Schaeuble Says Germany Will Negotiate With Hollande

French Presidential Candidate Francois Hollande
France's Socialist Party candidate for the 2012 French presidential election Francois Hollande waits to take part in the TV show "Le grand journal" on a set of French TV Canal+ on May 4, 2012 in Paris, two days before the second round of the French election.Photographer: Kenzo Tribouillard/AFP/GettyImages

The German government will allow a victorious Francois Hollande to “save face” while expecting him to uphold French commitments to Europe’s budget treaty, Finance Minister Wolfgang Schaeuble said.

Schaeuble’s comments are the clearest indication yet that Chancellor Angela Merkel’s government is preparing for a Hollande victory at France’s presidential election on May 6 after publicly backing Nicolas Sarkozy to win a second term. Earlier today, the German government said that diplomatic contact had been made with the Hollande camp.

“We’ve told Mister Hollande that the fiscal pact has been signed and that Europe works along the principle of pacta sunt servanda,” meaning agreements must be kept, Schaeuble said in a speech in the western German city of Cologne today.

“I’ve said that everybody who gets freshly elected into office must be able to save face,” Schaeuble said. “So we will discuss this with Hollande in a very friendly way. But we won’t change our principles.”

Hollande is leading European calls to step back from Germany’s austerity prescription intended to tackle the root of the debt crisis that sprang up in Greece in late 2009. He has said he wants to renegotiate the fiscal pact to focus on growth. Merkel has said the pact won’t be reopened, even as she backs plans for structural reforms to spur economic expansion.

German Agreement

Hollande “knows” that European Union agreements can’t be renegotiated every time a government changes, Schaeuble said. Even so, Merkel’s government expects Hollande to say that fiscal consolidation alone won’t be enough to create sustainable public finances, and the German side would agree with such sentiments, Schaeuble said.

“Heads of state and government said months ago that their June summit will focus on the strengthening of growth in Europe,” he said.

Sarkozy gained on Hollande in the campaign’s final daily tracking poll by Ifop today. The survey put Hollande’s lead at 52 percent to 48 percent, down from 53-47 yesterday, according to a statement by the pollster.

Hollande’s election would risk upsetting Merkel’s handling of the debt crisis in tandem with France. Merkel and Sarkozy took years to build a working relationship after he took office in 2007 and only aligned policies in 2010 as the crisis forced their hand.

Merkel Rejection

Merkel, who faces two state ballots in the next nine days and national elections in 2013, rejects any compromise over Hollande’s demands for issuing joint euro bonds, a more activist European Central Bank or loosening austerity measures.

“We can’t keep giving out more money than we take in,” Merkel told supporters of her Christian Democratic Union party at the closing rally today in Tornesch, in the northern state of Schleswig-Holstein. “You see it across Europe, where countries that have broken that rule can’t freely decide for themselves what they want to do and what they don’t want to do.”

Schaeuble sharpened that defense in his speech at a separate CDU rally in Cologne, in North Rhine-Westphalia, which goes to the polls on May 13. Schleswig-Holstein votes on May 6.

Schaeuble rejected proposals to allow the ECB to guarantee euro members’ government debt, saying that would lead to a loss of financial stability. He also reiterated his opposition to selling government bonds in the euro region jointly as that would set the wrong incentives for financial stability.

“As long as we don’t have a common fiscal policy, that would mean that the one side piles up debt while the other side pays,” Schaeuble said.

Spanish Banks

Neither should the European Stability Mechanism, the euro region’s financial backstop, be allowed to help recapitalize Spanish banks directly, he said.

“The answer is no,” Schaeuble said.

For all their differences, Merkel and Hollande will have little choice other than to cooperate, said Volker Perthes, director of the Berlin-based German Institute for International and Security Affairs, which advises the government.

“Both are pragmatists,” Perthes said in an interview. “They will find consensus.”

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