France And Germany Are In Two Different Universes

Germany and France exist in two different universes, apparently: France, safely ensconced in a Eurozone without bailouts and with nary a debt crisis on the horizon, debates its economic and social model. Germany sees a Eurozone ravaged by a debt crisis with mind-boggling bailout costs and risks that stir up a furor on all sides, and everything is getting questioned, even the euro itself.

But there was a moment of repose on Sunday: French President François Hollande and German Chancellor Angela Merkel met in the French city of Reims to commemorate a French-German handshake.

Reims was occupied by the Prussian military during the Franco-Prussian war of 1870-1871. During World War I, it was heavily damaged by German bombardment. During World War II, it was occupied by Germany. Then, on May 7, 1945, Germany signed its surrender there. And on July 8, 50 years ago, President Charles de Gaulle and Chancellor Konrad Adenauer shook hands to put an end, once and for all, to the wars between the two countries.

So, perhaps it was a bit strained: Merkel had campaigned against Hollande on French soil during the presidential election. In return, Hollande had promised to undo every single one of her save-the-euro policies. Since becoming president, he’d formed a triumvirate with Italy and Spain to counter Merkel—while Germany is questioning the entire euro bailout debacle. But at the Cathedral of Reims, the veneer of their friendship had been polished to a semi-gloss.

Merkel talked about the “herculean” challenges ahead for the Eurozone, and Hollande proposed to deepen the friendship even more. After reaffirming the importance of their unity, they departed; and Monday morning, they were back in their different universes.

In France, the government decided to raise the price of electricity and gas, but no more than the rate of inflation, currently 2%, “to protect household budgets.” EDF, France’s largest electricity provider, is state-owned, and such a dictate is easy; but GDF-Suez, the gas supplier, is a huge multinational, and it had asked for a 5% rate increase. More crumbs thrown to the people.

And Hollande spoke at the opening of the “Grande Social Conference.” Over the weekend, business leaders had demanded a “competitiveness shock” whereby the cost of labour, and the cost of doing business in general, one of the highest in Europe, would have to be lowered by massively reducing taxes and social charges and by reforming the labour market—the causes, they argued, of the deindustrialization of France. Hollande, who had lashed out against highly compensated bosses and large corporations not long ago, said he’d listen.

merkel hollande

Photo: (Photo by Patrick Aventurier/Getty Images)

But it got complicated. He wanted to cut the budget deficit to 4.5% of GDP this year and to 3% next year, increasingly impossible. He also wanted to conquer the ballooning unemployment problem with growth, so government spending. And to improve France’s competitiveness and stem the deindustrialization: “Efforts will be necessary,” he said, meaning sacrifices that “everyone will be ready to agree to.” And he sees a solution: “To evolve our social model so that it can be maintained.” Not a word about the debt crisis or the euro.In Germany, the euro debate raged on. The Council of Economic Experts that advises the federal government on economic policy came out with a sobering study that concluded that the current bailout funds—the temporary EFSF and the permanent, still non-existent, and highly controversial ESM—the very instruments that would save the Eurozone, could in fact not save the Eurozone.

They pointed at a fundamental flaw of the euro: highly indebted and uncompetitive countries with a currency they can’t create. While it may have a disciplinary effect on budgets, it also creates destabilizing processes whereby increased costs of borrowing impact a country’s ability to service its debt, which scares investors and further raises its costs of borrowing—a vicious cycle made worse by fears that a country might exit the monetary union. The ECB’s liquidity measures temporarily calmed the markets, and kept the Eurozone intact, but their effects have dissipated. So, the Eurozone finds itself in a crisis “that politics can no longer solve with simple solutions.”

And the report ventured into what had been euro blasphemy: it discussed the pros and cons of the reintroduction of national currencies including … gasp … the “reintroduction of the D-Mark.” That the words came from the Council of Economic Experts in an official manner is another step towards what appears to be more and more the inevitable—though they labour to explain why it would be better for German industry to hang on to the euro, and though they warn of the high risks of an “uncontrolled break-up” of the Eurozone.

Finnish Finance Minister Jutta Urpilainen set the scene for the long European summer break when she declared that Finland wouldn’t agree to take on “collective responsibility for debts and risks of other countries.” And if push came to shove: “We are prepared for all scenarios, including abandoning the Euro.” For what promises to be a torturous summer, read…. The Euro Crash Refuses To Go On Vacation.

Double-checking, as the euro miasma leeches into the economies around the world…. What Is Copper Telling Us about the Global Economy?

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