Monday, January 21, 2013

Franco-German motor sputters in crucial euro year

By Noah Barkin and Mark John

BERLIN/PARIS (Reuters) - Germany and France will put on a show of total unity this week to mark the 50th anniversary of the Elysee Treaty that cemented their post-war reconciliation.

France's President Francois Hollande holds a news conference during a European Union leaders summit, in Brussels December 14, 2012. REUTERS/Eric Vidal

But beneath the public display of friendship, the Franco-German motor that has long driven Europe is sputtering and unlikely to offer new policy breakthroughs this year to help speed the euro zone fully out of its crisis.

French President Francois Hollande will travel to Berlin for a joint cabinet meeting and session of parliament due on Tuesday. He will also join German Chancellor Angela Merkel in giving speeches in the Reichstag building where Adolf Hitler once presided.

Hollande has been overwhelmed by domestic problems since taking over from conservative Nicolas Sarkozy eight months ago, and finds himself hemmed in by a growing euro-wariness within his Socialist Party and among the wider French public.

Officials in Berlin are watching his early attempts to overhaul the struggling French economy, worrying that if there is not more progress soon, the euro's crisis could flare up again, enveloping France, and Germany with it.

While Hollande's poll ratings are at rock-bottom, Merkel is at the peak of her popularity. But with a federal election due in September, she is turning inward and thinking less about the leap forward in European integration that she talked about so much last year.

Paris is looking to see whether Merkel will be pushed from power or forced into a coalition with Social Democrats that would drag her closer to the French vision of a risk-sharing Europe that favours economic growth over austerity.

"When it comes to policy they are a long way apart and that makes the relationship tough," said an EU official who works closely with both leaders when they are in Brussels for summits.

LIMBO YEAR?

The 1963 signing of the Elysee Treaty by France's President Charles de Gaulle and German Chancellor Konrad Adenauer aimed to foster deep ties between the nations less than two decades after the Nazi occupation of France.

Over the years the treaty has spawned separate agreements in education, culture and defence that have sent millions of young French and Germans on language-learning exchange trips, created a joint TV channel and Europe's first cross-border army brigade.

While it is arguable whether it has led to a genuine cultural affinity - fewer French and Germans speak each others' language than in 1963 - the broad goal of post-war reconciliation of their peoples has been achieved.

The fact that 150 million French and Germans between them represent the southern and northern, Catholic and Protestant axes of Europe while generating over a third of EU output has given the partnership unparalleled political and economic clout.

But at each chapter in the history of the European Union, the entente is painfully stretched until a compromise is found - and the euro zone's debt crisis has stretched it more than most.

The much-hyped "Merkozy" rapport between the two conservative leaders gave way to a more prickly debut to the Hollande-Merkel relationship, with the French Socialist initially keen to emphasise policy differences with Berlin.

Officials insist the relationship, while not warm, has since made it on to a better footing. A diplomatic source in Hollande's office said they both favoured a workman-like style over the policy pyrotechnics of Sarkozy.

"After the change in government in France, both sides needed time to get to know each other - that is normal," said Michael Link, the German foreign ministry official who handles relations with Paris.

Link and others noted that Paris and Berlin finally managed late last year to overcome a dispute on how to supervise the EU's planned new banking union. They cite this as proof that the relationship is working, but the two governments remain apart on future steps to coordinate economic policy more closely.

"The French side is reluctant to transfer sovereignty unless it is in exchange for steps that are in French interests: a European unemployment insurance scheme, a big euro zone budget, eurobonds," said Daniela Schwarzer at Berlin's German Institute for International and Security Affairs in Berlin.

"For this German government, these are taboo."

GERMANY "STRUGGLES" WITH LEADERSHIP

France's Europe Minister Bernard Cazeneuve argued to Reuters such divergences have been an "inseparable" part of the Franco-German partnership for decades that have always been surmounted.

But in wider French circles, German intransigence on the policies for promoting growth which Hollande calls "integration with solidarity" is beginning to grate.

With Hollande promising to balance French public finances by 2017 and embarking on policies such as labour reform during an economic downturn, calls for Germany to play its part by easing off on EU-wide austerity are frequent.

"France finds it hard to accept Germany's economic leadership and Germany finds it hard to define that leadership," said French industrialist Louis Gallois, who advised Hollande on steps to boost France's flagging economic competitiveness.

"The leader should take into account Europe's interests as well as its own ... I think Germany is still struggling to take into account Europe's interests," he told Reuters last month.

Yet others say the euro zone survived last year because Merkel came around to a view closer to France's: that Greece must not be abandoned and that the European Central Bank should be allowed to use its massive firepower to prevent future market assaults on weak euro zone states.

Thomas Klau of the European Council on Foreign Relations cited ECB chief Mario Draghi's promise last year to do whatever was needed to rescue a euro zone country in trouble. "The Draghi shift was embedded in an Hollande-Merkel consensus," he said.

To what extent that shift in Merkel's thinking last August was influenced by Hollande or by Greek promises to commit to a painful austerity course is debatable.

With little prospect of any major new Franco-German policy moves until after Germany's general election - and possibly not before French local elections in March 2014 - ambitions for the partnership have already been toned down.

A German finance ministry official noted discussions between the two capitals on next steps were "very slow-moving".

"There is a keenness in France and Germany not to be spectacular," said Cazeneuve. "The crisis means we will be concentrating on operational efficiency.

(Additional reporting by Andreas Rinke in Berlin; Emmanuel Jarry in Paris; Luke Baker in Brussels; editing by David Stamp)

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Monday, January 21, 2013

Franco-German motor sputters in crucial euro year

By Noah Barkin and Mark John