Hollande, the Germans and 'political union'

Before becoming French president, Franҫois Hollande did not appear to take much interest in the EU. However, in his youth he was a protégé of Jacques Delors, the French left’s great European, and his instincts seem to be broadly pro-EU. Hollande’s arrival in the Elysée has not led to dramatic changes in France’s EU policy, but a new approach is emerging. Compared with Nicolas Sarkozy, Hollande is less hostile to EU institutions, more willing to work closely with the southern European member-states and, most crucial of all, keener to demonstrate that France does not slavishly follow German wishes.

Hollande knows very well that a strong Franco-German relationship is indispensable to sorting out the problems of the eurozone in particular and the EU in general. But, as officials in the Elysée, the finance ministry and the foreign ministry made clear during recent conversations, Hollande wants a more balanced Franco-German relationship.

These officials emphasise that the ‘Deauville’ model of Paris-Berlin relations has been scrapped. At the Franco-German summit in Deauville in October 2010, Chancellor Angela Merkel made Nicolas Sarkozy, the then French president, accept the principle that private-sector holders of sovereign bonds of countries needing a bail-out should suffer losses. At an EU summit a few days later, the ‘Merkozy’ duo imposed that principle on their fellow leaders, who feared that its adoption would destabilise sovereign bond markets (which is exactly what happened).  At many other summits, too, Merkel and Sarkozy set the agenda or delayed decisions while they consulted each other. This upset other member-states and the EU institutions.

Hollande understands what drove Sarkozy towards followership vis-à-vis Merkel: for several years the German economy had out-performed France’s – notably on unit labour costs, employment, export performance and growth – so that the relationship had become unbalanced.

Hollande has therefore sought to strengthen France’s position relative to Germany in a number of ways. One is to consult other countries – especially Italy and Spain – and the European Commission on key issues. Sarkozy avoided getting too close to ‘problem’ member-states, lest the financial markets associate France with southern Europe. But Hollande does not have that hang-up. At his first summit, when he lined up with Italy’s Mario Monti and Spain’s Mariano Rajoy, the Germans were not amused, but they have now – according to the French – seen that a more inclusive system of leadership is in their interests. Hollande’s officials claim that he has not been and will not be so crude as to try and put together a bloc to counter Germany.

Hollande’s second way of strengthening French influence is to retain the austere fiscal targets that he inherited, notably by limiting the budget deficit to 3 per cent of GDP in 2013. Some government officials believe that this and the budgetary targets adopted by other EU governments – partly because of German pressure – are excessive and counter-productive. They nevertheless say that France needs to stick to 3 per cent in order to win credibility in Berlin. They think that as long as economic growth this year holds up to the predicted 0.8 per cent, the target is feasible. Although the current emphasis is on shrinking the budget deficit through tax rises, in future years spending cuts will predominate, officials say.

The third way of raising France’s standing is to improve the country’s competitiveness. Outside France, the president and his ministers are not perceived as being particularly committed to structural economic reform. During the presidential election campaign, Hollande avoided the subject. But some of the key officials in Paris say that the government is determined to reduce unit labour costs and to reform labour markets. If the current negotiations between the social partners on labour market reform break down, they say, the government will legislate. Many previous French governments have declared their commitment to such reforms, only to back down in the face of street protests. But Hollande’s people are adamant that he will stand firm – and it is arguable that over the past 30 years, Socialist governments have reformed more boldly than Gaullist governments.

Having got off to a rocky start with Merkel – who refused to meet him before the French presidential election – Hollande now has a good working relationship with her, his advisers say. Although personalities matter much less than interests in Franco-German relations, this pair may end up with a more affable relationship than Merkel and Sarkozy had. The dour Merkel, who likes to move slowly and cautiously, and the mercurial Sarkozy, who is impatient and partial to bold initiatives, were not natural soul-mates. Hollande, however, tends to be soft-spoken and a consensus builder – as is Merkel.

French officials claim that Hollande helped to persuade Germany’s leaders to shift their thinking on the euro crisis. For example, Merkel and Wolfgang Schäuble, her finance minister, have rallied behind Mario Draghi, the president of the European Central Bank (ECB), and his scheme to intervene in bond markets to lower the borrowing costs of peripheral countries (but the French worry that Jens Weidmann, the Bundesbank president who opposes the scheme, is winning the public relations battle inside Germany). The German government has also made clear that – like France – it wants Greece to stay in the euro, for fear of the consequences of its departure.

But many tensions remain between Paris and Berlin. The French support the Commission’s proposals for an EU-wide system of bank supervision that would cover all Europe’s banks; the Germans want only the largest, cross-border banks to be covered – apparently oblivious to the fact that many of the problems in European banking emerged in small or medium-sized banks. Germany seems to want to slow down an agreement on EU banking supervision, although the European Stability Mechanism (the permanent bail-out fund that will soon be operational) cannot help banks in difficulty until the new supervisory regime is in place. Furthermore, the German government is counselling Spain not to activate the Draghi mechanism to intervene in bond markets, perhaps because it fears a vote in the Bundestag; the French believe that the mechanism must be used soon, lest the financial markets cease to believe in its potency.

On longer-term issues of eurozone governance, too, there is a huge distance between Paris and Berlin. The French worry about the incoherence of the way the eurozone is managed – nobody is in charge, and governments do not know what different leaders have said to each other. They want the Eurogroup (the regular meetings of eurozone finance ministers) to provide some of the missing leadership by appointing a full-time president and by introducing majority voting. But some Germans worry that a stronger Eurogroup could erode the independence of the ECB.

The French think that, because they have swallowed the painful medicine of the fiscal compact – that they will soon ratify – and thus given away some of their cherished budgetary sovereignty, Germany should be keener to discuss ‘eurobonds’ (the mutualisation of European debt), pan-European bank deposit insurance and a bank resolution regime. But Germany still says no to those ideas, since they would cost it money.

Another broad disagreement is over the woolly concept of ‘political union’, which is moving up the EU’s agenda. On September 12th, José Manuel Barroso, the Commission president, called for a “federation of nation-states” when he spoke to the European Parliament. He promised proposals for a new EU treaty before the 2014 European elections.

In Berlin, there is much talk of ‘more Europe’, treaty change and political union. Indeed, a reflection group led by Guido Westerwelle, the German foreign minister – with the participation of eight other foreign ministries – published a report on September 17th on Europe’s future. This proposed classic federalist solutions to the EU’s problems: majority voting on foreign policy, a stronger role for the High Representative for foreign policy, a European army, an elected Commission president, a stronger European Parliament and a new system for ratifying treaties (to prevent small countries holding back everybody else). Many of the report’s proposals would require treaty change. However, several ministers taking part in the Westerwelle group have dissociated themselves from certain proposals, and some of the governments not involved have reacted coolly.

In Paris there is no enthusiasm for the concept of political union. Although France was involved in the Westerwelle group – sending a junior minister, rather than the foreign minister – some French officials talk disdainfully of it. “When the EU is in crisis, the Germans have a Pavlovian reaction and call for political union, without really meaning it,” said one. Another opined that Merkel did not support many of the ideas in the Westerwelle report and that the Germans did not know what they wanted from treaty change (in many other capitals, too, there is scepticism about Merkel’s commitment to the report).

The negotiation of a major new EU treaty would have to be preceded by a convention on the future of Europe (“a nightmare”, in the words of one French official) and followed by ratification in every member-state, with some holding referendums. The French are in no hurry to re-open institutional questions. In the words of one key official: “The EU spent the last decade dealing with treaty changes and institutions, when it should have been worrying about the ‘Lisbon agenda’ [on competitiveness] and the flaws in eurozone governance”. The EU’s priority, the French believe, should be fixing the euro: the 17 that use it should agree on whatever arrangements are necessary, and then allow others that wish to join the euro to participate later.

Some French officials think they can postpone a major new EU treaty for two or three years. But others, notably in the finance ministry, are less hostile to treaty change; they know that neither a stronger Eurogroup nor EU-wide deposit insurance can be established under the current treaties.

Despite their wariness of political union, French officials are thinking about the future of EU institutions. They recognise that the increasing centralisation of decision-making on eurozone issues creates a greater need for democracy and accountability at eurozone level. Some officials talk of a new body of national parliamentarians and MEPs that could approve key appointments and hold to account eurozone decision-makers such as the Eurogroup president, or the ECB body that will be responsible for bank supervision. That idea is similar to a recommendation in the Westerwelle report, as is the view of many French officials that MEPs from countries outside the euro should not be allowed to vote on euro issues.

In general, the people around Hollande and finance minister Pierre Moscovici are less inter-governmentalist than were Sarkozy’s advisers. Some of them view the European Parliament quite sympathetically, though they do not think that in its current form it can play much of a role in eurozone governance. They are less keen than Sarkozy was to give national parliamentarians a role in EU decision-making. They criticise the Commission less viciously than Sarkozy’s people, though they complain about the quality of its leadership and its tendency to interfere on little things that should be left to member-states. They accept, albeit reluctantly, that the Commission must play a role in supervising the economic and budgetary policies of eurozone member-states. Hollande’s relatively communautaire approach puts him closer to traditional German thinking than to Gaullist thinking.

So far, Hollande’s new approach to Germany – working closely with it, but not following slavishly – seems to have been moderately successful. But in the long run, if he wants French influence in the EU to approach that of Germany, he will have to deliver on his promise to boost the competitiveness of the French economy.