Why Merkel and Hollande Will Make it Work

Overselling the Rift

By JACOB ALBERT

The leadup to the fateful meeting this past Tuesday between Francois Hollande and Angela Merkel was billed as a make-or-break moment for the foundering European Union. The European commentariat worked overtime to heighten the drama. “Berlin officials had worked feverishly behind the scenes to create the best possible impression of harmony before the visit, and tried in vain to downplay its significance,” gasped the Guardian. “But it was clearly far more than that, with two politicians who had never met before coming together to see not only if they could get on, but if they could work together to solve one of the most intractable problems Europe has faced since the second world war.” It’s hard to overstate the challenges facing the EU at the moment. But the anxious tone accompanying the summit was certainly overdone. For anyone with eyes, the chances of Merkel and Hollande being able to find a common ground always seemed like a good bet.

Francois Hollande came to power as part of a larger political shakeup that also caused the collapse of the Dutch government and pulverized the political establishment in Greece.  He won because he was not Sarkozy, and because his calls for growth fed straight into voters’ economic grievances against the German-led austerity—the fiscal restraint, structural reforms, and debt reduction—of the past five years.  During his campaign, Hollande became something of a champion to the movement of Europeans dissatisfied with years of belt-tightening and still no fruit to bear.  On winning the presidency, Hollande declared, “austerity need not to be Europe’s fate.” He had promised voters that he would refuse to ratify the fiscal pact intended to mandate budgetary discipline across Europe unless it contained “measures to support growth.”

A week before he was inaugurated, Hollande’s predecessor, Nicolas Sarkozy, hosted the president-elect and the German head of state, Angela Merkel, to a ceremony under the Arc de Triomphe, in commemoration of the end of World War II.  The meeting underscored the importance of maintaining a healthy Franco-German relationship even as doomsayers and ironists were pointing out the reverse symbolism of this particular Victory Day ceremony, which took place amid fraying Franco-German relations and the gravest threat to Europe’s existence since the end of World War II.

As president, Sarkozy had projected the idea of French influence by bringing France closer to Germany and by making it appear that the two major European economies, together, set the continent’s economic agenda.  Hollande campaigned on the idea that he would project the idea of French leadership by emphasizing his differences with Merkel.  But the evening Hollande ascended to the French presidency, on May 15^th, he flew to Berlin, where he and Merkel emphasized their commonality of interest.  The prospect of a Europe without Greece brought out the sincerest words of compromise heard from the two leaders since the beginning of the French presidential campaign.  Merkel said, “We want Greece to stay in the euro… We know that the majority of people in Greece see that,” and added, bending to the “growth agenda” that helped usher Hollande into office, “we will also give proposals to Greece to encourage growth.”

Hollande’s presidency is bound to dilute the cozy trans-Rhine alliance that came to be known as “Merkozy,” but there exists a greater personal affinity between the French socialist and Angela Merkel—born a month apart, both uncomfortable with the trappings of power, and both relatively self-effacing—than did between Merkel and the brash, showy Sarkozy.  More importantly, Hollande, whose greatest political influences, Francois Mitterand and Jacques Delors, were major actors in the construction of the EU, is actually more committed than his successor was to the idea of a European Union.  Whereas Sarkozy preferred for major decisions to remain in the hands of sovereign leaders, Hollande and Merkel both favor the strengthening of central European authority in Brussels.  And it was Hollande—not Sarkozy—who campaigned for France to vote “yes” in its referendum on Europe’s constitution, in 2005.

Because the Franco-German alliance has been a central pillar of European integration since the end of World War II, it is no surprise that the first meeting between Merkel and Hollande emphasized their willingness to help Greece help itself, with Hollande stating: “I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity so that there is a return to growth in Greece at a time when it is in recession.” And lest anyone forget the original motivations of the European project, Merkel added that the Euro was never “just a monetary project, but a political project. People who have a common currency will never fight a war against each other.”

In 1963, French war hero Charles de Gaulle signed the Elysée Treaty with his German counterpart, Konrad Adenauer, establishing a common stance between France and Germany and setting in motion a relationship that would become the principal engine of European integration. Since the treaty, the two nations have taken contrasting stances on defense, economic policy, and immigration.  But the countries fundamentally remained allies with a common past as former enemies, who saw, perhaps more clearly than other nations, the need to preserve and enhance the integration of the European Union.

Today, the Franco-German relationship remains vital to the future of the EU.  The fear that Hollande will set back the alliance and thereby prolong Europe’s intractable crisis has been partly predicated on Germany’s new self-assurance as it evolved into the largest and most dynamic economy in Europe.  Though the very idea of German national self-interest was nearly taboo for much of the later 20^th century, Germany has grown more than willing to assert and pursue its own interests amid the unfolding European crisis.

Yet Germany, too, is reeling from the effects of austerity – despite Merkel’s continued defense of her chosen approach.  The German economy is stagnating and Merkel’s Christian Democrats lost the key state of North Rhine-Westphalia on May 13^th to the leftwing Social Democrats in an election perceived as a German referendum on Merkel’s austerity policies.  Hannelore Kraft, the leftist whose party won the state election, was painted by her opponents as a German version of the spendthrift Greek: as a minority leader Kraft increased North Rhine-Westphalia’s debt but created more public sector jobs.  Yet she won the election, in her words, by making “people the central focus again.”  The election augurs poorly for Merkel (who came to power in 2005 after her predecessor, Gerhard Schroder, lost this key state), whose Christian Democrats have fared poorly in other recent state elections. 

But Merkel is smartening up to austerity’s bad rap.  Her once irremediable stance has softened as she has indicated willingness to work with Hollande to roll back some of the more severe aspects of her policy.  Although Merkel still abides by the idea that structural reforms are the panacea for Europe’s ills, she has become receptive to the idea that growth programs may be necessary rather than antithetical to solving the crisis. At the inaugural meeting, she said, “we signed the fiscal compact in March.  Now efforts will revolve around ... growth at the June summit and it will be very important thatGermany and France present their ideas together at this summit and prepare closely together.”

Merkel has already welcomed the need to focus on growth though she may not agree with Hollande’s methods for doing so.  But Hollande has scored some clear victories.  He stated during his campaign that he wanted increased financing from the European Investment Bank, the EU’s long-term lender, and a financial transaction tax to fund development projects across the continent.  Merkel appears to be willing to increase the bank’s capital by as much as €12.8 billion.

Though Merkel is opposed to Hollande’s suggestion of “euro bonds” for growth projects in infrastructure or green energy (these would ostensibly be backed by credit from stronger European economies), she would likely accept such a project if it were funded by the European Investment Bank (a trial run for the “project bonds” is already underway in Brussels).  And Hollande appears to have made progress on another key measure:  though Merkel refuses to weaken the fiscal pact, she has unofficially accepted the addition of language adding up to a “growth clause,” as long as Hollande consents to the savings policies set out in the pact.

Hollande’s statements about being firm and determined vis-à-vis Merkel reflect a clean break from the Merkozy alliance but they are also a good deal of political theater.  Hollande has promised to obey the debt limits set out in the fiscal pact and aims to balance the French budget by 2017.  If Hollande ignores structural reform and deepens France’s deficit, markets will turn on him.  France’s coffers are perilously depleted, and France’s debt burden is reaching alarming levels.  Though Hollande’s victory speech was partly a personal rebuttal of his predecessor’s ostentatious governance style, it was also an affirmation of fiscal and political responsibility.  Hollande promised "scrupulous sobriety of behavior” in the face of "a massive debt, weak growth, high unemployment, degraded competitiveness and a Europe that is struggling to come out of crisis."

The Franco-German relationship is the product of voters’ choices across Europe, not just of personal entente between policy makers on either side of the Rhine.  There will inevitably be compromises on both sides: Hollande’s pro-growth agenda has been echoed, in spirit if not in detail, by Mario Monti in Italy, Mariano Rajoy in Spain, the ECB’s Mario Draghi, and Merkel herself.  Hollande’s priorities are different from Sarkozy’s, but France and Germany will not split apart anytime soon.  Merkel herself suggested this when she said, “I'm not sure whether the public may see more divergence than actually exists.”

The conflict between austerity and growth is, to an extent, “a false debate,” as Olli Rhen, the European commissioner for economic and financial affairs, put it: “We need to stay on course for fiscal adjustment and also promote growth.” Mario Monti, the technocrat installed as Italy’s prime minister after the ouster of Silvio Berlusconi, made the same point when he said that “responsible public finances are a necessary condition, but certainly not sufficient for the key objective: sustainable growth that creates employment and is orientated toward social equality.”

For Germany and France to part ways is unlikely because both countries essentially agree, to varying degrees, that debt reduction and job creation must go hand in hand in order for the European Union to move in any coordinated direction.  The emerging approach to the economic crisis will be a mixed one that combines fiscal discipline and growth policies.  Austerity ignores that public spending can also be an engine of growth, while a singular focus on growth misses the point that Europe cannot restore its credibility or market confidence without fiscal discipline, and that it cannot recover competitiveness without structural reforms.

Hollande reaffirmed his commitment to the original terms of the fiscal pact when he said, "I am in favor of serious budget policy, I am in favor of meeting our targets. But it's because I am in favor of serious budget policies that I am in favor of growth because if there is no growth then no matter what we do we will not meet our debt and deficit reduction targets.”  Merkel echoed the same spirit of compromise when she announced her willingness to pay more attention to growth: “Growth is initially just a general term. Growth has to feed through to the people. And that's why I'm happy that we'll discuss different ideas on how to achieve growth. I'm not worried that there will be common ground and maybe there'll be the one or the other different opinion but ... I look forward to further cooperation.”

Although Europe appears as rudderless as ever after the political shakeup across the continent, the softening of binary policy oppositions—austerity versus growth; stimulus versus restraint; Keynes versus Hayek—and the appearance of flexibility and new compromises point to a pragmatic new direction intended, despite increasingly bad odds, to keep Greece a member of the European Union.  Merkel is dangling more carrots, and Hollande has agreed he will not ditch the stick.  It remains to be seen whether Greece, too, wants to preserve the great yet flawed project of European integration.