Nov 27, 2012

France Is Running Out of Time to Restrain Germany

Op-Ed by Blackstone's Gérard Errera Appeared in the Financial Times

Is Germany becoming the new Gaullist state of Europe? It has fiercely opposed fully rescuing eurozone countries, forcing the EU to repeatedly act too little too late. Chancellor Angela Merkel has given up on nuclear energy, killing the possibility of a European energy policy. Germany shot down the EADS-BAE merger, missing an opportunity to create a global aerospace giant. And Ms Merkel, while proclaiming the need for a federalised eurozone is stalling the implementation of a banking union. So, the argument goes: from now on, Germany is only looking out for its national interests and it is not interested in Europe any more.

This argument is, however, shortsighted. Many Germans would take offence at the accusation of being bad Europeans. Since the creation of the EU, they have been paying their dues, both financially and politically. It is logical that after restraining its pursuit of national interest after the second world war, Germany should begin to define and defend such rights. What is surprising is not that it does so; it is that it has taken it so long.

The more relevant question is will Germany become increasingly tempted to look towards the wider world – Russia, China and other emerging markets? For now, that would not be in Germany’s interest: more than half of Germany’s trade is with eurozone countries. In the future, though, its best outcome is less clear. Germany’s main European partners – Britain, Italy and France – must realise the stakes and be imaginative and determined in their vision of Europe. The more they can offer new ideas, the more they are in a position to conduct a constructive dialogue with Germany on Europe’s future. The stronger their economies, the more they can challenge Germany’s rigid vision of Europe’s monetary and fiscal policy.

Unfortunately, Britain is on the way to saying goodbye to Europe and excluding itself from influencing the EU’s fate. In contrast Italy, under the leadership of Mario Monti, is on the path to recovery and will be able to play its historic role as a pillar of the European project that it lost under Silvio Berlusconi.

And what about France? President François Hollande has made a welcome contribution to Europe’s recovery by insisting on the need to add a “growth pact” to the fiscal pact cherished by Ms Merkel. He is also right in criticising – implicitly – the German government for its approach to further integration. “The quickest to talk of political union are often those the most reticent to take urgent decisions”, Mr Hollande says.

He is implying that the entire fabric of the Franco-German relationship and their respective role in Europe needs to be reviewed and adapted to new continental realities. What he has not said yet is what France really wants for Europe in general and the Franco-German relationship in particular. So far, all we know is what France does not want. Presenting a more positive case means two things. Firstly, being clear, at last, about the level of sovereignty France is ready to share for the good of Europe. Secondly, undertaking the structural reforms and the economic policy France needs to prevent the competitiveness gap with Germany from widening.

Many opportunities have been lost over the past 25 years by various governments to change the French economic and social model. President Nicolas Sarkozy did not address the most compelling issues: labour market flexibility, the cost of welfare benefits and reform of the state.

Time is running out. Louis Gallois, former chief executive of EADS and one of France’s most respected figures, this week presented a report on ways of reforming the French system in order to have more competitive industries and to make France innovative, imaginative and successful again. If Mr Hollande does not enforce it quickly and if he does not decide to embark now on that painful but inescapable process, the French should not complain about Germany taking a separate course.

Much has been said about Germany unilaterally deciding the future of Europe. But France has a special responsibility in determining that German approach. It must do so before Ms Merkel turns her back on the continent.

Gérard Errera is a former French Ambassador to the UK and Chairman of the Blackstone Group in France