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  Jousting Egos: Germany and France Compete for Role of Financial Savior

Jousting Egos Germany and France Compete for Role of Financial Savior

Part 2: An Urgent Need for Improved Cooperation

Unlike Germany, where close ties between the political and business worlds tends to be the exception, France has always favored vigorous exchange among the elites. Many decision-makers in high-ranking positions were trained at the country's elite civil service schools, the ENA and Ecole Polytechnique. They have developed networks in the classroom that can last an entire career. The country's affairs are controlled by a group of people for whom a common background accounts for more than differences between political parties.

The French government still owns significant parts of the economy. It is not surprising that the utility giant Electricité de France, a dominant force in Europe, belongs to the state. But the French government also owns stakes in industries from which the governments of other countries have steered away or withdrawn. For instance, it owns shares in automaker Renault, as well as in the airline Air France/KLM.

Still, capitalism à la française has its limits. For years, Germany has outperformed France by almost every economic measure. It has higher growth, less new debt and has seen more job creation. While German companies were gaining market share in many world markets, their French competitors were losing it.

Nevertheless, strong government influence on economic affairs is always an advantage when it comes to international corporate mergers. This is one of the reasons the German government is currently so skeptical. Merkel has not forgotten that the French, in a guerilla war of sorts, made sure that key posts at the European joint aerospace company EADS went to their fellow Frenchmen.

Berlin also sees the takeover of German chemical giant Hoechst by Rhône-Poulenc as a cautionary tale. Originally touted as a merger of equals, it ended in the company headquarters being moved to Strasbourg and key positions going to French executives.

The chancellor has little reason to believe that things could improve in the future, becoming more cooperative and less chauvinistic. The French newspapers regularly offer a glimpse of how Sarkozy feels about himself and others. "Without me Europe would be in a sorry state," he recently told the weekly newspaper Le Canard enchaîné.

Before that, Sarkozy had already referred to himself as Europe's most important politician: "Bush is finished, Blair is no longer in office and Merkel, well, she too isn't the right one. I am the only one." When Merkel read the sentence, she couldn't resist remarking, sarcastically: "Some have smaller egos, while others happen to have bigger ones."

The chancellor is also said to have a good sense of timing. Her strength, however, is not the surprise offensive but patient perseverance. She frequently triumphs over her opponents by simply waiting for them to make the first mistake. And so the German-French relationship is dominated by two very different political temperaments: the master of improvisation and the mistress of delay.

Everyone agrees -- in principle -- that the financial crisis points out the need to cooperate more closely on economic policy. The unpleasant questions that follow the crisis include the question of government responsibility. In the financial economy, of all things, European governments have trusted the key players to behave correctly and have dispensed with effective supervision.

There was no lack of warnings. The traditional financial sector, with its banks and savings banks regulated by law, has been joined in recent years by a shadow economy of unregulated hedge funds and investment companies that speculated in new types of financial products beyond the scope of conventional market trading. Because everyone wanted to attract the fast-growing money industry to their countries, even Deutsche Bank complained that "the standards for monitoring and price control were improperly loosened" for many financial innovations.

The British were especially adept, in the last few decades, at achieving maximum growth rates while largely dispensing with government regulations and controls. London asserted itself as Europe's leading banking center and, from then on, was seen as a model.

The Irish followed the British example and attracted the European lending industry to their country, both with low tax rates and the promise of "accessible and service-oriented" bank regulators. More than 1,000 banks and mutual funds speculated under the eyes of the regulatory authorities, which proved to be "open to innovation," as a manager Depfa Bank recently bragged. A short time later, Depfa dragged its Munich parent company, Hypo Real Estate, to the brink of ruin.

For many in Germany, the deregulation of the financial industry could not happen quickly enough. At the end of 2003, the Social Democratic and Green Party coalition government adopted a law that modernized the investment sector, allowed hedge funds and permitted them to engage in the controversial practice of short selling. The new law was greeted with enthusiasm in the industry, not surprisingly, since it had worked closely with the government -- so closely, in fact, that the then Finance Minister Hans Eichel allowed a lobbyist for the Federal Association of Investment Companies to participate in the development of the legislation for months. The lobbyist was even given an office in the ministry. "They let themselves be convinced to write laws that they couldn't have come up with themselves and didn't understand," says Dietrich Austermann, a Christian Democrat and the former economics minister of the northern German state of Schleswig-Holstein.

When it comes to protecting national interests, little has changed. Only recently, members of the European Union tried to agree to new protective rules for the insurance industry. But after hours of consultation, the relevant ministers left the meeting empty-handed -- once again.

Improved cooperation in banking supervision seems to be the most urgently needed. It is organized differently in each country. The task of supervising banks goes to the central bank in some countries, to a separate agency in others and, in Germany, to both. All reforms are predicated on a European spirit and trust in the good will of others. This also applies to the ties between Europe's two most important countries, France and Germany -- but that relationship is already strained.

Last week Sarkozy gave reason to believe that he would like to be named chairman of the euro zone when his country's term as the six-month rotating of the EU presidency expires at the end of this year. Next year the EU chairmanship goes to the Czech Republic and Sweden, both countries that have not yet introduced the euro as their currency.

In this case, it appears that Merkel's delay tactics will retain the upper hand. During the Asia-Europe summit in Beijing last week, Merkel and Sarkozy agreed to discuss the matter in Paris on Nov. 7. Merkel's position is clear: The heads of state and government should continue to shape the basic elements of economic policy for the EU, while all questions relating to the currency union should be addressed in informal meetings of the finance ministers from the euro zone countries. This has been the policy since the European Council resolution of December 1997 and, if Merkel has her way, this is how it will remain. Behind the scenes, the chancellor made it clear that she would not allow anything to happen that would divide Europe.

JAN FLEISCHHAUER, CHRISTIAN REIERMANN, MICHAEL SAUGA, STEFAN SIMONS

Translated from the German by Christopher Sultan