The European Council on Foreign Relations

Reinventing Europe: Hans Eichel on Franco-German leadership

Date: 17th May 2012  |  Author: Hans Eichel ,

Categories: Reinventing Europe,
Tags: None

As part of ECFR's Reinvention project, we are running a series of blog posts looking at particular thematic issues facing Europe as it attempts to deal with the financial crisis.In the third of this series, Hans Eichel looks at the legitimacy of Franco-German leadership.

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Merkozy was necessary to maintain the cohesion of Europe and, in particular, of the currency union. The stability-orientated “Northern Europeans”, who have to enter into a significant risk to ensure that the “Southern Europeans” can finance their borrowing at tolerable conditions, can only be kept on board if they are sure that their idea of sound financial policy is shared throughout Europe. Hence the rescue programmes for Greece, the EFSF and ESM with strict conditions and hence the fiscal pact. Merkozy also meant accepting that the ECB could ultimately perform its role unrestrictedly and act under its own responsibility if it considered this necessary to maintain the integrity of the currency union and if the governments did not take sufficient measures to do so.

However, Merkozy also stood for recession in all the southern countries in the currency union, eventually spreading to the core economies of the eurozone. Precisely here, in a consolidation policy that was one-sided, forced and over-ambitious in terms of its time frame, is where the fault of Merkozy lay due to the weak position of France in this tandem. The Franco-German tandem is indispensable for Europe, but only if it produces a viable solution for Europe as a whole. This means that France has to stand up for its economic policy, which is different from Germany’s, with such vigour that Germany and France have to reconcile their differing ideas to produce a concept that is acceptable to both parties. A clean sweep for one side - in this case the Northern European/German group - cannot be sustainably acceptable.  And this is what has happened. Sarkozy was unable to stand up for his own country, let alone the rest of Southern Europe.

The consequence is Francois Hollande’s victory, and this victory opens up a great opportunity for Europe. Merkozy will soon be superseded by Merkande. Merkel and Hollande have no other choice and it is to be hoped that they do not want it to be any other way. The fiscal pact will be supplemented by a pact for growth. This is also in Germany’s interests, as it could otherwise also find itself drifting into recession.

What could a pact for growth entail? Certainly, structural reforms in the product and labour markets aimed at greater European integration and competitiveness. In Greece, for example, it also entails the creation of a functioning tax administration and a land register. It certainly also means investments in infrastructure (eg in common European energy grids and transport networks), in programmes to enhance energy efficiency, as well as resource efficiency in general, and in research and development. What is particularly necessary, however, is a programme for training and employment of young people. It is unacceptable that in parts of Southern Europe one young person in two under the age of 25 is unemployed. Europe can only be built if people are given opportunities.

Where should the money come from? On that point, Merkel and Hollande should agree - not from higher public borrowing. The EIB could play a greater part if its capital were to be increased. It could also be used in particular to prevent a credit crunch for SMEs in Southern Europe. A financial transactions tax is a further point on which Merkande will have to agree, although it will also be difficult to convince even all the members of the currency union. A genuinely determined joint campaign against tax evasion could generate money in the medium term. The wealthy in Europe could also be expected to accept a rise in income tax, particularly for the sake of unemployed young people, for example. Such taxation measures would demonstrate to the peoples of Europe that future efforts to combat crises would be fairer - an important message for emotional solidarity and for the acceptance of Europe. Also, an environmental tax could help to accelerate and at the same time finance necessary structural change. There is no lack of proposals. What must be done is to begin with those which can most readily be implemented.

First signals can - and must - be sent by Hollande and Merkel together, preferably in concert with the ECB, the EU Commission and the heads of the European Parliament. And Merkande must avoid making Merkozy’s mistake (due in particular to the French part of the tandem) of publicly presenting the other European partners with faits accomplis. Hollande still has to fight for a majority in the elections to the National Assembly, whereas Merkel can count on a German parliament in which the opposition is more Europe-friendly than the members of her own government coalition. And the great majority of the German people, who must not be asked too much of, has understood that there is no sensible alternative to European union and to the common currency.

I am an optimist. I am confident that Merkel and Hollande are intelligent and success-orientated enough to recognise and seize the opportunity in Merkande. That will only be the beginning, however. There are many urgent tasks awaiting them which must not be approached in a narrow spirit of national interest. Their goal must be to reach common European solutions and to strengthen community law and the community institutions, in particular the EP and the EU Commission.

Also in this series:

Tibor Dessewffy on populism in Hungary - "Leaders will play by EU rules only as long as their interests so dictate, and this is heightened by the sense that the crisis is sinking Europe as a whole"

Jean Pisani-Ferry on the economics of the crisis - "Germany is reluctant because both a banking union and Eurobonds can serve as channels for transfers. This is a legitimate concern"

Ivan Krastev on Soviet lessons - "it is Germany’s view of what is happening in the Union that will more dramatically affect the future of the European project than the troubles of the Greek or Spanish economies."

Click here for our series of responses by prominent thinkers and academics to Mark Leonard's 'Four scenarios for the reinvention of Europe' paper.