Global Insight

May 7, 2012 4:19 pm

Berlin prepares for pragmatic partnership

Hollande could even turn out to be a blessing for Merkel

François Hollande’s victory in the French presidential election was greeted in Berlin with a Gallic shrug – at least in government circles.

“Oh well,” was one of the more revealing responses to the Socialist’s success. It was neither heartily welcomed nor cursed, but seen as something one has to live with.

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It was not what Chancellor Angela Merkel had wanted. Indeed, she had publicly and rather rashly thrown her political weight behind Nicolas Sarkozy, the centre-right incumbent in the Elysée palace. She had even agreed to go and campaign for him – until he withdrew the invitation.

In recent weeks, however, it had been obvious that Ms Merkel had become reconciled to a victory for Mr Hollande. The German government machine went suddenly very quiet on the subject. “It is too sensitive to comment,” was the official line. But behind the scenes, diplomatic feelers were being put out to the Hollande team to work out a new modus vivendi.

This is not only because of Ms Merkel’s pragmatism, but it is also in the strange nature of the Franco-German partnership to be flexible. The double-act often works best when the two leaders belong to opposite political persuasions: Helmut Schmidt and Valéry Giscard d’Estaing, and Helmut Kohl and François Mitterrand are classic examples.

On the other hand, Mr Kohl and Jacques Chirac, two conservatives, never hit it off. As for Ms Merkel and Mr Sarkozy, for all the talk of a “Merkozy” axis, theirs was always an uneasy partnership – a forced marriage, caused by the eurozone crisis.

Ms Merkel has already sketched the outline of a sensible compromise with the new French president. Mr Hollande must accept that the fiscal pact agreed by 25 of the 27 EU members – setting out the rules of budget discipline to be enshrined in fundamental national legislation – cannot be renegotiated. Like all international treaties, says Berlin, it cannot be rewritten for every national election.

In exchange, Ms Merkel will be flexible in beefing up a “growth pact” to run alongside it, linked perhaps by an annexe to the original treaty. She wants it to be financed by money already committed – not new borrowing.

At least two of the ideas floated by the European Commission in recent months – a €10bn increase in European Investment Bank capital, and the issuing of jointly guaranteed “project bonds” to finance infrastructure projects – are getting a fair wind in Berlin. There may be German conditions, such as insisting that everyone contributes pro rata to the EIB top-up, including the most debt-strapped, and not wasting money on extravagant infrastructure white elephants.

German officials insist this is simply moving to “phase two” of a crisis management programme in which “phase one” was fiscal consolidation. They also stress that growth must be “sustainable”. But the combination of austerity and growth was always part of the German agenda, they say.

Ms Merkel expects Mr Hollande to be equally pragmatic, although she recognises that he cannot simply ditch all his election promises of spending on growth – and certainly not before next month’s French parliamentary elections. But she knows that he will face the discipline of the financial markets, restraining him from a rush to debt-financed stimulus.

Germany is certainly not going to transform overnight from its mantra of austerity to a new Keynesian gospel of growth. Ms Merkel has to beg the Bundestag to part with a single euro of increased German guarantees for the rest of the eurozone.

Yet the advent of Mr Hollande may prove to be more of a blessing than a curse for the chancellor. It will allow her to relax a little on the austerity message and lean more generously towards growth, just when she needs to for domestic electoral reasons.

She will be stealing the policies of her centre-left opponents in Germany – the Social Democrats and Greens – with re-election looming in 2013. Merci, François, for the excellent opportunity.

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