European Headaches

For some weeks the press had speculated that Chancellor Angela Merkel and French President Nicolas Sarkozy were hopelessly at odds. However, on Monday the two insisted in Berlin they had resolved key differences on how to tackle the euro crisis, and had forged a common front ahead of this week’s EU summit.

The German chancellor and the French president did what was demanded of them. They displayed unity. “More than ever, Germany and France are determined to talk with one voice,” said President Sarkozy, “to adopt common policies, to give Europe the means to meet its legitimate ambitions.”

They often meet together just before a summit. What France and Germany agree on before the summits is what usually happens. But not necessarily this time. Courtship rituals do not disguise the fact that there are deep differences between France and Germany over how to address the crisis in the eurozone.

1. Fear that Greece may default in spite of the rescue plans. Despite the optimistic words coming out of the Greek finance ministry it is hard to find an official in Brussels who does not think that sooner or later Greek debt will have to be restructured. The question is whether it should be restructured inside or outside the eurozone.

2. Spain may be the next casualty. A Spanish official said on Monday that some foreign banks were refusing to lend to a group of Spanish banks. On the same day, the German chancellor Angela Merkel said Spain could make use of the 750 billion euro rescue mechanism. If the rescue mechanism is drawn upon will the sums be enough? It is inconceivable that Germany would be willing again to underwrite a further deal.

3. Insufficient political support for the austerity measures. In Germany 87% of those polled thought the measures were unfair. The Italians and the Spanish are all protesting. Eventually the question could become political: “Is all this (austerity, bail-outs) the price of keeping the eurozone together?”

4. Cracks in the Franco-German alliance. Only this week Der Spiegel wrote that President Sarkozy and Chancellor Merkel can hardly stand each other and that she calls him “little Napoleon.” The French paper Le Point concludes “nothing is working any more in the German-French relationship.” The key for Germany is the principle that those who use the single currency must live by the rules when it comes to tax and spending. The French propose a giant leap forward towards integration for the 16 countries that use the eurozone.

Source: BBC’s Hewett on Europe, and Der Spiegel

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