French-German relations

Save French-German friendship, drop the single currency

Recently, the French Ex-President Valerie Giscard d’Estaing said that

He was of course referring to the French-German partnership and to the widening economic differences between the two countries. Having lived in France for many years, still frequenting my “résidence secondaire” in the Normandy and boasting quite a number of French friends, I know that Giscard’s views are shared by many of his countrymen. As a German, I do not agree with them. Nations do not act like married couples where one always has to wait for the other. Also, Germany’s economy outperforming France’s is not exactly news either. Neither on Giscard’s nor on any of his successors’ watch had diverging economic performances negative effects on French-German relations. Likewise, Germany’s relations with much smaller economic players such as The Netherlands, Poland or the Czech Republic are as good as ever.

Giscard’s remarks stem from the undeniable fact that today French-German relations are at their lowest point since de Gaulle and Adenauer embraced each other sixty years ago. Assuming that France’s Ex-President is right in his analysis, the two countries’ relations are to get even worse as the economic gap between the two countries is widening.

I am convinced that the major reason for the deteriorating relations between the two countries has something to do with the Euro. Having originally been an adamant supporter of the Euro, I now consider my engagement for the single currency to be the biggest professional mistake I ever made. Although it has become obvious, it remains politically incorrect to admit that the Euro has become too strong for France and too weak for Germany.

For decades, France was able to maintain its international competitiveness by applying a mixture of socially acceptable reforms and modest devaluations. Today the country is trapped between a Government which is unable or unwilling to execute the necessary reforms and a Euro which denies them the devaluation necessary to offer French goods and services at prices affordable to their customers in the world. The result is recession, rising unemployment, a shrinking tax base and further increasing Government debts.

While the French are yearning for economic growth, the Germans are getting increasingly concerned about inflation. German pensioners and those relying on interest income are suffering from increases way below inflation and see their savings losing value constantly. As a result, Germans worried by inflation are creating an unprecedented rush for real estate in German cities.

What do we learn from President Hollande begging the European Central Bank for a further interest rate cut while at the same time Chancellor Merkel demands higher interest rates? The answer is: a “one-size-fits-all” currency doesn’t work in economic environments as different as in Germany and in France, let alone Greece.

So far, the strategy applied in Brussels, Paris and Berlin has been to adjust the different realities in the countries to the needs of a common currency instead of tailoring the currency to the reality. Hardly anybody disagrees today that to maintain the Euro, the huge differences in productivity between, say Germany and Greece must to some extent be ironed out. Hence the “Fiscal Compact” as a road map towards more common economical environments. The trouble with this strategy is that it does not work. Virtually none of the “Southern” countries is meeting its fiscal commitments. Each time the “Troika” inspects Greece, Portugal, Italy or Spain, targets are lowered and deadlines are prolonged. Worse, unemployment, in particular for the young, is mushrooming. Since it has become obvious that the productivity gap will not sufficiently be closed by the “South”, pressure has been mounting on the “North”, in particular on Germany, to fill the gap from the other end.

And here comes France in to the picture. While it is economically not better off than for instance Italy, the effect of the reforms put in place by the French Government will be even less effective than those in the other Southern countries. In fact, some of the recent decisions taken by the French Government like raising minimum wages, lowering the retirement age for some employees or introducing punitive tax rates for “the rich” seem to go in the wrong direction. More than half of the French economy is controlled by the state. 90 out of 1000 French employees work for the Government, in Germany only 50.

In the days of the French Franc or the D-Mark the effects of such deviations were more or less contained to each country. And mind you, Germany had its own “lost decade” when it was rightfully regarded “Europe’s sick man”. At that time many Germans looked with admiration across the Rhine. Now stuck with a common currency such deviations inevitably result in the Euro becoming too strong for the “South” and too weak for the “North”. While the strong Euro prices Peugeot and Renault out of the global markets, Audi’s and BMW’s are selling like hot cakes in the world with the help of a Euro much too weak for Germany.

And here we get to the core of the strained relations between France and Germany. The French Government does not only want to introduce Eurobonds thereby socializing public debts of the “South” with Germany’s, leading French politicians are now asking Germany to become less productive, export less and import more. Indeed Germany is the third largest exporter in the world, but it is also the second largest importer. Since the introduction of the Euro, Germany’s dependency on exports to countries of the Euro-zone has shrunk constantly. Already more than 60% of German exports go outside the Euro-zone. As David Marsh from the British OMFIF pointed out the other day, the U.K. has replaced France as Germany’s main trade and service partner. In any case, to reduce Germany’s productivity “to save the Euro” means nothing but putting Germany’s global competitiveness at risk. In Germany some politicians believe that this risk is worth taking to smooth French-German relations. I do not. I do not even think it is good for France.

It is time to admit that the Euro not only fails in delivering its economic but also its political objective. Wasn’t it meant to contribute to European integration and peace? Instead, various rescue packages for the Euro have forced Germany into the role of a potential creditor. As a result, Berlin constantly lectures its potential debtors on how to manage their economies, increasingly also France. No wonder the French are upset about German arrogance. Before the Euro, the economic affairs of other countries were none of our business. Today it seems Germany’s Government is more occupied with privatization in Greece, public debt in Italy and labor reforms in France than with the significant problems of its own country. Before the Euro, Germany was the E.U.’s most respected country in many countries of the South. When Chancellor Merkel recently went to Athens she had to be protected by seven thousand police.

Also the rift between the countries in the Euro-zone and those outside is of increasing concern. Of the countries outside the Euro-zone only the population of Rumania still wants the Euro. The prospects of the U.K. leaving the E.U. altogether has undoubtedly something to do with the many decisions in the Euro-zone to centralize, equalize and harmonize. Before the French-German friendship is becoming the worst collateral damage: let’s do away with the single currency.

Prof. Dr. Hans-Olaf Henkel, Universiteit van Mannheim