May 8, 2012

France Challenges Germany: Who Will Win?

May 8, 2012 | From
It is 1861 in Europe, and time is running out.

The special relationship between Berlin and Paris is over. The alliance that has steered the Union from its beginning appears to be shattered. A power struggle over the Union’s steering wheel is about to ensue. People are going to get run over. The only question is how many will get hurt before a strong hand grabs control.

Up until this point in Europe, the German solution for Europe’s economic woes was for nations to live within their means. Europeans had borrowed money to live high—now they must live lower to pay it back. Nicolas Sarkozy seemed content to submit to Berlin’s lead on this matter, mostly because it appeared that it was mostly other nations that would have to do the low living.
But France’s economy is deteriorating fast, unemployment is rising, and a new president seems to have other ideas.
On Sunday, the French elected their first openly socialist president in 31 years. From the Bastille, the symbolic heart of the French Revolution,François Hollande addressed the nation. “Remember your whole life this great gathering … it must tell the whole of Europe that change is coming,” he said. “In the capitals, beyond government leaders, there are people who are hoping, looking to us, and want an end to austerity”(emphasis added throughout).

Hollande’s anti-German approach has not been hidden. “It’s not for Germany to decide for the rest of Europe,” he said in the lead-up to the election. “[T]he people of Europe expect that we, the people of France, will provide Europe with another perspective, another direction, another orientation.”
Those are fighting words—aimed directly at Europe’s financial leaders in Germany. As Brad Macdonald wrote last week, “this man isn’t merely campaigning for leadership of France, he’s making a play for leadership of Europe.”
That is a dangerous move when your economy is weak and the enemy’s is strong.
The discontent in Europe boils down to this. Many Europeans wonder why they should suffer a slow economic recovery, through the process of debt default, recession, saving and hard work, when they can simply print and spend more money. The big banks get bailouts. Why shouldn’t the people?
It’s not hard to see the appeal in such thinking. But the reasoning is deeply flawed. Two wrongs don’t make a right.
Germans know what happens when governments print money to pay their bills. This reality was seared into their national consciousness by wheelbarrows of worthless papiermarks—during the Weimar Republic.
Also, what is the motivation for Germany to agree to more money printing when the French cling to their notorious 35-hour capped work week, and Hollande pushes to fulfill his election promise of lowering the national retirement age to 60? It is hard to feel sorry for the French, or Spanish and Greeks for that matter.
So now, France and Germany appear to be on a collision course—which may be the worst of all worlds for Europe. Instead of one bad driver, Europe now has two—and they are pulling in different directions. Europe is locked on an economic course that is sure to lead to a tragic accident.
Time is running out for France and Europe.
“Francois Hollande has 10 weeks to avert a French bond crisis,” writes the Telegraph’s Ambrose Evans-Pritchard. May 16 will be the first test, as France must go to the bond market to borrow money.
Hollande has also promised to raise taxes to 75 percent on the rich. Evans-Pritchard notes that high-end property prices are soaring in Britain again—due to all the rich French, Italians and Greeks trying to shelter their assets from a tax-hungry government.
But ironically, Britain isn’t the only nation benefiting from Europe’s economic woes. Germany also benefits from Europe’s troubles, via concessions for bailouts and as a recipient of safe-haven-seeking investor money.
Still, the marginal benefits to Germany will evaporate if Europe completely breaks apart and burns. The European Central Bank has already printed and lent $1.3 trillion that have mostly gone to propping up governments like Spain, Italy and Greece. But now the money has been spent, andborrowing rates for these countries are rising again.
More money printing, as prescribed by Hollande, may delay the inevitable. But this is not a solution to the crisis. It is a temporary measure at best.
If Europe is to be saved, a much more comprehensive plan is needed—something on the order of a European 1861. The differing states must be subjected to a federalizing authority with the powers of debt issuance and taxation. A true United States of Europe, in the full sense of the word, will be needed.
A true monetary and political union will not be easy. But crises provide both cover and opportunity.
With Germany and France stuck in gridlock, there will be no shortage of crisis.
Even now, Europe is practically begging Germany to open its pocketbooks, turn on the printing presses and save it. Hollande might be surprised. He might get even more than he is asking for.
Germany might surprise the pundits and ride to Europe’s rescue. And you can be equally sure that in exchange, its grip on the bureaucratic machinations of Europe will only be tightened.
Europe is waiting for its Abraham Lincoln. A leader who can stand up, unite the states, and sooth the divisions. It is 1861 in Europe. And time is running out.

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