Poisoned Atmosphere France and Germany at Odds ahead of EU Summit

Germany has a clear vision for the future of the European Union -- but so does France. Unfortunately, the two concepts are radically different, and neither side seems interested in backing down. The conflict is set to dominate the EU summit on Thursday and Friday.

German Chancellor Angela Merkel and French President François Hollande are at odds.

German Chancellor Angela Merkel and French President François Hollande are at odds.

A bit of brinksmanship on the eve of European Union summits is to be expected. Heads of state and government are fond of going public with what they hope to achieve, only to make concessions once negotiations begin in Brussels. What might look like a deep abyss prior to the meeting will often be bridged.

But this time around, the self-serving rhetoric has been so intense that it is difficult to imagine the 27 EU leaders coming to agreement at the two-day summit, which begins on Thursday afternoon. First, it was German Finance Minister Wolfgang Schäuble, from Chancellor Angela Merkel's conservative Christian Democrats, who went on the offensive on Tuesday with a far-reaching plan to outfit Brussels with a veto right over national budgets. The position, widely referred to as a "super-commissioner," would even be able to override national parliaments, a taboo in Paris and in many other European capitals.

Then, in an interview with five leading European dailies, French President François Hollande repeated a proposal that isn't any less controversial. He wants to see the introduction of euro bonds, in addition to the installation of a euro-zone wide banking oversight authority by the end of the year. In Berlin, euro bonds are categorically rejected. And Hollande's timeline for banking oversight, combined with serious differences between Paris and Berlin on what such a regime might look like, is seen in Germany as unrealistic to the point of being an affront.

It almost seems as though Paris and Berlin are intentionally getting in each other's way. Germany wants to further stiffen EU budgetary rules and would like to amend EU treaties as quickly as possible next year to make it possible. France, on the other hand, believes the priority should be the collectivization of debt and rapidly installing bank oversight. For the summit, the result is likely to be a stalemate. The new Franco-German partnership of Merkollande is on the verge of earning a less flattering moniker: Merde.

Remaining Taboo

Sources in the Berlin government have already tried to lower expectations for the summit. There will be no decisions made, they said, adding that the summit is only one step on the way to the next meeting of EU leaders in December.

Merkel is likely to find herself on the defensive once again in Brussels, though. The eight-page pre-summit document distributed by European Council President Herman Van Rompuy mentions neither Berlin's demand for a super-commissioner nor its desire for EU treaty changes. Both proposals have not yet found a majority in the European club -- and the idea of changing the EU treaty is likely to remain taboo until after the European Parliament elections in 2014.

Van Rompuy's paper does, however, include explicit references to euro bonds and the creation of a separate budget for the euro zone, in the hopes that it could help to iron out the economic inequalities between northern and southern Europe.

Schäuble's proposal was an attempt to redirect the European discussion. It is unclear whether Merkel will broach the subject of a European super-commissioner during the two-day summit in Brussels. But government sources have made it clear that Merkel agrees with her finance minister's analysis regarding the reforms necessary to attack the roots of the euro crisis. Focusing solely on a banking union is not enough, Berlin believes.

As such, it appears that an agreement on how to proceed with the creation of an EU bank oversight regime will not be reached at this summit. It is a question that already proved divisive during the EU summit back in June. Spain, Italy and France want the creation of a collective bank oversight system to be completed by the end of the year so that the European Stability Mechanism (ESM), the euro bailout fund, can begin providing direct aid to banks beginning in January 2013. At the moment, such aid must be given indirectly via national governments.

Taste of the Coming Conflict

In the short term, a quick agreement would be a boon for Spain and Ireland, both of which are having difficulties meeting the requirements of their crisis-stricken financial sectors. Germany, however, believes that the timeline is much too rushed. Thoroughness should take a higher priority than speed, Berlin has grown fond of repeating. Furthermore, German officials are opposed in principle to helping countries dispose of liabilities inherited from past profligacy.

Hollande provided a taste of the coming conflict in his interview, which appeared in Germany's Süddeutsche Zeitung and the UK's The Guardian, among other newspapers. Demands to further the project of integration by deepening political union, he said, are often made to distract from more urgent problems. "The question of institutions is often addressed so that no decisions must be made," he said. "Those who speak most passionately about political union are often the ones who hesitate the most when it comes to making pressing decisions."

He insisted that the comment was not directed specifically at Germany, but he did not shy away from accusing Merkel of being overly worried about domestic political concerns. "She's very sensitive to questions of internal politics and to the demands of her parliament," he said. "I understand that, and can respect that. But we all have our own public opinion. Our common responsibility is to put Europe's interests first." Perhaps this is easy to say given that French elections are a number of years off, while Merkel faces a general election in 2013. But it certainly won't contribute to Franco-German harmony in Brussels on Thursday and Friday.

European leaders have said they are not going to reach any decisions regarding euro-zone crisis countries. That hasn't stopped investors from speculating that Spain might finally apply for aid from the ESM, though. Rumors that Madrid is preparing to submit such an application have been rife for months, and such a move would allow the European Central Bank (ECB) to buy large quantities of Spanish sovereign bonds, thus lowering Madrid's borrowing costs. Indeed, the euro exchange rate against the dollar has risen in anticipation. There is, however, no concrete evidence that a Spanish application is imminent.

Deepening of the Currency Union

The crisis in Greece is likewise not expected to play a large role. There seems to be little remaining doubt that Athens will receive the next tranche of its bailout package despite the fact that the country has not yet implemented all of the reforms it has promised. The next report of the troika, made up of the International Monetary Fund, the ECB and the European Commission, has not yet been completed, but unofficially the decision has long since been made not to allow Greece to go bankrupt. SPIEGEL learned this week that the German Finance Ministry has worked out a solution with the troika and other euro-zone member states that involves depositing the next tranche, worth €31.5 billion, into a blocked account so that Greek access to the money can be stopped at any time. By doing so, pressure will remain high on Greek Prime Minister Antonis Samaras to pursue reform.

The focus of the summit is to be the deepening of the currency union. In addition to the banking union, the creation of a discrete budget for the euro zone will also be addressed. That would, however, require taking in revenues in addition to the European Union budget, which makes the idea controversial. In the paper submitted by Van Rompuy, there is merely a mention of a "fiscal capacity" for the common currency zone. Berlin too has been at pains to avoid the term "budget," preferring instead to speak of a "special fund."

Just how the budget might be funded and what it would be used for remains unclear. Some have mentioned the planned financial transaction tax as a potential revenue source. But there are problems with that idea. For one, revenues from the tax aren't likely to be terribly high. For another, the transaction tax, as it currently stands, will only apply in 11 euro-zone member states. But any euro-zone budget would have to be financed by all 17 members of the common currency area -- and the system would have to be an equitable one.

Berlin, at least, has a concrete proposal for how such a budget could be used -- as a pot to reward reform efforts in crisis-stricken euro-zone countries.

Discuss this issue with other readers!
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aaallison 10/18/2012
1. Not rocket science
Germany has figured out that France is trying to make it responsible for part of its problem debt.
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