Merkel-Sarkozy Love Fest Blooms over EU Biz Pact
Business + Economy

Merkel-Sarkozy Love Fest Blooms over EU Biz Pact

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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.

“It's simply a fact that because at present the handling of deficit procedures isn't sufficiently regulated, Europe isn't in the position to solve such a problem on its own,” she said last March.

Meanwhile, Sarkozy called for swift action from Germany and the rest of the euro zone to shore up Greece’s finances. The French president also pushed for greater economic cooperation throughout the euro zone, including regulations that would take away some of the fiscal autonomy of member states. Merkel deflected all such proposals, which were deeply unpopular with the German electorate.

However, when Merkel’s failure to act ultimately caused the crisis to persist into the spring, German voters turned against her. Polls at the time showed that voters were unhappy with the prudent chancellor.  She announced a bailout package for Greece days ahead of an important May regional election in Germany in an effort to salvage the election for her ruling coalition.

Her efforts were too late, and voters in the industrial northwest of Germany handed the German parliament to Merkel’s opposition. Since then, Merkel has been faced with political setback after setback. Earlier this month, she was forced to cancel talks about unemployment benefits, as her opponents refused to agree to her planned cuts.  Last weekend, her party lost control of Hamburg for the first time in 50 years. And as concerns about other European debt crises have mounted, German voters appear to be looking for some assurance that situations like the one in Greece do not occur again.

“It’s one of these issues where you’re a loser when something bad is happening on your watch,” Orenstein of Johns Hopkins said.  “At the end of the day her government could be brought down by the crisis regardless of how she’s playing the politics.”

Much of the EU is unhappy with the plan. Italian Foreign Minister Franco Frattini, speaking in Prague this week, implied that France and Germany were bullying smaller member states. Spain has expressed concerns over unified corporate tax rates, while Belgium is opposed to the wage controls. Even the European Commission and the European Parliament have expressed concerns about some of the provisions in the pact.

Germany and France have signaled there is some room for negotiation, and German officials have signaled they are willing to make some compromises before a meeting of EU leaders, scheduled for next month. But Merkel knows that if any member falters, her position as Europe’s economic engine and the savior of the EU is a strong one. She’s betting the passage of the pact will lift her coalition in regional elections set to take place soon after the March summit.

Meanwhile, Sarkozy finally has gotten his wish. Next month, he’ll stand arm and arm with Merkel at the podium, praising their joint plan. Merkel might try to shy away from the Frenchman’s touch. But her acquiescence to the French concept of European fiscal policy has given the diminutive Sarkozy what he’s wanted all along: a seat at Europe’s big kid’s table.

Related Links
UPDATE: Discussing Extension To Greek Aid Program – Merkel (The Wall Street Journal)
Merkel, in Reversal, Urges Rescue of Euro (The New York Times)
Europe Revolts Against Merkel’s Euro-Zone Plan (Spiegel International)