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Alain Boublil Blog


France-Germany: the moment of truth?

In the aftermath of the European summit whose results were disappointing for France, and right before a debate revealing that France is behind schedule regarding its budget commitments, one can wonder about German motivations. Wolfgang Schäuble never misses an opportunity to barely covertly criticize the French government's economic policy and to condemn in advance any coordinated action, initiated by the ECB or of the Eurogroup, to stimulate growth in the euro zone.

France did not manage to set up a date for a summit devoted specifically to this issue and will have to wait until October for the next meeting of the whole EU member states. And everyone expects tough times when the figures for the French deficit in 2014 and the forecasts for 2015 will be published. Given that France failed to meet its budget commitment, that growth is down in Europe, even in Germany, what is Germany’s interest in embarrassing its main partner? What goal does it aim to achieve by systematically blocking the necessary actions to be taken in order to support activity and consequently reconciling citizens with the European project?

Domestically, it is incomprehensible. The success of the anti-euro AFD party in the last elections in Saxony, joining thereby the regional Parliament, which might also happen in Thuringia and Brandenburg on September 14, can hardly benefit Angela Merkel. And at the European level, the political principle does not hold. First, the euro zone has successfully gone through the turbulences of 2010-2011, as evidenced by the very low level of interest rates and the tighter spreads between France and Germany on the one hand, and the countries like Spain or Portugal on the other hand that were in trouble at that time - not to speak of Italy which is financed under the same conditions as ... the United States. The euro zone is also experiencing a substantial surplus in its curent account balance of payments - which is a strong guarantee.

In terms of compliance with treaties, Germany is not in the best position to patronize. Its public debt has reached 85% of its GDP that is well above the 60% allowed by the treaty, in spite of low military spending, and a decreasing demography that generates a short-term reduction in education spending but that is worrying in the long term as one wonders who would repay the debt.

Moreover, during the post-unification period, Germany has taken many liberties with the 3% criterion - with the culpable complicity of France, to be sure. But these two rules, which appeared when the countries first discussed the creation of a common currency in the late 80s, were only intended to support the fundamental objective of price stability. Germany had experienced during the 1920s, a catastrophic hyperinflation that had disastrous economic and political consequences. Therefore, one could not accused Germany to take all measures to protect itself against this risk, especially since France, during the 1970s, had shown, in this respect, an irresponsible indulgence. It was not until 1982 that the reforms are implemented and it took a few more years to see their effects and to notice behaviour change. At that time, economies were less open to international competition and markets were less developed. People feared that an excessive deficit would put upward pressure on prices, by artificially creating demand, and that too much debt would cause the rise of interest rates.

Twenty-five years later, these arguments do not make sense anymore, as evidenced by the evolution of prices in the euro zone and the fears concerning the emergence of deflationary risk. Global economy’s functioning has changed. Excess demand in one country can create a deficit, but certainly not a resurgence of inflation, considering the current climate of competition. Inflation would come from external factors, such as changes in commodity prices, or domestic factors such as the appearance of housing bubbles created by an overly accommodative monetary policy and, in particular, a too favourable taxation.

Despite the fact that all member states have failed to comply with the debt and deficit criteria, inflation and interest rates in the euro zone have reached historically low levels. There is no link anymore between these criteria and price stability. So why should we strive for meeting them? The euro zone’s crisis is in our memories. It arose from the uncontrolled debt of several countries, either due to carelessness of their banking system or the irresponsibility of their political leaders, or both. It created a new threat to member states: that of having to pay the debts of others. A parry was found thanks to new intervention and funds, designed to help countries in trouble, in case of emergency.  It is a sort of European Monetary Fund in some way, to which France has greatly contributed.

The last argument that Germany could invoke against France would be that our country could pose a threat to the survival of the euro zone. It is politically indefensible and technically absurd. Our country has a deficit in its current balance of payments of 1.4% (instead of 4% as Jacques Attali mistakenly stated in an interview with Les Echos) that will decrease further in 2014. Moreover, France has, just like Germany, a very high saving rate and a financial saving rate much higher than the deficit. France Trésor which is the agency that manages public debt is proud to see its bonds subscribed to more than 60% by foreign investors, which is indeed good practice in commercial terms. But this figure is clearly overstated because the resources collected from life insurances in France are sent to euro funds located in Luxembourg and recently in London for technical reasons related to quotation.  

The reality is that the level of French savings is much higher than the national public debt and consequently poses no risk to the euro zone. As long as these conditions last, low inflation and high financial savings, non-compliance with the letter of the treaties will run much less risk to the euro zone than the weak growth, which impedes the recovery of indebted states, including Germany, and which causes people’s disaffection, as evidenced by the results of all elections in Europe, including also in Germany. So why does this country desperately try to endanger its partners, and France in particular? The only plausible yet sobering explanation is the return of our neighbour’s will to power. Germany has given up playing a leading diplomatic role and it does not see, unlike France, Europe as a way to be influential on a global scale. Germany seems to look instead for its commercial success in order to increase its influence in Europe. It does so by weakening its competitors, including France and Italy, and by relying on the Eastern countries that joined the EU after the Soviet Union’s collapse. Thus, it verifies the prediction made then according to which Germany’s goal consisted in converting the former political satellites of Moscow into the new economic satellites of Germany.

Its companies have structured their supply chains by implanting subcontractors in this area and have thereby benefited, notably in the Czech Republic, Slovakia and Poland, from very low costs that have improved their competitiveness while creating new opportunities. And it also helped obtain a favourable rate exchange: either these countries joined the euro zone, after having massively depreciated their currency, or they remained outside of the euro zone and Germany benefited from the strong euro.

French companies, as evidenced by a study published by the Treasury in April 2013 have done exactly the opposite, especially in the automotive industry. By imposing in the euro zone ​​restrictive policies that weaken its main competitors, Germany, allying with its subcontractors, strengthens its dominant position. The question therefore that arises today is clear. France and the countries affected by this policy are consistent in appearance to the letter of the treaties even if they go against the spirit of European integration and even threaten them. When would they start acting differently?




  1. Hugo 09/02/2014 10:20 p.m. #

    Une analyse brillante, à la fois d'actualité et cohérente avec les agissements politiques de l'Allemagne depuis plusieurs décennies.

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