08 December 2011

Philip Stephens: Now the Franco-German question

For France, the survival of the euro is existential. Never mind the initial, enormous economic shock that would follow its failure. The break-up of monetary union would most likely see France slide into the continent’s second division. Europe is the engine room of French power. Without it there would be nothing left of its global pretensions.

Mr Sarkozy, of course, has been fighting his corner – pressing for a Gaullist, intergovernmental arrangement rather than a leap to fiscal federalism. France has been attuned to the danger of Berlin’s habit of elevating the avoidance of moral hazard above restoring confidence in financial markets. In the end, however, Berlin has prevailed. As Charles Grant of the Centre for European Reform has observed, the proposals for a stability union presented to the Brussels summit were essentially written in Germany, even if the odd page was edited in Paris.

Assuming (perhaps foolishly) agreement at the summit, the present approach should secure a second chance for the euro: the more so if it provides cover for decisive intervention in the markets by the European Central Bank. But for the very reason it has been written in Germany, the strategy fails to offer a sustainable long-term answer.

Germany is now within reach of the political integration it sought as a counterpart to monetary union when the euro was established. The danger is an assumption in Berlin that the new structure can be built to an entirely German design. If German leadership is to avoid being oppressive, it must recognise that fiscal union cannot be a one-sided affair. It was encouraging this week to hear Ms Merkel talk about the competitiveness problems in the weaker eurozone economies. It would be more so were she to talk about formulating a strategy for growth.

For its part, France must begin to reimagine the political geography of Europe. The Franco-German relationship will always be a pivotal one, but it is now unequivocally unequal. Paris needs friends beyond Berlin – in Warsaw, Rome and Madrid. If Britain’s Tory party were ever to leave behind its European nightmare, there would also be a case to revive the old entente.

Few would dispute that the survival of the euro now rests with German leadership. There must be more to that leadership, though, than the promise of austerity.

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