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Forget debt. Europe has a new big problem: the insurmountable differences between Merkel and Hollande.
BERLIN, Germany – Francois Hollande and Angela Merkel made a valiant attempt to strike a note of harmony on Wednesday evening as they met in Paris. However, the reality remains that they still fail to see eye-to-eye on critical euro-zone issues.
As the two met on the eve of yet another crucial European Union summit, the tone was cordial, yet there was little indication of potential compromise between their vastly different visions on how to address Europe’s escalating debt crisis. That means that the prospects of the meeting in Brussels yielding any lasting solution to the crisis are decidedly slim.
Nevertheless, the leaders sought to find some areas of common ground.
“We both want to deepen economic, monetary — and in the future — political union, to arrive at integration and solidarity,” Hollande said at a joint press conference before they embarked on a two-hour meeting.
“We have made progress toward a pact for growth, which we hope can be decided tomorrow,” Merkel said, referring to the proposed 130 billion euro ($160 billion) package of measures designed to promote growth in the euro zone. “We will then talk about the political future of the economic and currency union,” she said, adding: “We need more Europe, we need a Europe that works. The markets are expecting this, and we need a Europe whose members help each other.”
Although the two leaders insist they both want to achieve a solution to the crisis, they differ significantly on how to achieve it.
Hollande wants greater efforts to foster growth, and wants solidarity among EU countries, such as through the pooling of debt liabilities. He also sees the need for more immediate measures, such as creating a banking union and injecting cash directly into Spanish banks. Furthermore it is highly doubtful that Paris, always highly protective of its independence, would agree to cede national economic sovereignty to Brussels.
In contrast, Merkel advocates addressing the crisis by improving competitiveness and consolidating budgets. She wants a strong European political union, with centralized control of national budgets, as a prerequisite for any discussion of Germany pooling its debts with other countries. This is a project that could take years to achieve.
And on Wednesday night there was no sign of any significant compromise.
Merkel made it very clear before she even set off for Paris that she opposes one of France’s key proposals: euro bonds. For Berlin, the idea of mutualizing debts before there is sufficient centralized control would simply put Germany on the hook for the profligacy of other countries. That is why Berlin is pushing the idea of political and financial integration.
“There can only be joint liabilities when sufficient controls have been put in place” Merkel told the German parliament on Wednesday. “Apart from the fact that instruments like euro bonds, euro bills, dept redemption schemes and much more are not compatible with the constitution in Germany, I consider them economically wrong and counterproductive.”
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In fact the leader was even more vehement earlier in the week, telling a meeting of her coalition partners, the Free Democrats, that she did not expect to see total shared debt liability “in her lifetime.”
Where Merkel has conceded the point to Hollande is on the issue of a need for growth measures to complement her austerity drive. But even here, the much heralded 130 billion euro growth pact, which amounts to 1 percent of European GDP, is largely a repackaging of existing measures.
Meanwhile Hollande seems to have subtly dropped his insistence that the fiscal pact be renegotiated, something that had been a key pledge in his election campaign.
The reality is that as Europe’s paymaster, Germany seems to hold all the cards. Although there are some signs that its economy is weakening, it is in a much stronger position than France, where unemployment is rising and the 2012 growth forecast has been revised down to just 0.4 percent.
What remains to be seen is if the current differences between Merkel and Hollande means a more significant erosion of the partnership between the two nations that have been at the core of the European project. Preventing future conflict between the two countries was after all one of the key motivations for European integration after World War II.
Traditionally Germany was the EU’s economic powerhouse, while Paris provided political leadership. That has shifted in recent years, with Berlin gaining ever more dominance in the political sphere, but holding onto the idea of a Franco-German axis to avoid appearing as the dominant force in Europe.
During the “Merkozy” era, the chancellor would make sure to meet with Hollande’s predecessor Nicolas Sarzoky ahead of the summits to agree on a common Franco-German position, often to the annoyance of other countries.
The departure of Sarkozy last month changed all that.
The fact that Merkel supported Hollande’s rival in the election is of course one reason why their relationship has had a rocky start. Furthermore, Hollande has sought to challenge Berlin’s dominance in the euro crisis, and has emerged as a champion of those seeking an alternative to the austerity doctrine, particularly the Spanish and Italian leaders.
The effort to isolate Germany appears to have backfired. If anything, Merkel seems to be digging in her heels even harder after the less than harmonious meeting of the four leaders in Rome last week which followed a similarly acrimonious G-20 meeting.
Furthermore Hollande’s left-wing program for France, including reducing the retirement age for some workers, is anathema to the German conservative’s idea that only structural reforms and measures to improve competitiveness can get at the root of Europe’s problems.
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However, others warn that much more immediate measures are required, as harsh austerity measures appear to be pushing many economies into a downward spiral while their borrowing costs soar.
Ahead of the summit, Monetary Affairs Commissioner Olli Rehn said that leaders should find a way to relieve the current market pressures on struggling countries.
“It is essential that policy measures of a short-term are decided by the European Council” he told reporters.
While small Cyprus became the latest country to request a bailout, big economies like Italy and Spain are also at risk. If they were to need a bailout, then it is unlikely that the funds currently envisaged for the European rescue fund, the ESM, would be sufficient.
Spain has already requested a banking bailout and this week its borrowing costs hit 6.8 percent, close to the level that is regarded as unsustainable.
“The most urgent subject is the subject of financing,” Prime Minister Mariano Rajoy told the Spanish parliament. “We cannot finance ourselves for a long time at prices like those we are no paying.”
The markets will be looking for some indication from the summit that Europe is getting to grips with the crisis. Yet in the absence of a Franco-German accord, that could be all the harder to achieve.