Germany, France Reconnect in a Push for Crisis Solutions

Germany and France agreed to drive ahead measures on closer European integration in a renewed show of unity by the region’s two biggest economies to fix the crisis in the euro zone.

German Finance Minister Wolfgang Schaeuble, speaking after talks in Berlin today with his French counterpart, Pierre Moscovici, said the two countries will create a working group to advance European Union cooperation on banking union, fiscal union and the strengthening of monetary union.

“We’re having to deal with a phase of weakening growth in the global economy but also in Europe,” Schaeuble told reporters. “We want to take joint decisions” to counter that. French President Francois Hollande said later in Paris that Franco-German ties are key to Europe’s reorientation.

The common French-German action signals a turnaround in relations after Hollande led a revolt at a June summit against Chancellor Angela Merkel’s austerity-first doctrine for combating the financial crisis. It builds on a visit to Berlin by Hollande last week when he and Merkel agreed to stand behind the Greek government as it strives to overhaul its economy.

‘Economic Island’

“It’s not in German interests to kick Greece out of the euro zone,” Carsten Brzeski, an economist at ING Group in Brussels, said in an interview today with Bloomberg Radio’s Ken Prewitt. “Everyone realizes that it’s in the German interest to solve the crisis. At the same time, it’s become weak enough to show them that they’re not an economic island any more.”

Signs of rapprochement come nearly three years after the crisis emerged in Greece, as policy makers’ crisis-fighting efforts enter what Merkel said in an interview with Germany’s ARD television yesterday was a “decisive phase.”

The crisis in the 17-nation euro area is France’s No. 1 challenge and there’s “no time to lose” on enacting the decisions of the June summit, Hollande said in Paris. A compromise on proposals for banking union is needed by the end of the year, he said.

The time has come to act on sovereign bond yields, although action to bring down borrowing costs can only come for those states that request help, he said. Europe needs to move toward fiscal union, and that union means mutualizing debt. Those decisions that need to be taken for the euro should be in place by Oct. 18, in time for the next European summit, he said.

Draghi’s Plan

Before then, the so-called troika of Greece’s international creditors is compiling a progress report that may determine the country’s future in the euro as the European Central Bank fleshes out bond-buying proposals announced by ECB chief Mario Draghi earlier this month. A top German court is meanwhile due to rule on Sept. 12 whether Europe’s permanent bailout fund, the European Stability Mechanism, is constitutional.

Draghi may provide further hints on policy when he speaks at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Sept. 1. Bundesbank President Jens Weidmann renewed his criticism of Draghi’s plan to help borrowing costs, telling this week’s Der Spiegel magazine that monetary financing of budgets can “become addictive like a drug.”

The German-French working group will prepare the implementation of agreements reached between Greek Prime Minister Antonis Samaras and Merkel and Hollande, Schaeuble said. The two countries will also be in close contact with the Spanish government to allow swift decision-making on implementing Spain’s bank-recapitalization program, he said.

Euro ‘Integrity’

“We value the integrity, sustainability and stability of the euro region,” Moscovici told reporters, adding the two states will work on “structural” solutions.

Spain and Italy, the countries most exposed to contagion from Greece, have yet to decide whether they will seek ECB help to lower bond yields. Draghi said Aug. 2 that the ECB might enter debt markets in tandem with Europe’s rescue funds in return for strict conditions on the countries in need of help.

Hollande will travel to Madrid on Aug. 30 for talks with Spanish Minister Mariano Rajoy, the French president’s office said today. Rajoy has said he will host Merkel in the Spanish capital the following week, on Sept. 6.

Merkel and Hollande agreed last week to await the report from the troika of the ECB, the European Commission and the International Monetary Fund before making a decision on whether to ease the terms of Greece’s $240 billion lifeline.

That report could come in “late September or early October” after troika officials return to Athens at the beginning of next month, Commission spokesman Simon O’Connor told reporters in Brussels today.

Draghi may wait until Germany’s Constitutional Court rules on the legality of the permanent bailout fund before unveiling full details of his plan to buy government bonds, disappointing investors who might have expected an announcement on Sept. 6, two central bank officials said last week.

Schaeuble said that he and Moscovici talk on the phone once a week and meet in person at least every other week. The working group now being established “is proof just how close our cooperation is,” he said.

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