Crisis Counseling

France Asking for Deficit Absolution

Will Germany take France by the hand again? Francois Mitterrand, left, and Helmut Kohl in 1984 during a WWII commemoration ceremony. Source: imago
Will Germany take France by the hand this time? French President Francois Mitterrand, left, and German Chancellor Helmut Kohl in 1984. The photo, considered iconic in Germany, marked the first time that France had invited its former arch-enemy to a WWII commemoration service.
  • Why it matters

    Why it matters

    If Germany and France fail to agree on a common fiscal strategy, investors may lose trust that the overseers of the euro zone can overcome debt problems and stagnant growth.

  • Facts

    Facts

    • As the two largest euro zone economies, Germany and France shape euro zone policy.
    • Germany and France disagree on how to cut deficits and revive growth in the euro zone.
    • France has asked for two more years to reduce its deficit below the E.U. limit of 3 percent of GDP.
  • Audio

    Audio

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The French economy minister, Emmanuel Macron, and the country’s finance minister, Michel Sapin, were scheduled to hold high-level talks with their German counterparts on Monday in an effort to avoid an embarrassing and potentially damaging rift in one of the key relationships driving European Union economic policy.

The outcome of the top-level gathering has the potential to mark a turning point in Europe’s fiscal strategy for emerging from the 2008 financial and euro currency crises. Until now, the 18 countries in the euro currency zone, at Germany’s insistence, have adhered closely to a prescription of fiscal austerity in the wake of the crises.

While drastic government budget cutting has produced positive results in countries such as Ireland, the austerity has yet to engineer a turnaround in E.U. members such as Spain, Italy and Portugal.

After last week’s slump in global stock and euro zone bond markets, deep disagreement between the two largest countries in the currency bloc over how to revive economic growth might increase financial instability.

The 18-country euro zone, which had to bail out Greece, Spain, Portugal and Ireland between 2010 and 2012, is at risk of falling into a recession again, the International Monetary Fund said two weeks ago.

Frances Budget Struggle-Debt-Deficit-Growth-01

 

The situations in peripheral euro zone countries may be still be precarious, but the significance of their problems pales in comparison to that of France, which is the bloc’s second-largest economy after Germany. Furthermore, Paris has largely resisted austerity remedies under the Socialist government of President Francois Hollande. Six years after the collapse of Lehman Brothers, the economic situation in France continues to deteriorate.

Without leniency from E.U. countries, especially Germany, France risks seeing the European Commission in Brussels impose significant fines if the country’s budget deficit remains above the E.U.’s 3-percent limit in 2015.

Germany, reluctant to exacerbate an already strained relationship with France, wants to extract binding concessions from Paris to cut its budget in exchange for its support.

“Any kind of negative statement would be badly received by the financial markets, the economic sentiment is worsening,” said Pawel Tokarski, a research associate at the German Institute for International and Security Affairs in Berlin.

“Traditionally Franco-German relations were always very close and crucial for the development of the E.U., but now Germany has a problem because the crisis in the euro zone has not been solved yet,” Mr. Tokarski said.

Since the late 1940s, the former adversaries France and Germany have cultivated a close bilateral relationship which helped pave the way for the creation of the now 28-country European Union, one of the world’s largest, most prosperous economic zones with more than 500 million consumers.

German Chancellor Angela Merkel has been frustrated by France’s unwillingness to heed her austerity plea.

The relationship, embodied by former Chancellor Helmut Kohl and the late French President Francois Mitterrand, led in large part to the creation of the euro, the world’s No. 2 reserve currency.

But after a period of relative harmony throughout the 1990s and into the last decade, the longtime partners have drifted apart as Germany has emerged stronger from the financial crisis, while France has struggled. The conservative Chancellor Angela Merkel and the Socialist, Mr. Hollande, have little in common politically and Ms. Merkel has been frustrated by France’s unwillingness to heed her austerity plea.

While the Germans are inclined to come to the aid of the French, they are wary of giving their struggling neighbor carte blanche to continue public spending and further put off needed reforms.

According to German magazine Der Spiegel, the countries have agreed on a plan that will commit France to making a series of economic reforms in exchange for German leniency on E.U. deficit spending.

German officials, however, called the report inaccurate and there was no sign in the run-up to today’s meeting that the two countries had reached an agreement, Reuters reported.

France-Germany-National-Flags-Dark-Clouds-Sept-2014-Berlin-Source-Ipon
Can Germany and France agree on a common path out of the euro crisis? Source: Ipon

 

The French are hoping to convince the German government to invest €50 billion ($63 billion) over the next three years to match €50 billion in French government spending cuts, French ministers Mr. Sapin and Mr. Macron told the German daily newspaper Frankfurter Allgemeine ahead of their meeting in Berlin. The German finance minister, Wolfgang Schäuble, said in an interview with newspaper Welt am Sonntag that Germany was committed to producing a balanced federal budget next year, which suggests that Germany was unwilling to support French demands for additional government spending.

France is keen on seeing more spending from Germany, because it could help economic growth in France, its biggest trading partner. Furthermore, faster German economic growth can help France cut its own public deficits more quickly.

With sluggish growth at home, France has again asked for two more years to bring back its budget deficit below the E.U.’s 3 percent limit. The country, which will have an estimated deficit of 4.4 percent of GDP this year, does not expect to reach the E.U. target until 2017 at the earliest.

Ironically, Germany and France, which has only met the E.U.’s deficit target four times in the past 14 years, may ultimately agree to a similar deal they adopted a decade ago. At that time, the countries let their budget deficits remain above the 3 percent E.U. limit, which set a precedent for other euro zone economies to spend and encouraged less disciplined members such as Greece to grossly violate the spending rules.

In 2012, the situation erupted into the euro debt crisis and politicians and economists have partly blamed the German-Franco deal as its cause.

 

Kevin O’Brien is Editor in Chief of Handelsblatt Global Edition in Berlin. Gilbert Kreijger is an editor for Handeslblatt Global Edition, covering economics and politics. Lára Hilmarsdóttir has reported for several publications. To contact the authors: Obrien@handelsblatt.comKreijger@handelsblatt.comL.Hilmarsdóttir@vhb.de 

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