Blind in Brussels

France's EU problem
November 14, 2012

A few hours after taking office on 15th May, the French president François Hollande rushed to Berlin to meet Angela Merkel, the German chancellor. He had not yet appointed a prime minister, but there was no time to waste. For all the parochialism of the French presidential campaign, during which both candidates debated only domestic issues, Europe could not wait.

During his campaign, Hollande promised he would never surrender to Berlin; he would twist Merkel’s arm and renegotiate the fiscal austerity pact to which Sarkozy had agreed. Isn’t France the founding mother of the Union, the homeland of Monnet, Schumann and Delors, and its second largest economy? Nothing is possible in Europe without France, Hollande declared. True. But nothing is possible in France without Europe either—and Europe’s capital today is Berlin.

New to Brussels, with no government experience but a background in party politicking, Hollande claimed victory after his first European summit in June. Supported by Mario Monti, the prime minister of Italy, he ensured that a chapter about economic growth was added to the fiscal compact imposed by Merkel. Lionel Jospin, France’s last socialist prime minister, had similarly been granted an addendum to the Lisbon treaty, without any concrete results. Such is the French obsession with semantics that they tend to think the problem is somehow solved once the proper wording is forged.

Five months later, an appraisal of Hollande’s performance came from a fellow socialist in Berlin. Basking in the success of his “Agenda 2010”—reforms that cost him his job but which account for the current strength of the German economy—Gerhard Schröder, the former chancellor, did not mince his words. The French must come to terms with reality, he told me recently at the Berggruen conference on governance. So far, the wrong signals have been sent and soon the financial markets will pass judgment.

The French economy is in trouble. Unemployment is growing, as is the trade deficit; the car industry is on the verge of collapse; and confidence is low. But the government’s policies correspond to a pre-crisis ideological package rather than a realistic assessment of the situation: retirement at 60; no change to the 35-hour working week; no reduction to business rates or improvement of labour flexibility; massive fiscal reform hitting the rich and middle class without any incentives to stimulate consumption. As a Brussels expert told me, these reforms amount to “too many small steps in the wrong direction.”

However, the target of a public deficit of 3 per cent of GDP by 2013 and the ratification of the fiscal treaty in spite of reluctance within the parliamentary majority are promising signs. As to the structural reforms that Berlin wants, the government insists they should be considered over the next five years—the duration of Hollande’s mandate—and not in the short term. Confronted with a daunting new report, the government has just announced a battery of measures, including a VAT increase for 2014 and a reduction of charges on business—a mellow version of the report’s recommendations.

At the heart of the matter lie the deep cultural differences within the European Union. The British are obsessed with markets: indeed their main rationale for being in the EU has been the completion of the single market. The Germans are preoccupied with the primary role of their parliament, with which Merkel has skilfully governed throughout the crisis. But the French still believe in the supremacy of the state.

For half a century, as European unification progressed, the French felt convinced that the EU would turn out like a larger France, with a semi-protected internal market, strong regulation and a consolidated welfare system. Paradoxically the push towards a more intergovernmental approach has led Paris into isolation. Not one single member state shares a belief in the towering role of the state in driving the economy. France has been losing the ideological battle in Brussels, as well as key positions within its bureaucracy.

It could have been Britain’s silent victory, a revenge over the integrationist, French-driven machinery London has always dreaded: a Union with 27 members, where national interests were traded in the Council, not subject to communal goals set up by the Commission. But the euro crisis, unfolding spasmodically under Berlin’s short-term guidance, has changed the course of events and dramatically altered the power balance within the union. Eurozone states are bound together by a new process, which aims to correct its original flaws: the central bank will act like one; a common monetary policy will lead to co-ordinated economic policies, a banking union and, sooner or later, fiscal harmonisation. Britain is out of the process, its isolation not all that splendid. It is difficult to see how British interests in the City and in the single market could not be impacted by increased eurozone integration.

London is drifting away, Paris is out of focus and Berlin leads Europe. For its own comfort, as well as vested European interests, Germany doesn’t want to stand alone. But it is getting used to it. For Europe’s and France’s sake, Hollande better get his act together.