministers of the two countries, in which they spell out a common vision of a new Europe.

Of course Poland does not have the same weight as France in European affairs. The Eastern European state has only about 20% of France’s economic output, 60% of its population and there is no fixed date for it to join the eurozone. But Germany’s new closeness to Poland gives some indication of how relations are shifting and how they could move again in the future.

France and Germany may not be heading back to the days of military bloodshed but neither are they destined to remain best friends forever.