France and Germany: Leading but Where?

This post, almost without comment from us, picks out some illuminating points from a recently published book, which suggests that deep divisions on questions of economics and finance are at the root of the EU’s problems in the eurozone:


The Euro and the Battle of Ideas. By Markus Brunnermeier, Harold James and Jean-Pierre Landau. Princeton University Press

The book’s authors contribute an op-ed article to the New York Times and the Economist has reviewed the book.

First, the book’s authors (from Germany, Britain and France respectively):

Europeans are coming to realize that Brexit is changing Europe. Britain has long been a semidetached part of Europe, but in that capacity it played a crucial role. It was partly a balancing power, partly a therapist for the Franco-German couple that constituted the core of European politics. In Germany and France, it is a common refrain that they each need Britain as a counterweight to the other.

The European integration story began in optimism, but now seems mired in misunderstanding and miscommunication. French and German people don’t speak each other’s language, and literally don’t understand one another. That’s not just a linguistic issue; it is one that appears in every political and economic discussion.

The root of the tension between Paris and Berlin is their different understanding of economics and politics. They each think about the state in contrasting ways. The clash remained beneath the surface as long as there was economic growth, but during the European debt crisis, it erupted into the open.


The essence of each national position is easy to describe. The French vision likes to draw on the Anglo-American Keynesian tradition, in which state activity is the great stabilizer. In the French account, the state is good because it provides central planning and management, and large-scale public expenditure is a useful way of getting out of cyclical crises. France’s industrial policy also protects its national champions.

By contrast, Germany is skeptical about public-sector interventions; instead, its policy aims to support a broad group of middling-size enterprises rather than pick a handful of winners. German politicians typically worry more about creating moral hazards by featherbedding businesses.


In the mind-set of today’s European Union elite, who still adhere to an idea of European integration laid down by Jean Monnet, crises merely require the central bureaucracy to tweak the existing technocratic plan. Beyond Brussels and Strasbourg, though, people have come to view a crisis with a constant sense of hopelessness and the impossibility of effective reform.

Post-Brexit, the European Union has to look as if it can work. It needs a vision, but just as important, it needs to show results. Without that, people in its member states will lose confidence in the idea of the union and in the idea of themselves as its citizens.”

Next, the Economist review:

THE euro crisis that first blew up in late 2009 has revealed deep flaws in the single currency’s design. Yet in part because it began with the bail-out of Greece, many politicians, especially German ones, think the main culprits were not these design flaws but fiscal profligacy and excessive public debt. That meant the only cure was fiscal austerity. In fact, that has often needlessly prolonged the pain. 

eurozone-1They [the book’s authors] blame euro-zone governments for failing to sort out troubled banks more quickly, for not realising that current-account deficits matter when public debts are in effect denominated in a foreign currency, for not making the ECB into a lender of last resort and for not pushing through structural reforms in good times.

The authors find the roots of these failings not in stupidity but in clashing economic ideas. Simplifying a bit, they focus on Germany and France. The Germans like rules and discipline, and fret about excessive debt and the moral hazard created by bail-outs. The French prefer flexibility and discretion, and worry about large current-account surpluses and the lack of a mutualised debt instrument. The Germans favour budget austerity even in hard times; the French favour fiscal stimulus on Keynesian lines. German policymakers are often lawyers, French ones more frequently economists.

Throughout the crisis the French tended to see bank or national-debt woes as cases of illiquidity whereas the Germans usually viewed them as signs of insolvency. Similar divides have emerged in rows over Eurobonds (backed by France, opposed by Germany) and over accountability and democratic control at supranational level (backed by federal Germany but not by centralised France).

Their analysis might equally lead to pessimism. The euro crisis is far from over, with Greece needing more debt relief, Italy mired in banking problems and chronic slow growth and high unemployment almost everywhere.

The trouble is that, as the book shows, France and Germany still have huge differences over the direction of travel. The French want debt mutualisation and fg_footballmore fiscal flexibility first, and are only then ready to talk about more discipline and deeper integration. The Germans are the reverse, pushing for discipline and integration before being ready even to think about debt mutualisation. After next year’s elections in both countries, such deep differences are likely to cause continuing problems for the single currency.

We note that the New York Times reports broadly favourably on the EU and the Economist is rabidly hostile to Brexit. Nevertheless both newspapers are reporting significant weaknesses in the structure of the EU, although they do not explicitly draw the conclusion that we do, which is that the EU is fragile and unlikely to survive for much longer.

We are concerned that so few EU supporters and Brexit antagonists take into account the clear risks that Britain would take were it to remain in the EU. Factoring in these ignored risks would surely change a few minds.


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