Hollande’s Plan

Hollande Appeals to Merkel to Counter Crisis, Build Europe – Bloomberg.

Hollande uses the metaphor of an elderly couple for the Franco-German relationship:

Hollande compared Germany and France, geographical neighbours and Europe’s two biggest economies, to an elderly couple who depend upon each other with a friendship that “sometimes loses its way” yet is mutually “essential.”

I have an alternate metaphor. Germany and France are like a young couple that spends all of its time either making love or fighting. After awhile, they grow old and lose this passion, but they cannot break up. Everyone else knows how crazy they are, so they’re stuck with each other.

Because of the atrocities of World War II, people blame Germany for always going to war against poor France. All the French want to do is paint pretty pictures, sip coffee and smoke cigarettes in a cafe, but those belligerent Germans won’t leave them alone.

The actual interplay between France and Germany is much more complicated. Going back to the 17th Century, France opposed German unification. This is a strategic consideration. France’s northeastern frontier does not possess many natural defensive barriers, so it is best to have hundreds of principalities here rather than one unified state.

Germany eventually began coalescing around its largest states of Prussia, Wurtemburg-Baden and Bavaria. Napoleon III tried to prevent the unification of Germany by declaring war on Prussia in 1870. The rest of the independent German states quickly came to Prussia’s aid, and they resoundingly defeated France.

As part of the peace treaty ending the war, France surrendered Alsace and Lorraine. Not only did the loss of French territory create resentment, but the loss of territory also made the defense of France’s eastern frontier more difficult. And now France would not be facing a collection of principalities in a war, but the German Empire.

I think that Bismarck, the brilliant German premier, realized that good relations with France would be best for the new country. Over the years, he created good will in France and actually encouraged French colonial expansion. He figured if France was busy trying to conquer swathes of Africa it would keep them from focusing too much on European affairs. It would also place France in a position of rivalry with its traditional enemy Britain.

This status quo remained in place until World War I. Kaiser Wilhelm II dismissed Bismarck and began competing with France and Britain for colonial territories. Then, he decided to challenge the supremacy of the Royal Navy by building his own.

The Kaiser was such a dolt he managed to get Britain and France into an alliance. The balance of power and European alliances are fluid, but a Anglo-French alliance had never happened. The two countries seceded from each other in the middle ages and had been at each other’s throats ever since.

Since Kaiser Wilhelm alienated all of the other powers, his only choice was to seek alliances with the sick men of Europe, the Hapsburgs and the Ottomans.

The result of all of these machinations was World War I. War is hell, but the Germans took it to a level that shocked the world. The atrocities that Germany committed in the early days of the war isolated it and made it virtually certain that the United States would assist the allied powers.

At the time, the United States had a huge population of recent German and Irish immigrants and Britain was viewed both as the mother country and an historical enemy. New York City still even celebrated, Evacuation Day, when British forces retreated from the city after the end of the Revolutionary War. In retrospect, it is absolutely amazing that the Kaiser was able to unite the United States and United Kingdom in an alliance, one which has grown stronger to this day.

All of these blunders directly led to Germany’s defeat. Now it was France’s turn to be vindictive. The terms of the Treaty of Versailles caused World War II.  Even Field Marshall Foch, the commander of Allied forces at the time of the German surrender, believed that terms were too harsh. He said, “This is not a peace. It is an armistice for twenty years.”

Twenty years and sixty five days later on September 1, 1939, Germany’s invasion of Poland  and World War II commenced. In the wake of the war, both the French and Germans were much more concerned with the Soviets than each other. They were also old and much too tired to fight anymore. They began forging their special relationship.

The relationship has an interesting dynamic. Germany is more economically robust than France. France is much more prominent in world affairs, because of Germany’s  unique history.

It is no surprise that Hollande wishes to forge a closer European Union. France is secretly the sick man of Europe. By some measures, Italy is in a much better economic position than France:

https://dareconomics.wordpress.com/2012/08/28/france-is-in-more-trouble-than-italy/

Hollande is aware of France’s declining strength and is proposing a plan to get France out of trouble:

Europe is on the verge of a “new frontier” that can only be crossed by moving together to develop closer ties, including fiscal, banking, social and political union, Hollande told an audience including Chancellor Angela Merkel in a speech marking 50 years of Franco-German reconciliation following World War II.

Examining each point, the plan reveals itself. Closer fiscal ties mean eurobonds. France is getting into budgetary trouble, and socialist Hollande is reluctant to roll back the French welfare state. The solution is German money via eurobonds. This ploy will allow France to finance its gaping budget deficits at lower rates.

Closer banking ties means a banking union. Any banking union comes with a depository guarantee scheme, just like the American FDIC. French banks are in amazingly poor condition. The bailouts of Greece, Ireland and Portugal were actually backdoor bailouts of the French banks, and they are still in trouble. Once again, the solution is deploying German money via a banking union.

A closer social union will also serve French interests. If your trading partners are busy raising retirement ages and cutting social spending, your economy will become less competitive if you do not match the cuts. The solution to this problem is creating a consensus so that every country has a similar social welfare state and similar costs. Here, the word “similar” means more like the French system.

In exchange for all this, France will continue to use its political clout to advance German interests on the world stage through a political union. I think it goes without saying that the new United State of Europe will be led by a Frenchman. Countries such as the Netherlands and those in Central and Eastern Europe could not be led by a German due to the resentment created by Germany’s unique history.

Hollande points out the roadblocks to the closer union,

We must act together or we risk being swept away in each of our nations, by skepticism, selfishness and populism.

By skepticism, he is referring to opposition to the euro. It is clear to everyone that the currency union has failed. The large internal imbalances in trade and capital flows show that the euro is now actually pulling the countries apart rather than pushing them together. The euro is a step on the way to a United States of Europe, so it must be saved at all costs, including the social and economic costs of the depressions and recessions currently ongoing around in the south.

Populism refers to democracy. Just like in war, and this may be an economic war, the common people suffer for the ambitions of the elite. The people of Spain, Greece, Portugal and Ireland are tolerating great depredations so that the cult of the euro can continue in its ambitions to forge a United States of Europe.

When he orates about selfishness, he is discussing the Germans and the Northern countries not wishing to give their hard-earned money away. There is populism here, too, because the electorate of these countries is getting weary of these constant bailouts.

Hollande’s plan is to create a United States of Europe, which will help prop up France. His speech reveals contempt for the democratic processes holding himself and the rest of the cult of the euro back from these plans. Keep in mind that his own people rejected a closer European Union by referendum in 2005.

It will be interesting to see how the situation develops over the coming years. My own opinion is that lashing together a bunch of uncompetitive economies will not make the whole more competitive than the sum of the parts. I think that economic, fiscal and social reforms must precede a political union, but we will to have to wait to see this drama unfold in the coming years.

dareconomics.wordpress.com

 

 

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8 thoughts on “Hollande’s Plan

  1. I really hope you can do math and check your facts and the data you look upon (as happened with your several articles about Spain). Because I think you pourposely mislead information.

    France problems of financing? They are putting their deficit under control (unlike your USA that you never seem to complain about much nor throw apocalyptic forecasts about it) and their yields are at records low from the last 5 years.
    http://www.bloomberg.com/news/2012-09-23/france-will-target-3-deficit-in-2013-budget-moscovici-says.html

    Or is Bloomberg and the French goverment lying too? Just like everyone who doesn’t agree with you?

    0/10, this is all I can do for you.

  2. About the rest of your article, as I said while quoting you on Bloomberg, I think you just want some attention, or perhaps you are following this “Tea Party” culture where Europe is and must fail at all cost. At any case, no further comments are needed.

    It’s funny you wrote once an article about “hope” because of the USA healthy demographics, while you ignore that France is shining about it to. You shouldn’t have ignored this for the shake of fariness regarding your predictions of France “fading away”.

    But then again, why would you care about objetivity? Now I understand what there is really behind your bitterness against “mainstream” medias.

  3. Your writings are superb, your logic is solid, and you are certainly well-informed and prolific. Keep up the great work. I could not agree with you more concerning France. France is like the crippled, wounded infantryman advancing behind the German tank, hoping to keep his head down for as long as possible.

    I have a theory concerning OMT, if it ever really gets off the ground without either the German Constitutional Court or the Bundesbank torpedoing it. My theory is that the market will develop a preference for the bonds of EMU countries with an ECB backstop in place, to the detriment of weaker countries without the program. Once Spain is forced in, the attention will most certainly turn to Italy. Once Italy is in, the I truly believe that French infantryman will suddenly find himself utterly devoid of any further cover or concealment.

      • Yes, “blankfiend” was a stroke of genius. You certainly know its origins….

        Did you see this article on Reuters?

        http://www.reuters.com/article/2012/09/23/us-eurozone-bailout-fund-idUSBRE88M0BH20120923

        The title is “Euro zone to boost bailout fund firepower to 2 trillion euros: report” and it is based on a front page article from Der Spiegel entitled “Euro-Länder wollen Rettungsschirm auf zwei Billionen hebeln.” Translated, from the German, we would have “European States Want to Leverage the Rescue Parachute to Two Trillion”

        A lot of difference between “to (will)” and “want to,” or in German between “werden” and “wollen.”

        This goes directly to your theme about the mainstream media and hype journalism.

  4. I just read the article. The leverage will come from private investors. Let’s see how many line up to buy ESM debt when its assets will be the sovereign debt of the distressed nations.

    If liability increases, the Bundestag will have to approve the increase according to the German Constitutional Court decision from September 12, 2012. This may prove to be tricky given the current political climate.

    Do you ever think that they float these stories on Sunday to create a market bounce on Monday?

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