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Franco-German Impasse More Important Than Brexit
World Economy

Franco-German Impasse More Important Than Brexit

Forget Brexit. The real obstacle to deeper European integration is not the awkward British, whether they choose to stay in the European Union with a "special status" or leave.

It is a long-running Franco-German impasse on how to make the eurozone stronger and more sustainable, reconciling two radically different economic and political cultures, Reuters reported.

Now that David Cameron has won a deal to enshrine formally Britain's semi-detached status in the 28-nation bloc–if his skeptical voters don't detach it completely–the onus will return to Europe's founding nations to work out a way forward.

European federalists such as Belgian Prime Minister Charles Michel are fretting that the terms granted to Britain's embattled leader may whet others' appetite for opting out of EU policies and ultimately lead to a disintegration of the union.

"We must not give the impression that Europe is a self-service," French President Francois Hollande said. "There can be differences but there cannot be a Europe where each country picks out what it wants."

Whatever It Takes

But it is the breakdown of Franco-German leadership in the eurozone–the economic core of the 60-year-old European project–that worries the architects of European integration.

In the heat of the eurozone debt crisis in 2010-12, they found just enough common ground: The eurozone tightened fiscal rules and created its own rescue fund, a partial banking union with a common supervisor and a mechanism for winding up failed banks with an embryonic common resolution fund.

But since the European Central Bank averted a meltdown of the 19-nation currency zone by pledging in 2012 to do "whatever it takes" to preserve the euro, reforms to reinforce economic governance and mutualism risk have stalled.

Frustrated and Cheated

A 2012 blueprint entitled "Towards a Genuine Economic and Monetary Union" signed by the four presidents of the European Commission, the European Council, the ECB and eurozone finance ministers, led to the first steps in banking union but got stuck after that.

The French refused to contemplate the principle of making binding contracts with Brussels to reform their rigid labor market or generous welfare system–issues that could trigger strikes and topple governments.

The Germans and their allies balked at providing financial incentives for countries to sign up to such reforms. Berlin brushed aside ideas for a central eurozone budget, common bank deposit insurance or any joint debt issuance.

A second report last year outlining a more modest three-stage plan for eurozone reform, adding the signature of the president of the European Parliament, got no more traction.

Both main European powers are frustrated and feel cheated. The Germans think fiscal discipline is still not being properly enforced, notably on the French, while the French feel Berlin is still failing to show solidarity with weaker southern economies.

Imbalance

A growing power imbalance between an economically successful Germany and a stagnant, reform-shy France has compounded underlying differences of national tradition.

Germans dream of a rules-based Europe in which governments transfer sovereignty over national budget balances to a central authority with the power to fine or expel them, and economic reform commitments are made enforceable by EU courts.

In such a union, Berlin might be willing to accept a limited common eurozone budget and common bank deposit insurance but probably never common debt issuance.

A "transfer union"– redistributing wealth from industrious northerners to easy-going southerners – remains many Germans' nightmare. They see it as an open door to "moral hazard", a permanent reward for bad behavior.

Many in France still dream of a smaller core eurozone with harmonized taxes at or close to their own high levels, a common minimum wage and unemployment insurance, and a sizeable common budget backed by joint public borrowing.

 

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