Oui Nein & Non Ja - Franco-German fault lines & Eurocrisis

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Whenever the future of the European Union was considered in the past, at least in the last couple of decades or so, a crucial fault line that always limited progress towards an 'ever closer union' was the critical differences between the French and German approaches to the European Project.

Germany favoured a stronger institutional structure with more co-ordination and a centralized decision-making structure, France a more decentralized construction where groups of national leaders were the ultimate decision-making authority and the transfer of sovereignty to the centre was rather limited. 

This inherent tension between the two was also why the institutional underpinnings of the monetary union were not completed as the French were unwilling to cede the power the Germans demanded for the fiscal complement to the monetary union. 

Fast forward to now and the price of this fundamental fault-line is clear for all to see as the Eurocrisis deepens. We are now at a moment of truth where these same two countries and their leaders Merkel and Hollande have the lead on taking decisions that will make or break Europe, at least the Eurozone. Yet again, the fundamental fault line between these two countries with very different histories, political cultures and attitudes towards the European Union, is re-emerging.

France, together with countries such as Italy and Spain, is asking Germany to agree to a bevy of proposals that broadly make economic sense but all imply a sharing of risk and contingent liabilities if the risks materialize and losses have to be shared. 

The most important of these are 1) a bigger role for the European Central Bank in supporting sovereigns that are shut out of the market either directly through a more ambitious bond purchase program or through the use of a banking licence for the European Stability Mechanism that can then use ECB funds to buy sovereign bonds 2) a move towards the joint issuance of debt in the form of Eurobonds of some kind 3) a 'banking union' of some kind with European mechanisms for equity and funding support as well as deposit insurance.

France's self-interest in this is clear as its economy is vulnerable, particularly to a spread of the crisis to Spain and especially to Italy. The logic goes that if the Eurozone huddles together and Germany, together with the other stronger economies, underwrites the liabilities of the weaker economies and banks, the market panic would go away. 

Germany's perspective on this is very clear. It is open-minded to doing some (not all) of this underwriting but in exchange for 1) weaker economies credibly implementing what Germany thinks are necessary corrective fiscal and structural measures 2) a much greater degree of rules-based centralized control and oversight for both sovereigns and banks and 3) incentives for countries not to be lax with their fiscal accounts and banking sector. 

The principle of 'he who pays the piper calls the tune' is very clear in Germany's current approach and much more so than any time in the past. While ideally Germany & its institutions would like to call the tune themselves, in reality they are aware that given the history of the continent this can never be the case, at least blatantly. So Germany is trying a repeat of a second best approach - constructing EU institutions and rules that best proxy the German approach and thinking. This is why the ECB was modelled on the Bundesbank and how the Stability and Growth pact came about. Now Germany wants to take this much further with new mechanisms such as the Fiscal Compact and others that are in the pipeline.

The French, while wanting Germany to play this role, want very much to continue to be able to call the tune. They have a deep-seated suspicion of a more federal approach to Europe and are paranoid about a loss of control over economic institutions and the diminished policy space that goes with it. That is why in any discussion of the transfer of sovereignty, it is the French who are the naysayers, not the Germans. 

So here we are again, the French want a 'Fiscal Union' of some kind, at least fiscal pooling. And they say Oui to a 'Banking Union' of some kind. But to 'more Europe', at least the kind of 'Political Union' that Germany wants, the French say Non!

In recent months, Germany has repeatedly said Nein to the French, Italian, Spanish and European Commission proposals that have any element of shared liabilities or risks beyond what they have already agreed to do through the two crisis funds; the temporary European Financial Stability Facility EFSF and the permanent European Stability Mechanism ESM. This has been the result of both a ‘bailout fatigue’ and a very ill-informed public debate in Germany on the one hand and the recognition by the policymakers that the institutional price they needed for opening up the purse would not be acceptable particularly to France.

However, signs are that Germany now recognizes that saying Nein, Nein, Nein is no longer an option and that if the Eurozone is to survive it will have to be willing to do more and do so sooner rather than later. It is still very reluctant to go the whole hog, where countries such as France and Italy want to it to. It is prepared to say Ja to at least some of what the others are asking for. However, it wants the political union that France says Non to, to come before any serious consideration of the fiscal or banking union that commits it to backstop its Eurozone partners.

So France says Oui to the important things that Germany says Nein to. The conditions for a German Ja are things that to France may always be Non. To macro-economically insignificant policies such as a Financial Transaction Tax, or a modest increase in the capital of the European Investment Bank that both Germany and France say Ja and Oui to, the markets say NO!

Given how vulnerable they are right now, Spain and Italy would probably say Si to anything that helps defend them against the crisis so are even less influential than normal in deciding the shape of European affairs. As for the other smaller countries, they belong either to the German camp or the French camp at least as far as their approach to the crisis goes and will probably, with some cajoling, come round to the position that Germany or France take respectively.

The fate of the EU and the Eurozone in particular once again lies in the hands of France and Germany. It does not bode well then that the fault line between the two remains as big as ever!