07 May 2012

FT: Berlin prepares for pragmatic partnership

In recent weeks, it has been obvious that Ms Merkel had become reconciled to a victory for Mr Hollande. 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.

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 €10 billion 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.

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