Jousting Egos Germany and France Compete for Role of Financial Savior

As tremors shake markets around the world, European partners Germany and France have gone separate ways in fighting the crisis. Sarkozy wants to bring banks and threatened industries under the government's protection, but Merkel is opposing such state intervention.

Nicolas Sarkozy has a talent for timing. The French president knows exactly when to shine a spotlight on himself. Timing, one of the indispensable requisites of statesmanship, is critical in politics.

On Tuesday of last week, the time had come, once again, for a forceful appearance. Sarkozy, wearing a dark suit and a purple shirt, stood in front of the members of the European Parliament in Strasbourg, insisting on the need for a "European economic government." It sounded like high diplomacy, at least until the president mentioned his first concrete proposal. In the future, Sarkozy said, governments, through state-owned funds, should hold direct stakes in important companies, not just banks. "We cannot continue the way we have been going," he told his audience.

Sarkozy is also a man of quick decisions. Two days later, the first fund in France was already a done deal, and it is expected to have been established by the end of the year.

The climate is undoubtedly right for far-reaching proposals. Four weeks ago, no responsible politician would have dared to call for the nationalization of entire industries, and he would have been ridiculed or pronounced insane if he had done so. But then the financial crisis still appeared to be an American problem.

Since then, the political class on the old continent has been upgraded to savior of the financial system, and the caste of parliamentarians, derided until recently, is suddenly experiencing a sensational comeback. Governments all over Europe have assembled massive bailout packages to protect the monetary cycle from collapse: €500 billion ($635 billion) in Germany, €360 billion in France and €570 billion in Great Britain.

These unheard-of sums have boosted the self-confidence of those who made the money available. Suddenly there is talk of the return of government as a bastion of hope for citizens. The question now is whether politicians will give in to their call for action and intervene elsewhere. German members of parliament are already beginning to question plans to take the national railway Deutsche Bahn public because, as they now believe, privatization is no longer appropriate.

But the crisis is not over. Last Friday alone, the DAX lost 5.0 percent of its value, the Nikkei Average lost 9.6 percent and the Dow Jones was down 3.6 percent by the end of the trading day. All in all, market capital worth $1.5 trillion was wiped out in the course of last week, and there is no reason to believe that improvement is on the way. Some economists already believe that Germany is in recession.

Many experts believe that it is high time for a European concept that goes beyond the current bank guarantees. "Europe needs an economic government," former foreign minister and Green Party member Joschka Fischer said in a reference for calls in Europe for governments to closely coordinate economic policy in the future. "The individual nations are simply too small too handle a crisis of this magnitude."

But Berlin's first reaction to the French president's nationalization plans was an icy silence, followed by Economics Minister Michael Glos's terse remark that the proposal contradicts "all successful principles of our economic policy." It is difficult to express disapproval more clearly.

Last week also marked a return to normalcy, which stands in sharp contrast to the turmoil in the markets. Only a few days after a series of rounds of hectic summit diplomacy, politicians seem to have established sufficient distance between themselves and the crisis so that further joint action seems unnecessary. Although political leaders are now touting the need for a new global financial order in their press conferences, national interests have taken center stage once again within the individual governments.

The problem with Sarkozy, from the Chancellery's standpoint, is that he cannot be trusted. When he speaks of a "European economic government," his listeners in Berlin translate this to mean "economic government under French leadership." When he calls for state-run economic programs, they interpret his words as an attack on the European Union's Maastricht Treaty, which sets clear debt limits for countries.

As the Germans see it, the thrust coming from Paris marks the beginning of a conflict over which model is to dominate Europe in the future, that of the social market economy, which keeps the government out of the business of running companies to the greatest extent possible, or the French model of a government-controlled economy. "Sarkozy wants to seize the opportunity to shift the economic and political balance in Europe," says an advisor to Chancellor Merkel.

In truth, Sarkozy is part of a long tradition of presidents who believe that the state -- that is, they themselves -- is best equipped to run the economy. Statism has always been a strong force in France, no matter which party the man in the Elysée Palace belongs to.

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

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