Merkozy and the art of euro zone maintenance

Why Berlin and Paris won’t — and shouldn’t — let go of their fractious embrace on a smouldering stage.

The stereotype is integral to the European love of poking fun at each other. Everyone has a good giggle at the image of the dour-faced Frau chomping on sauerkraut while barking Nein, as much as at the idea of a baguette-bearing, feckless lothario whispering of lâ amour..

In Europe’s powerful first couple, German Chancellor Angela Merkel and French President Nicolas Sarkozy, these stereotypes take on material form. She is a no-nonsense, consensus-oriented, physicist from former communist East Germany, while he is an effusive, hyperactive, headstrong lawyer, with a penchant for beautiful women. She is known to cringe at his cheek-kissing Gallic-excess, while he is rumoured to enjoy kissing her the more for knowing it irritates her.

Their personality differences reflect broader divergences in the cultures of the nations they lead and the instinctively different policies they tend to prescribe for combating the region’s ongoing fiscal crises.

For the past two years Merkel has preached the mantra of frugality, austerity and fiscal discipline, convinced that countries that commit the ‘sin’ of over-spending cannot expect absolution without suffering real pain. Sarkozy, on the other hand, has been pushing for bigger bailouts, more collective responsibility and closer fiscal integration of the euro zone. With its bloated welfare state (no French government has balanced its budget for 28 years), France has long avoided the painful structural reforms undertaken by Germany over the last decade to enhance its competitiveness.

Why they must
However, although Merkel and Sarkozy might have a testy personal relationship, they know they must stay together for the kids — the euro zone and the entire European project. The Franco-German detente has always been about more than individual leaders. Their alliance has powered European integration since the inception of the idea, following the devastation of the Second World War. Through the post-war decades and into the new century, the Franco-German leadership of Europe has allowed France to hide its weakness and Germany to disguise its strength.

In economic terms, Berlin has long outstripped Paris, but the myth of their equality has shielded Germany from accusations of unilateralism in a Europe where the atrocities of the Nazi regime still cast a long shadow. For France, the co-management of the EU and in particular the euro zone (which excludes a potential rival in the UK), has allowed it an exaggerated strength in Europe, even as Paris’ clout declines globally.

The euro crisis has disrupted this cozy pact and Sarkozy has been finding it increasingly difficult to keep Merkel on a leash, as Germany’s economic ascendency coincides with its political coming of age. Berlin has clearly demonstrated in its response to the euro crisis that it is no longer willing to unquestioningly backstop the euro zone financially. France has, thus, been forced to repeatedly extend the leash and compromise on its own preferences for addressing the crisis.

Paris was initially keen on the idea of some form of euro bonds, but Berlin rejected the plan outright. Mindful of the threat to its own triple-A credit rating, Sarkozy then suggested confronting the challenge of recapitalising banks by converting the euro zone’s bailout fund, the EFSF, into a bank that could tap European Central Bank (ECB) funding. Merkel shot it down. France was wary of forcing the private sector to accept write-downs on Greek bonds. Germany forced the haircuts through.

But even if weakened, the French role remains important. Sarkozy is almost constantly on the phone with Merkel. Instead of attending the birth of his baby daughter in Paris, the President was in Berlin, meeting the Chancellor. The two continue to hold joint press conferences to announce their ‘common’ positions before euro zone summits. So inseparable that they have been dubbed ‘Merkozy’.

France remains the main link tethering Germany to the euro zone. Sarkozy works hard to ensure that Merkel balances responding to populist sentiment on the domestic front with the broader needs of the euro. It was largely because of French lobbying that Germany agreed to the setting up of a permanent rescue fund to replace the EFSF from 2013. Similarly, Sarkozy’s hand in persuading Merkel to back down from insisting on automatic penalties against countries breaking fiscal rules in the euro zone was evident.

As the euro crisis spreads across the continent, Germany needs the legitimacy conferred by the French fig leaf more than ever before. It’s not only ‘lying’ Greeks that are now in need of German aid, but the major economies of Italy and Spain as well. But the German insistence that all debtor countries follow its way or the highway is not going down well in national capitals, as they are pushed by Berlin towards ever-greater austerity even in the face of recession.

Ahead
With Spanish and Italian bond yields reaching unsustainable levels and even France’s finances no longer looking secure, Germany is facing a chorus of concerted criticism for its ‘blinkered’ diktats. The issue around which the battle-lines are now being drawn is that of the ECB’s role. Germany is increasingly isolated in its refusal to allow the ECB to act as the euro zone’s lender of last resort. The grumblings about Germany’s dictatorial tendencies are getting louder and, as always, the historical ghost of the disastrous consequences of a too-strong Germany hovers translucently in the background.

Merkel therefore cannot let go of Sarkozy’s hand, no matter how much he might irk her personally. She continues to need his embrace to make bitter German medicine more palatable. As for Sarkozy, he has no intention of loosening his clasp of Merkel either, for without German support, there is no euro zone.

And, so, whatever twists the euro zone drama might yet experience, Merkozy’s constant bickering and negotiating will remain crucial to the eventual outcome.