Aug. 1 (Bloomberg) -- To policy makers in Berlin, who have been the target of global pressure to do more to douse Europe’s financial crisis, France poses the bigger obstacle.
French President Francois Hollande is resisting Germany’s call to give up more sovereignty in steps toward the political union that German leaders, including Chancellor Angela Merkel and Bundesbank President Jens Weidmann, say is key to putting the 17-nation currency bloc on sound footing.
Germany forfeited control of its destiny after losing World War II and it took decades before the victors allowed it to reunify in 1990, forming a 16-state federation. In France, where power has resided in a monarch or head of state for most of its history, defeat by Germany in 1871 and 1940 forged a desire to keep a tight grip on how much sovereignty it cedes. Those contrasting concepts of power are now making it harder for Merkel and Hollande to find a solution to Europe’s debt crisis.
“Germany has the model of shareable sovereignty that results from federalism” meaning control “can be split between various layers including at European level,” Sabine von Oppeln, a political scientist at Berlin’s Free University specializing in Franco-German affairs, said by phone. “In the French concept of nation and state, sovereignty can’t be shared, and that’s why French politics has problems giving it up.”
The Franco-German split on fixing Europe makes it more likely the crisis in the 17-nation euro area will worsen, according to Connecticut-based Bridgewater Associates LP, the hedge fund founded by Ray Dalio that manages about $120 billion in assets.
“Germany and France no longer stand in solidarity as backstops behind the euro system,” the firm said in its second-quarter report. “There are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way.”
Merkel, the lead actor in almost three years of crisis fighting, says that euro states ready for “more Europe” should shift budgetary oversight to a pan-European level, where spending decisions can be vetoed to stop debt from building up.
The euro can’t work without shared responsibility for economic policy, Finance Minister Wolfgang Schaeuble said May 17 when he was awarded the Charlemagne prize for service in the cause of European unification in Aachen, Germany.
To give legitimacy to a future “political union,” the citizens of Europe should elect a European Commission president directly, Schaeuble said. They should accept the commission, the European Union’s executive body, as Europe’s government, to be controlled by a strengthened European Parliament and a chamber in which EU states are represented, he said.
The push for closer political ties has been Merkel’s response to complaints from counterparts around the world -- and across the River Rhine in France -- that her emphasis on austerity has failed to solve the debt crisis while driving economies into recession.
It’s a debate that echoes to the dawn of Europe’s postwar effort to build a peaceful union after centuries of war. France resisted Germany’s push to hand more say to European institutions legitimized to take cross-border decisions, preferring to keep power in national capitals.
France has reasserted sovereignty over the decades. It rejected a proposed European army, because the Gaullists wouldn’t cede control over the French military. Former President Charles de Gaulle, who led Allied troops back into Paris in 1944, pulled out of NATO command 22 years later and built his own nuclear weapons.
In a 10-page “Pact for Growth in Europe” last month, Hollande failed to make any specific proposals for political union, calling only for a “road map for the next decade” to examine the “conditions for integration.”
Hollande’s Socialist party splintered in 2005 when French voters defeated a proposed European Constitution in a referendum. While Hollande, then party leader, backed the referendum, his foreign minister, Laurent Fabius, was an opposition leader.
“Hollande is walking a very fine line to move ahead on federalism and the idea of giving up bits of sovereignty,” Bruno Cautres, a political analyst at Paris-based Cevipof research center, said in a July 27 telephone interview. “There is a breaking point, a red line he cannot cross on Europe and European integration or face an explosion within his party and within the population.”
Hollande criticized Merkel’s EU pact on budget discipline in his presidential campaign and inaugural address. The accord was negotiated with his predecessor Nicolas Sarkozy in December 2011 and approved by EU leaders in March, with a debt ceiling in national constitutions one of its elements. While Hollande has since indicated he’ll ratify the pact, he has been less willing to consider the further steps to integration Merkel advocates.
“Even in states where the governments champion euro bonds, as in France, I can neither see a public debate nor support in the population for a transfer of sovereignty,” the Bundesbank’s Weidmann told French newspaper Le Monde in a May 25 interview.
France on occasions in the past agreed to cede sovereignty if it benefited more than others. The European Coal and Steel Community, the precursor to the EU, gave France control over German resources that were larger than its own, against warnings from De Gaulle, who served as French president from 1959 to 1969, that France was too weak to dominate the ECSC.
Surrendering its currency in the euro monetary union set up in 1999 was appealing to France because it broke the dominance of the Bundesbank. Germany was willing to pay that price for its reunification, according to officials including former Bavarian Prime Minister Edmund Stoiber.
Merkel, even while faced with a European Central Bank in Frankfurt that’s stretching its mandate to the limits of German central banking orthodoxy, told her fellow countrymen to prepare for deeper political integration and a common budgetary policy among euro members in a June 7 interview on ARD television.
“We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” Merkel said. “And we need most of all a political union, that means we need to gradually give competencies to Europe and give Europe control.”
International Monetary Fund Managing Director Christine Lagarde on July 26 urged euro region leaders to follow up on their commitments to create “more Europe,” saying more steps toward a fiscal and banking union are needed. U.S. Treasury Secretary Timothy F. Geithner, in a joint statement with Schaeuble on July 30, expressed confidence in euro states’ “efforts to reform and move towards greater integration.”
EU President Herman Van Rompuy may present a plan for deeper European integration by December after sketching “building blocks” at the June 28-29 summit in Brussels that reflected the Franco-German split.
Steps toward joint debt liability “could be considered as long as a robust framework for budgetary discipline and competitiveness is in place,” Van Rompuy said in the report, without being clear on the sequencing of sharing power and debt.
The new institutional setup “is something that hasn’t been talked about at all and that’s where there is very little common ground so far,” said von Oppeln. “If that’s put on the international agenda, there is a whole range of controversial issues that go well beyond the debt brake that’s tied to the fiscal pact.”
Former Chancellor Helmut Kohl told Internationale Politik magazine a year ago he had wanted more progress toward political union in Europe after German reunification, yet had to compromise “because more wasn’t possible.” While the 1992 Maastricht Treaty led to monetary union, political union stalled.
“The French should have an interest in a greater institutionalized sharing of government debt,” Kurt Lauk, the head of the business group in Merkel’s Christian Democratic Union party, said June 11. “But for that they would have to give up sovereignty and that’s exactly what they’re not doing.”
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