Merkel-Sarkozy Love Fest Blooms over EU Biz Pact
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The Fiscal Times
February 23, 2011

They have bickered practically from the start of the euro zone financial crisis last year, and nobody would ever mistake them for friends.  Yet French President Nicolas Sarkozy and German Chancellor Angela Merkel have surprisingly forged a united front in a bid to radically alter the way Europe does business.

Merkel and Sarkozy  early this month unveiled a plan for more coordinated economic policy across the euro zone to secure the currency by imposing uniform corporate tax rates across the union, upping  the retirement age to 67 to control pension costs, and centralizing authority over wage negotiations in an effort to keep labor costs down and to prevent large salary disparities from country to country. The German-French “competitiveness pact” also calls for debt limits for each EU member state.

Last week, at a meeting of European finance ministers in Brussels, Merkel and Sarkozy pressed the European Union to agree to parts of the plan.

Until recently, Germany has resisted such drastic changes to EU fiscal policy, largely by stalling on each rescue effort. But as debt crises loom in Ireland and elsewhere, and as it has become increasingly clear that Germany will have to shoulder much of any bailout, Berlin has embraced Paris’ long-held belief that universal monetary policies are necessary.

“Merkel has a difficult time being on the cutting edge of these economic governance issues because German public opinion is against the bailouts. There are big electoral stakes in this,” said Mitchell Orenstein, a professor of European studies at the Johns Hopkins School of Advanced International Studies. “Unfortunately for her, she has to go ahead with this economic governance idea or there’s serious economic risk.”

For the past year, the flamboyant Sarkozy has tried hard to appear close to the dour Merkel, with little success. At joint press conferences, he would often lock arms with Merkel, espousing at length the need for immediate cooperation to alleviate the strain of the financial crisis. On these occasions, Merkel would smile uncomfortably and subtly attempt to free herself from Sarkozy’s grip.  When it was her turn to talk, the chancellor offered support for European unity but little else – determined to do nothing to hurt her country’s vibrant economy.

Merkel has mocked Sarkozy privately, while Sarkozy has complained that Merkel is indecisive. Not a recipe for success. Critics complained that this palpable tension virtually paralyzed useful discussions among leaders of the euro zone. But Merkel and Sarkozy were able to set aside their many differences and agree on a policy and strategy to pursue.

Until recently, Merkel’s nick name was “Frau Nein,” because of her propensity to say ‘no’ to many of the rescue proposals floated by other European leaders and financial ministers. For sure, her willingness to join forces with Sarkozy is due in part to the fact that their pact has a very German flavor. For example, the proposed retirement age for all countries in the euro zone is 67 – the same as it is in Germany. Merkel also favored breaking any links between wages and inflation, and bringing corporate tax systems closer together.

But Merkel’s change of heart also had to do with the growing impatience of many Germans who viewed her as an impediment to European recovery from its mushrooming debt crisis.

Germany’s About-Face on Unified Policy
When the euro zone crisis began in January 2010, Germany refused to take immediate action, believing – rightly so, as it turned out--that the financial burden for the Greek debt crisis would fall on its shoulders. Throughout the crisis, Merkel insisted that Greece be held accountable for the irresponsible financial  actions that led to the crisis in the first place – out-of-control government spending, bloated social services, generous pension benefits and misleading budget forecasts.

An editor-at-large for The Fiscal Times, David Francis has reported from all over the world on issues that range from defense to border security to transatlantic relations.