France makes its opening euro bid

Posted on June 14, 2012

Sooner than one might have expected, François Hollande’s election has shifted the tactical balance in eurozone politics away from Berlin. The new French president has rallied Italy and Spain behind his proposals for a “stability pact” – which challenges certain German preferences – ahead of the European Council summit in two weeks’ time. At the same time, Berlin is strengthening its rhetorical defence against calls to take on more of the eurozone’s collective economic burden.

Chancellor Angela Merkel has again made clear that her country, for all its economic strengths, cannot carry the whole eurozone on its shoulders. The vast majority in Germany argue Berlin has already staked a huge amount on its euro partners. This is true, even though two rescues were designed to bail out German investors in Spanish and Irish banks at the expense of those nations’ taxpayers.

    Ms Merkel has again signalled that Germany is willing to go very far in pooling national liabilities – including common eurozone bonds – on the condition of a concomitant pooling of sovereignty, a “political union”. Germans say that this, however, is not something others are willing to do.

    Mr Hollande’s proposal – sensible steps towards a banking union – may be aimed at calling the German bluff. He wants to give the European Central Bank the power to wind up the eurozone’s most important banks. This would be a serious ceding of sovereignty, as it would weaken the power of governments to lean on their banking systems to favour particular sectors or buy sovereign debt. Mr Hollande also wants the new eurozone rescue fund – the European Stability Mechanism – to provide equity directly to banks, so that the risk of bank recapitalisation would be shared across the monetary union.

    Mr Hollande’s stability pact falls far short of the sort of sovereignty-sharing Berlin says its wants. But then, Berlin may want too much. It is reasonable to make eurozone bonds wait for common control of deficits. There is no need to impose from the outside the exact composition of public spending or the choice between a high-tax, high-spending model and its opposite.

    While the rhetorical skirmish plays out between Paris and Berlin, Britain, a non-eurozone member, is breaking new ground in an effort to reignite growth. The Bank of England’s adoption of new monetary tools to ease credit is a welcome step. It underlines how all countries in or out of the euro must shed the constraints of conventional thinking.

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