PARIS, France — In recent days, the French press has accused President Nicolas Sarkozy of selling out to the Germans.
Liberation, for example, said he had morphed into "candidate Angela Sarkozy," writing, "if you closed your eyes, you could hear Merkel speak."
The taunts are unlikely to cease as Sarkozy and German Chancellor Angela Merkel work on their grand plan to save the euro zone, forcing Teutonic fiscal discipline down EU throats.
In a speech on Thursday, Sarkozy parroted Merkel’s ideas, arguing that the developed world was entering a “new economic cycle” dominated by debt reduction, with tough times ahead.
Those who hoped he would announce a forceful intervention by the European Central Bank — with the creation of euro-bonds or a massive purchase of bonds — were disappointed.
Worried about losing its AAA credit rating, France had until recently been pressing Germany to lift its effective veto power on the European Central Bank and buy up sovereign debt to reassure markets and bring down interest rates. Germany instead has appeared more intent on punishing profligate EU members into balancing their books.
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And in the tete-a-tete between Berlin and Paris, Sarkozy blinked first.
The president now says he is pushing for more fiscal discipline across Europe — Germany’s central demand.
But did he get anything in return? Not really.
"The ECB is independent and will stay that way. I’m sure that it will act against the deflation if it threatens Europe. It will decide when and how," Sarkozy said.
That’s hardly something investors can sink their teeth into.
Elie Cohen, an economist at the Cevipof Institute in Paris, said the power of the ECB must be unleashed.
"Today our house is on fire and if we do not take decisive action, the euro zone will explode and I do not see how treaty reforms are going to solve our problems," he said.
Early this week, Moody’s rating agency issued a warning on European banks, saying a “rapid escalation” of Europe’s sovereign debt crisis threatened the entire region. The ECB has committed just over $268 billion — a tiny amount compared to the size of the problem — to purchasing bonds on secondary markets, but it has resisted going further and becoming the euro zone’s last resort lender.
Merkel warned on Friday that there will be no quick fix, and that the implementation of fiscal reforms could "take years."
Merkel’s planned "fiscal union" would involve greater convergence of the tax-and-spend policies of EU members, with Brussels imposing sanctions on profligate states who breach the rules.
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On paper, tighter regulations could help reduce the mountains of debt the euro zone has accumulated, if the euro zone doesn’t sink into a deep recession. However, economists say they have a funny feeling of "deja-vu."
In 1997, EU member states signed a pact to maintain the stability of the euro zone, pledging to keep their finances in order. The pact included a system of multiple warnings and sanctions against states which exceeded set deficit and debt thresholds.
The deal was a dismal failure. Rules were breached more than 60 times. Ironically, Germany and France, the two heavyweights now prescribing shock treatment, showed no qualms about breaking the pact’s rules. They both crossed the 3 percent deficit threshold in the early 2000s and blocked the European Commission from taking any action against them.
So it’s no wonder a new so-called "fiscal union" along the same lines lacks credibility.
"It all depends on who decides on sanctions," said Philippe Martin, a professor of economics at Sciences Po, a university in Paris. "If the Council of Ministers gets to decide on whether a country that breaks the rules is punished, make no mistake, small countries won’t be allowed to cheat, but big ones will," he said.
Martin says the euro zone needs an external legal authority to monitor budgets and send wasteful governments back to the drawing board.
On Thursday, Sarkozy said EU member states had learned from their mistakes and sanctions on spendthrift states would now be automatic. Media reports say EU officials are discussing involving the European Court of Justice.
Cohen said automatic sanctions would likely fail.
"Why do countries cross their debt thresholds and increase deficits?" Cohen asked. "Usually there is a reason. They’re either facing a sudden economic downturn or an asymmetrical shock. I don’t see how the European Court of Justice would be able to say whether a country was or wasn’t justified in increasing its deficit."
Cohen said market forces have already pushed through the corrective reforms Merkel wants in Greece and in Italy, which are now in urgent need of support.
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Jean-François Robin, a strategist with the French bank Natixis, welcomed the move toward automatic sanctions, saying it’s a step towards federalism — first step, but a small one. He admits investors were hoping for something more decisive.
"If we are going to review European treaties, shouldn’t we aim for something a bit more ambitious? Their moves didn’t convince stock markets. I didn’t see any euphoria nor any real optimism in trading," Robin said. On Friday, European stocks rose, with Germany’s DAX gaining 1.5 percent and France CAC-40 climbing 1.6 percent.
Robin agreed that more discipline will help solve the euro zone’s long-term issues. But, critically, he said it won’t stop EU members scrambling for loans in the short term with investors asking for unsustainable interest rates.
Italy, the euro zone’s third economy, owes $2.55 trillion and has to refinance a $530-billion chunk in 2012.
Help might be on the way. ECB President Mario Draghi hinted Thursday that the central bank could intervene. He said rules on public finances would be "the most important element to start restoring credibility" with financial markets, before adding that "other elements might follow."
Martin said the ECB is coy about admitting it would intervene, because it reduces market pressure on member states which are then less likely to carry out reforms.
"We saw it this summer with Berlusconi. The ECB said it would be buy Italian debt during negotiations on a fiscal adjustment policies which included increased tax on wealthy households," Martin says. "The day after, Berlusconi backtracked on increasing taxes on the rich."
With investors and credit rating agencies breathing down their backs, politicians may agree to reducing deficits and letting European technocrats check their books. But for how long?
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Sarkozy says he is committed to fiscal discipline. But so far his austerity plans will save a mere $25.7 billion by the end of 2012, compared to nearly $2 trillion owed, according to OECD figures.
French Socialist candidate François Hollande — who leads Sarkozy in opinion polls — said he opposes German plans to solve the debt crisis.
"I will never accept that for the sake of controlling national budgets and coordinating budget policy the European Court of Justice should be the judge of the spending and receipts of a sovereign state," he said.
But unlike France’s far right, the French Socialists have no interest in campaigning against the European Union. So it’s not clear how long they would snub the Germans if they came to power.
One thing is understood however. European leaders are again playing a game of brinkmanship, with Germany having the upper hand, only this time the stakes are so much higher than usual.