Sunday, 22 April 2012

Hollande for France and for Europe

This article was published In the Malta Indepenent on Sunday on 22 April 2012

The first round of the French Presidential elections takes place today with the more or less foregone conclusion that President Sarkozy and Socialist challenger Francois Hollande will be chosen to proceed to a two-horse race in the second round on 6 May, when the French electorate will take the final decision about the next occupant of the Elysee Palace.

Opinion polls clearly indicate that Hollande will emerge as the outright winner in the second round, even if the first round is likely to be a neck-and-neck affair.
The main reason why the French seem to be leaning towards Hollande, who would be the first socialist President since Mitterrand, is the ‘anyone-but-Sarkozy’ attitude.
The only evident clear supporter of Sarkozy is Chancellor Merkel of Germany and this by itself is a good enough reason why France – and Europe – need to eject Sarkozy from office and elect a French leader who can restore balance in the Franco-German relationship – which affects the whole leadership of the EU and certainly affects us in Malta as an EU member.

Sarkozy’s presidency, beyond the flamboyancy of his personal life, has been a failure on two major policy areas: he failed to deliver on his promises to liberalise and modernise the French economy and, above all, he has failed to offer a balance to German economic fundamentalism about how to resolve the Euro crisis. Instead, Sarkozy has provided shameless cover for Chancellor Merkel and given a French seal of approval to counter-productive austerity policies that accentuate rather than resolve unsustainable imbalances among 17 countries locked in a monetary union.

It is an undeniable fact that France and Germany are, and for as long as one can see will remain, the effective joint leaders of the EU. Britain has decided to keep itself on the margins, considering the EU more a free-trade area than a political project with a distant destination for economic and political union. In so doing, it has denied itself a pole position that would have served Europe well.

Italy and Spain, as the other large economies of the EU, have not matured sufficiently for a leadership role. They still have internal sovereign problems with strong undercurrents for a separation of important regions and a fractured political system that limits the authority of elected leaders to pursue much-needed economic restructuring to maintain and enhance competitiveness. Italy still needs to resort periodically to unelected technical governments to clean up the mess accumulated under elected political coalitions. Spain still has to find a system whereby central government can have control over the financial commitments of its regions, many of whom still expect autonomy in political decisions without fiscal responsibility for their regional decisions.

Poland will eventually be an important large country leader but its recent accession means it has decades of political maturity before it can take a seat at the top table.

The success of the EU depends on a successful working collaboration between the leaders of Germany and France and this seems to work better when their leaders come from different political stables. Conservative French President Giscard d’Estaing and Social Democrat Chancellor Helmut Schmidt worked as closely together as the Socialist Francois Mitterrand did with Christian Democrat Helmut Kohl. Merkel and Sarkozy both come from the same conservative wing and, in the end, Merkel has become dominant and relegated Sarkozy to a mere stamp of approval to make German impositions look like joint French-German initiatives.

The further development of the EU depends on a strong balance in the German-French leadership duo. While Germany represents economic conservatism, preferring thrift over consumption, obsessed with fears of inflation even when a moderate dose thereof could form part of a cure package for economic ills and focused on exports of high-scale manufacturing, France should offer a balance to represent the interest of countries that depend more on services and tourism for their development.

By their very nature, services and tourism cannot have the inflexible conservatism that Germany applies to its rigid manufacturing philosophy. Services, the diffusion of which on an EU-wide basis still faces many barriers, depend on flexibility, flair and a joie de vivre that is more natural to the Mediterranean temperament.

This balance has been missing, with Sarkozy adopting a submissive posture for the imposition of a German style of leadership. This lack of balance has led to a seemingly never-ending euro crisis – and the reason is obvious: a prolongation of the crisis is very much in Germany’s interests. The crisis has reduced the euro exchange rate against the dollar to a narrow band fluctuating between $1.30 and $1.34. It has also reduced Germany’s funding costs to record lows below two per cent for its 10-year bonds.

These great benefits for Germany’s export machine come at the expense of fellow eurozone countries. German competitiveness, accumulated over two decades of sacrifice on the part of its workers and unions – who accepted low or no wage increases as a national sacrifice to integrate the former communist east into one Germany, means that it can be competitive with a euro rate of $1.60. It is super competitive with a rate of $1.30, explaining why Germany has record high employment, record exports and high consumer and business confidence, and why Merkel seems reassured of re-election to the Chancellorship in 2013, even if she will need to change her coalition partners by including the SPD and ditching the FDP, who will probably disappear from parliamentary representation, dominated as they have been by Merkel’s CDU.

Fellow eurozone members of the Mediterranean rim – but not only them – need a rate of $1.18 – the original exchange rate at the launch of the euro in 1999 – to be competitive. So by keeping the rate of the euro at 1.30 Germany is eating the lunch of fellow euro countries, including ours.

A strong French president in the duo leadership of the EU, someone less submissive than Sarkozy, will not give the French stamp of approval to such subtle economic plundering. Someone other than Sarkozy will insist that while the distressed economies of Greece, Portugal, Italy, Spain and Ireland have to accept their share of austerity caused by the restructuring of their economies, they need a show of solidarity from Germany and allied countries (Finland, Netherlands and Austria, in particular) whereby the latter permit a higher dose of domestic inflation through wage increases and greater consumption, which increases the demand for goods and services exported from countries in distress.

This is needed so that these countries can show a fair balance of austerity and growth and keep their electorate on board with the restructuring process. Failure to do so will unavoidably mean that at some point in time one of these countries will tire of austerity, go its own way and ignite a dangerous and contagious process of lack of confidence in the sustainability of the euro monetary system leading to its dismantling under crisis. This would mean that each country will be forced to revert to its old domestic currency and there will follow unavoidably a process of competitive devaluations, beggar-my-neighbour policies and restrictions on the freedom of trade and capital movement that form the basic foundations on which the EU prosperity has been built.

A strong French president will hold his ground and explain to Germany that their austerity-above-all policy is counter productive and will backfire sooner rather than later. A strong French President will make Germany face the reality that they have to choose between dismantling the euro, which nobody wants, or further European integration, including closer economic and fiscal policies and the funding of countries on an EU-wide basis through the issue of euro bonds at least up to the limit permitted under the Maastricht treaty, ie up to 60 per cent of each country’s GDP.

Whether Hollande is the right person to restore balance in the German-French tandem of EU leadership still has to be seen. That Sarkozy cannot restore such a balance has been proved by his failed presidency.

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