Guest Post: Merkollande Becomes Merde

Submitted by Pater Tenebrarum of Acting-Man blog,

European Discord Mounts – The Fraying Franco-German Alliance

The most important alliance within the EU, the one that has ultimately defined the union's course over the past few decades, is the French-German axis. It appears that this is no longer the case. The once so strong friendship is in danger of fraying ever since the socialist Francois Hollande has become president of France. Not only was he elected on an 'anti austerity' platform (disguised as a 'pro growth' agenda, which is of course one of the most laughable misrepresentations ever),  it has turned out that his big-brother, anti-free market socialist agenda wasn't merely an electoral ploy to differentiate himself from Sarkozy. He actually means it.

This puts him at odds with the at least nominally conservative chancellor of Germany, Angela Merkel. Shortly after Hollande's election, the tone of  commentary emanating from Germany was still marked by cautious optimism. Sure, so the story went, Mrs. Merkel would have preferred it if she had been able to continue working with Mr. Sarkozy. But we don't always get what we want, and surely it would be possible to find enough common ground with Mr. Hollande on questions concerning Europe. However, in the euro area, it is no longer so easy to completely divorce domestic policy from euro-land policy. And Hollande's domestic policies are setting a terrible example.

How can Germany demand free market-oriented reforms and austerity from the periphery while the French president implements anything but with great fanfare in France?

The growing rift was not yet as glaringly evident during the first EU summit in which Hollande took part, although the summit was notable for creating the impression that 'Germany was backing down on key demands' according to the press – ostensibly due to Mario Monti digging in his heels. However, Monti, Rajoy, Hollande and Merkel had met ahead of the summit to clear up the most important questions, so it seemed likely that we merely witnessing an example of well staged political theater. Monti was under great deal of political pressure at the time and had to return home with a 'victory'.

In the run-up to last week's 'banking union' summit, the vast gulf between the diverging opinions of the French and German administrations garnered some attention however. Apparently this time, it was rather more difficult to find common ground. As 'Der Spiegel' noted at the time, it seemed as though the moniker 'Merkozy', which was at first replaced with 'Merkollande',  was on the verge of being shortened to 'Merde':

"A bit of brinksmanship on the eve of European Union summits is to be expected. Heads of state and government are fond of going public with what they hope to achieve, only to make concessions once negotiations begin in Brussels. What might look like a deep abyss prior to the meeting will often be bridged.


But this time around, the self-serving rhetoric has been so intense that it is difficult to imagine the 27 EU leaders coming to agreement at the two-day summit, which begins on Thursday afternoon. First, it was German Finance Minister Wolfgang Schäuble, from Chancellor Angela Merkel's conservative Christian Democrats, who went on the offensive on Tuesday with a far-reaching plan to outfit Brussels with a veto right over national budgets. The position, widely referred to as a "super-commissioner," would even be able to override national parliaments, a taboo in Paris and in many other European capitals.


Then, in an interview with five leading European dailies, French President François Hollande repeated a proposal that isn't any less controversial. He wants to see the introduction of euro bonds, in addition to the installation of a euro-zone wide banking oversight authority by the end of the year. In Berlin, euro bonds are categorically rejected. And Hollande's timeline for banking oversight, combined with serious differences between Paris and Berlin on what such a regime might look like, is seen in Germany as unrealistic to the point of being an affront.

It almost seems as though Paris and Berlin are intentionally getting in each other's way. Germany wants to further stiffen EU budgetary rules and would like to amend EU treaties as quickly as possible next year to make it possible. France, on the other hand, believes the priority should be the collectivization of debt and rapidly installing bank oversight. For the summit, the result is likely to be a stalemate. The new Franco-German partnership of Merkollande is on the verge of earning a less flattering moniker: Merde."

(emphasis added)


Not seeing eye to eye: Francois Hollande and Angela Merkel.

(Photo credit: Getty Images)

Although the German government has refrained from publicly commenting on Hollande's domestic policies, it doesn't require a big leap of the imagination that the bizarre and outmoded socialist program implemented by the French administration is regarded with some apprehension from Berlin. There is not only the already mentioned signal that France is sending to the rest of Europe one needs to consider. There is also the not unimportant question of how France is going to be able to adhere to the deficit and debt targets of the 'fiscal compact' if Hollande runs its economy into the ground. Should France miss its targets, what can Germany do about it? In reality, not much. And should the markets begin to get worried about the sustainability of France's government debt, then it will be all over but the shouting.


What Angela Merkel dreams about: the much happier times when Ersatz Napoleon was still around.

(Photo credit: Philippe Wojazer/AP/Press Association Images)


Parallel Universes

In its latest edition, Der Spiegel once again tackles the topic of the Franco-German alliance, this time asserting that a 'crisis of confidence' has developed. France and Germany, so the magazine, now inhabit 'parallel universes' and relations have turned 'frosty'.

“Since the days of former German Chancellor Konrad Adenauer and former French President Charles de Gaulle, Germany and France have generally been run by politicians who placed more value on unity than their differences. The axis between former German Chancellor Helmut Schmidt and former French President Valéry d'Estaing axis proved to be just as resilient as the partnership between their successors, Helmut Kohl and Francois Mitterand.


Frosty Relations


Under Merkel and Hollande, however, the German-French partnership threatens to deteriorate into nothing but a façade. The two politicians, who hold the fate of the continent in their hands, greet each other politely with kisses on the cheek, and their respective public relations staffs extol their "professional" and "trusting" cooperation.

In truth, however, the relationship began on a cool note and has since slipped below the freezing point. Hollande doesn't want to forgive Merkel for having campaigned for his conservative opponent, former President Nicolas Sarkozy. Now the Chancellery suspects that Hollande is secretly planning a campaign for Merkel's challenger from the center-left Social Democratic Party (SPD), former Finance Minister Peer Steinbrück.


Mistrust shapes the relationship between Paris and Berlin, on issues ranging from future European bank regulation to the joint aerospace and defense group EADS and the future architecture of Europe. Hollande suspects that Berlin is using budget consolidation as an excuse to gain European dominance. Merkel notes with unease that Hollande is joining forces with Rome and Madrid to form a joint axis against Germany.


Last Monday, a joint interview with the French president at the Elysée Palace given to six European newspapers offered a sense of how deep the divide is. In the one-hour meeting, Hollande not only criticized German policies more sharply than he ever has before since taking office, but he also rebuffed Merkel's austerity course. "It is France's task to tirelessly tell our partners that there are alternatives to a policy of austerity," Hollande said.


His predecessor Sarkozy also had differences of opinion with Merkel. Nevertheless, the two leaders always managed to agree on a joint position prior to a summit. This has changed, with the two sides now intensifying rather than smoothing over their conflicts prior to meetings.”

(emphasis added)

But what are Hollande's vaunted 'alternatives to the austerity policy'? The new socialist “Zwangswirtchaft” model that he is implementing in France and which marches on inexorably, from one absurdity to the next? If Spain were to attempt to do the same, its bond market would crash in an instant.

To be sure, Hollande is not entirely wrong when he accuses the German government of having 'double standards'. As we have often pointed out, Germany itself has little moral standing in demanding that others cut their debt loads while it is in flagrant violation of the Maastricht (now 'fiscal compact') limits itself. The unilateral scuttling of the EADS/BEA merger was an inexplicable oddity as well. However, the Germans are quite correct when they grumble about the unprofessional attitude revealed by the  'journalistic broadsides' Hollande lately fires at them and about Hollande's economic policies at home. As an unnamed German official noted privately: “You don't get France's problems under control by raising taxes and lowering the retirement age.”  In fact, this is not only not the way to get France's problems under control, it is sure to add to the growing list of problems of the euro-zone as a whole.

One thing is certain: the markets have not yet fully assimilated what is going on here. If relations between France and Germany continue to fray, it will become highly likely that the euro area will eventually fall apart with a bang. After last week's summit, which predictably did not result in anything tangible,  Hollande sotto voce declared that “Europe is very close to ending the debt crisis” and had “taken the right decisions” (actually, no decisions have been taken at all). Ironically, he also proposed that the “surplus countries should lower their taxes”. This must have been the first time ever that Hollande has put the terms 'lower' and 'taxes' into the same sentence. Of course he is on safe ground here, as France is definitely not a surplus country:


France's trade deficit – click for better resolution.


France's current account deficit – click for better resolution.


Still, we can finally commend him for uttering a good idea: lowering taxes is always a good plan, no matter who pursues it. Let's get on with it.

Unfortunately he proposed a very bad idea in the same sentence: the surplus countries should also “raise wages”. He did not mention that rising wages need to be accompanied by gains in labor productivity – no, he wants the countries with trade surpluses to make themselves deliberately less competitive, which is an utterly nonsensical demand. Not only is it absurd, period, it is especially so as no country is an island, and neither is the euro area as a whole. German producers not only need to consider the European market – they must stay competitive globally. Obviously, to deliberately make one set of countries less competitive is fundamentally very different from altering conditions in those that are currently not competitive in a positive direction. Hollande is essentially saying: 'I'm implementing terrible policies at home – those with better policies should drag themselves down to my level, so as to blunt the harm I'm inflicting on France in the service of unworkable socialism.'


Addendum: BuBa Still Unhappy with the ECB

The Bundesbank's latest monthly report has come out yesterday (at the moment, unfortunately only the German version is available), and it is evident that the German central bank continues to look askance at Super Mario's foray into manipulating interest rates in euro area crisis countries by buying their debt.  We mention this here because this rift between ECB and BuBa is in a way mirroring the rift between France and Germany. If it were up to France, Draghi would no doubt already be a clone of  Bernanke. Alphaville has a brief comment on the BuBa's report, summarizing several of the salient points. We intend to provide a more extensive overview in an upcoming post.



Another picture from happier times, when France and Germany were working closely together: Francois Mitterand and Helmut Kohl are commemorating the dead of World War 1 in Verdun in 1984. It was a 'symbolic moment of reconciliation between the two countries' as Der Spiegel remarks.