Six-Point Growth Plan: Merkel Prepares to Strike Back Against Hollande

France's new president, François Hollande, has put the German chancellor on the defensive with his growth agenda. Now Angela Merkel is planning to strike back. She is calling for structural reforms to save the euro with a six-point plan aimed at harmonizing austerity and growth in Europe once again.

Photo Gallery: Reconciling Growth and Austerity in Europe Photos
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The more European leaders talked at a dinner last Wednesday, the grimmer Angela Merkel looked. One after another, they spoke out in favor of the joint assumption of debt and against the strict austerity course Berlin is calling for. The chancellor stared silently at the man who was responsible for this change of mood -- France's new president, François Hollande, who noted with satisfaction that there was "an outlook for euro bonds in Europe."

Merkel disagreed, saying that euro bonds are not the right tool, but to no avail. Only a minority stood behind the German leader. Even European Council President Herman Van Rompuy said, at the end of the dinner, that there should be "no taboos," and that he would examine the idea of euro bonds. "Herman," Merkel blurted out, "you should at least say that some at this table are of a different opinion."

Merkel's world had been turned upside down. For the first time in years, the chancellor did not set the tone at an EU summit, nor did she and the French president agree on joint positions in a backroom before the meeting.

Much depends on whether Merkel and Hollande will be able to find common ground in the fight over Europe's common currency. They have been arguing for weeks over whether more austerity or more spending can save the euro. Now the dispute has reached a new level of escalation. After Hollande's statements on Wednesday, Merkel is now presenting her opposing concept. In a six-point plan, she calls for deep-seated structural reforms for Europe. Under the plan, government-owned businesses are to be sold off, protections against wrongful dismissal relaxed and obstructive regulations for companies removed. There is also talk of special economic zones and privatization agencies based on the model of Germany's Treuhand trust, created at the time of reunification to sell off most of former East Germany's state-owned enterprises. In short, the Mediterranean region is to become more like Germany, but with better weather.

Merkel and Hollande are presenting two contrasting programs for the planned EU growth summit at the end of June. A compromise will have to be reached in the end, but there are still considerable risks. If the two leaders manage to forge a joint concept for the currency zone out of their different plans, they could go down in history as the saviors of the euro. If they fail, the process that a growing number of experts believe is unavoidable will only be accelerated: the breakup of the monetary union.

Political Equilibrium At Stake

This week, Europe seemed to move a little closer to the abyss. The financial markets speculated on a Greek withdrawal from the euro, the exchange rate for the common currency plunged to new lows and economic imbalances worsened. While Germany was able to float a two-year bond with a zero interest rate on the markets for the first time, risk premiums for Spanish and Italian sovereign debt remained at crisis levels.

The euro zone is drifting apart, and the Franco-German dispute over how to tackle the problem is partly to blame. It isn't just a question of growth programs or the fiscal pact. Europe's political equilibrium, which has shifted since Hollande came into office, is also at stake.

A president has stepped onto the stage who wants to show his citizens and the rest of Europe that he will not submit to his more powerful German counterpart, Angela Merkel, because he believes that she is wrong. He doesn't want to agree to her conditions, but in fact dictate his own terms to her -- or at least he wants it to look that way.

In recent weeks, Hollande has come across as a man who was practically bursting with self-confidence. In response a conservative politician's critical remark that he behaves as if he could walk on water, he said jokingly to journalists at the recent G-8 summit in the United States: "The chances that I will attempt this are slim."

That was the most modest thing he said at the summit. Afterwards, the president bragged that he had placed the subject of "growth" on the agenda -- even if "growth" means something a little different to everyone else. His advisors let it be known that while Hollande and Obama got along very well, Merkel has been isolated with her austerity course.

Long before the EU special summit in Brussels on May 23, the French president made the impression that he wanted a showdown with the Germans. In the election campaign, he had consistently called for a renegotiation of the fiscal pact. After coming into office, he repeated that he would not ratify the pact unless it contained a "growth component." Although he has spoken out against the so-called communitization of debt in the past, since last week he is suddenly calling for real euro bonds, not just "project bonds" to pay for European infrastructure projects.

Last weekend, French Prime Minister Jean-Marc Ayrault made an additional demand, one that contradicts everything the Germans consider sacred: that the European Central Bank (ECB) should be able to lend money directly to countries in crisis.

A Vulnerable Merkel

It appears as if the French are trying to forge an alliance against the Germans, together with representatives of the European Commission, groups like the Organization for Economic Cooperation and Development (OECD), and the representatives of smaller and southern EU countries. Hollande's advisors have noted that Italian Prime Minister Mario Monti's ideas put him closer to the French than the Germans.

Has his successful start made Hollande overly confident? Or is he trying to lead Europe away from an erroneous course? Is he merely trying to expand his negotiating position to get as much as possible in the end? Or is it all just a big show for the domestic audience, which he hopes will provide him with a majority in parliamentary elections on June 10 and 17?

For the first time since the beginning of the debt crisis Merkel, once dubbed the "Queen of Europe," no longer seems invulnerable. Hollande, who she humiliated during the campaign by unconditionally siding with his predecessor, is now paying her back.

Nicolas Sarkozy, who sought his salvation by aligning himself with the chancellor, has been followed by a president who expects to achieve a greater political success by opposing German dominance in Europe. Hollande doesn't want a German-French directorate. Instead, he wants to open up Europe once again.

The French are convinced that what has to be done in the current crisis of confidence in the common currency is what Germany has sought to prevent until now: The euro-zone countries should issue joint bonds for at least a portion of their debt. They believe that euro bonds would establish the stability for investors in the crisis-ridden countries that is so urgently needed. Besides, Hollande said on Wednesday, it is unfair that Germany pays much lower interest rates than Spain, for example. The French argument is based on the view, shared by many economists, that a monetary union without a political union and debt sharing has never worked.

Hollande's ideas are not fundamentally different from those of his predecessor Sarkozy, who consistently held similar views. Sarkozy, however, worked out his differences with Merkel in back rooms, so as to bring calm to the markets. In contrast, President Hollande highlights the differences and seems convinced that it is up to him to put Germany on the right track.

A Judo Attack

But Merkel is an experienced opponent. She knows that she is now on the defensive in Europe, and she is planning her counter-attack. She believes that euro bonds would enable the crisis-ridden countries to lower their borrowing costs, and that the necessary structural reforms would be postponed. This is why she now wants to counter Hollande's proposals with a principle familiar to judo fighters: using your opponent's momentum for your own attack.

Merkel is determined to reject both Hollande's call for euro bonds and his proposal to allow direct lending by the ECB. The monetary watchdogs, she argues, would already do everything necessary to stabilize the euro, and thus preserve their high-paying jobs in Frankfurt's Euro Tower.

There is something to this. The ECB has signaled internally that, if it becomes necessary (if Greece withdraws from the euro, for example), it will buy up the bonds of other ailing countries once again. With a view toward Hollande's calls for more growth incentives, the Germans, for their part, are trying to seem more conciliatory. They are prepared to increase the capital of the European Investment Bank (EIB) to €10 billion, which would bring Germany's share to €1.6 billion.

They also want to yield to the French drive to use the money in the European Structural Funds in a more growth-friendly manner and float so-called project bonds. This would involve the EU countries and private investors raising funds together to pay for things like cross-border infrastructure projects. Merkel isn't hostile to the idea.

In Strasbourg, a day before the beginning of the EU special summit in Brussels last week, the European Parliament and European governments decided to try out such bonds, which was good news for Hollande. According to an internal European Commission priority list that SPIEGEL has obtained, some of the projects directly involve France. They include construction of the TGV high-speed rail line between Lyon and Turin, the Seine-Northern Europe canal in the corridor between Amsterdam and Marseilles and the expansion of travel routes between Dublin and Brussels.

When it comes to energy projects, the European Commission places special emphasis on projects such as connecting the wind farms in the North Sea and the cross-border power and gas lines among the Baltic countries, between Northern and Southern Europe and to North Africa. It also wants to promote international natural gas pipelines like Nabucco and expanding efficient internet connections. While Germany and France agree on the importance of these projects, their differences lie elsewhere. To stimulate growth throughout Europe, Merkel's advisors don't just want to implement measures that cost money. The Germans are convinced that growth can also be generated less expensively, using structural reforms that require nothing more than living with hardships.

Six-Point Plan

According to an internal document making the rounds at the Chancellery, German government experts have developed a six-point plan that is reminiscent of former Chancellor Gerhard Schröder's Agenda 2010 economic reforms, and seeks to harmonize austerity and growth in Europe once again. The document defines the position with which Merkel intends to enter into negotiations with Hollande and the other EU partners.

In the plan, the Germans focus primarily on measures that have been successful in Germany in the past, and that placed the country in the role of Europe's engine for growth. Accordingly, Merkel wants to launch Europe-wide programs to promote start-ups and small and mid-sized business, like the programs offered by the KfW development bank in Germany. Under the German programs, government agencies have to approve investments within a fixed time period, and the applications are considered automatically approved if they are not denied within that time period.

Merkel also wants EU countries with high unemployment to use Germany as a model in reforming their labor markets. This would mean relaxing protections against wrongful dismissal and introducing more limited employment circumstances, called "mini-jobs" in Germany, with lower tax and contribution burdens. And like Germany, these countries would also be expected to develop a dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment.

Merkel's advisors have also noticed that southern EU countries still own many companies that enjoy special protections. Under their plan, privatization agencies or special funds would be established in these countries to privatize the state-owned businesses. Foreign investors could be attracted with tax benefits and less stringent regulations.

The advisors also recommend the establishment of so-called special economic zones, like the ones that once ushered in China's economic ascent. Finally, the Germans want Europe's southern countries to invest more in renewable energy, reduce tax barriers and promote worker mobility. All of this, they reason, strengthens Europe's competitiveness.

Hope in Hollande

Growth programs versus structural reforms: This is the conflict Europe is about to face, and for which Merkel and Hollande are now seeking allies. The French president has awakened the hope, especially in the southern European countries, that the German chancellor's austerity course could be softened. He already portrayed himself as something of a messiah for the southern countries during the campaign. "So many people in Europe long for our success! I don't want a Europe of austerity, where nations are forced on their knees," he told his supporters.

With remarks like that, Hollande became a shining light in Greece. In his resistance to Merkel's austerity policy, Alexis Tsipras, the leader of the leftist alliance Syriza, invokes a "new era" and says that the French socialist is "clearly a great white hope for us."

In Italy, where Prime Minister Monti's government of technocrats has not produced any growth so far, despite having implemented a few reforms, commentators maliciously referred to the G-8 summit as "Merkel's defeat" and raved about the "birth of a new alliance" between Monti and Hollande.

The former Berlusconi activist newspaper Il Giornale wrote that Germany, and not Greece, is Europe's real problem, "because it is bursting with health and, as a result, is also causing its neighbors to burst. Germany has to adjust to the rest of Europe, not the other way around."

So far, Merkel has shown little interest in publicly rebuking Hollande. At the EU special summit in Brussels, she merely noted pointedly: "Euro bonds do not create growth." She knows that she has to wait until after the parliamentary election in mid-June to begin dealing with a president who is no longer involved in an election campaign. What she doesn't yet know is whether he will be less adamant after that.

Uncertain Outcome

Although Merkel has lost allies, she is not completely isolated, not even in southern Europe. Portuguese Prime Minister Passos Coelho is competing with his Spanish counterpart Mariano Rajoy for the distinction of being Merkel's model student. Since the Spanish conservative came into power last December, hardly a week has passed in which he has not imposed a new austerity measure.

The Spanish media and the socialist opposition had hoped that Rajoy, in Hollande's wake, could apply more pressure to the German chancellor to spend more on growth measures. But the first upset happened even before Hollande and Rajoy met. Hollande said that it ought to be possible to recapitalize the Spanish banks from the European bailout fund. But this remark came at a very inconvenient time for Rajoy. "Hollande doesn't know what condition the Spanish banks are in," he said, rebuffing the French president's suggestion.

Instead, Rajoy cozied up to the chancellor during a group boat ride on the Chicago River after the NATO summit. He too takes no stock in a debate over euro bonds. "They're not the most important thing now," he repeated on Wednesday after meeting with Hollande in Paris. However, Rajoy agrees with Hollande's proposal to allow the ECB to actively buy government bonds, thus helping to lower interest rates.

Europe finds itself in the middle of a conflict with an uncertain outcome. The dispute over the growth pact could exacerbate the fiscal crisis if Hollande and Merkel block each other's proposals. But it could also turn out to be liberating if it leads to a workable consensus. The Germans have to accept that even more money has to flow from the north to the south, while all the Mediterranean countries must accept that they need additional reforms.

The fight has only just begun, and so it comes as no surprise that the roar of battle is drowning out everything else at the moment. But there are also signs of rapprochement. During his first official visit to Berlin, Pierre Moscovici, the new French minister of economics and finance, revealed some sympathy for the German line. He confirmed the new French government's intention to reduce the national deficit in the coming year to below the upper limit of 3 percent of GDP, and to eliminate all new borrowing starting in 2017. He also underscored how important healthy budgets are for growth and employment. Those who have too much debt become impoverished, he said. And those who are poor, he added, cannot invest.

BY FIONA EHLERS, JULIA AMALIA HEYER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, MATHIEU VON ROHR, MICHAEL SAUGA, CHRISTOPH SCHULT, HELENE ZUBER

Translatedfrom the German by Christopher Sultan

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