As the financial crisis has taken its toll on Europe’s southern perimeter, Germany has grown used to being insulted and vilified. In Greece, Cyprus and even Spain and Portugal, Chancellor Angela Merkel and Germans in general have been depicted in the press as uncaring hardheads, and at times as a throwback to warmongering Nazis, for the way they are supposedly imposing their economic stamp on the rest of the euro zone. For the most part, the Germans have shrugged off the caricatures.
But when France’s Socialist Party, the party of President François Hollande, circulated a draft text on April 26 that attacked Merkel for her “selfish intransigence” and called for a “confrontation” with Germany over policy, the reaction was one of surprise and pain. France, after all, is the country that allied itself wholeheartedly with Germany in the 1950s to drive forward the grandiose project of greater European integration. While there have been policy differences in the past between the two countries, they’ve never before descended to the level of personal insults.
The draft text was quickly amended to remove the offending passages. But the damage has been done. In the aftermath of the incident, policymakers and political analysts in France, Germany and elsewhere have been trying to figure out how serious the rift is, what its primary causes could be and, above all, what it means for the future. While interpretations differ, the consensus seems to be that the cohesion between France and Germany that has been so critical for the past five decades is now seriously fraying.
“This is a slippery slope, and it’s important we don’t continue down it,” says Pascale Joannin, general manager of the Fondation Robert Schuman think tank in Paris.
The divergence between France and Germany both in ideas and in policy practice has grown. The French want Germany to loosen tight restraints on both wages and investment spending; the Germans see that as irresponsible and shortsighted, and say the French — and other Europeans — need to become more competitive. Germany has led the way by example: it has held down increases in labor costs over the past decade, even as the French have allowed their production costs to grow rapidly. The same divergence has been evident in fiscal and budgetary policy, with Germany at pains to keep down government spending, while France has allowed its share of spending as a percentage of the overall economy to rise to 56% of gross domestic product and its deficit to swell; by comparison, public spending is just 45% of GDP in Germany, and the budget there is in surplus. The overall result is a big and growing gulf between German and French competitiveness. The unemployment rate in France, at 11%, is more than double the 5.4% rate in Germany. And while France’s trade deficit continues to widen, hitting nearly $87.7 billion in 2012, the Germans once again posted a buoyant trade surplus, of $246 billion. For Germany, it was the second highest ever, just below the record 2007 level; for France, it was the second worst ever, only slightly improved from 2011.
The view from Germany, increasingly, is that French economic weakness is now becoming a serious problem for Europe. On April 29, the business daily Handelsblatt published a leaked internal report about the French economy written by experts in the German Economics Ministry. Its withering conclusion: “French industry is increasingly losing its competitiveness. Ever more businesses are shifting outside France, and profitability is low.”
One of the problems is that in Paris there is no consensus within Hollande’s party, or his government, about the right direction to take Europe’s economy. Hollande was elected on a platform of promoting a growth agenda in Europe that would tone down the hard edges of Germany’s insistence on budgetary rigor. So far, he has failed to make much of a dent in that policy. Within the government in Paris, some ministers, including the firebrand in charge of industrial renovation, Arnaud Montebourg, are openly calling for a bold Keynesian reflation that jettisons the efforts to keep down the deficit. Hollande, Prime Minister Jean-Marc Ayrault and Finance Minister Pierre Moscovici are resisting — but haven’t taken serious steps to reduce government spending.
One high-level German official in Paris says “France’s biggest problem is that the left just cannot agree on how to deal with the economy. In that context, it’s easiest to find a scapegoat, who happens to be Merkel.”
So where does it all go from here? The experts see three possible scenarios. One is a kiss-and-make-up strategy: in other words, Hollande and his team will try to patch up relations with Merkel. The second possibility is that the French government essentially waits to see what happens in the German national elections this fall, hoping that the Social Democratic Party, currently in opposition, will be returned to government in Berlin, perhaps in a coalition. But even if the Social Democrats do return to power, the French may be disappointed to discover that they share less of Paris’ concerns than expected.
The third scenario is the one Berlin is most afraid of: that the French economy hits increasing turbulence over the next few months, and that France suddenly becomes a focus of attacks on financial markets. If that’s the case, Germany alone can’t save the euro. For now, says Claire Demesmay, a France specialist at the German Council on Foreign Relations in Berlin, “financial markets are calm and French interest rates are low. But we just don’t know how long that will continue.”