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posted on 30 November 2017

Negotiating The EU's Future On Even Ground

from STRATFOR

-- this post authored by Adriano Bosoni

From its very inception, the European Union has depended on the alliance between France and Germany. The bloc's predecessor, the European Economic Community, formed with the principal goal of binding the two countries together so closely that another war on the Continent would be impossible. And from the 1950s on, a tacit agreement underlay their partnership: France was the main political and military power in the bloc, and Germany was the main financial supporter (paying for, among other things, onerous subsidies for French farmers). After German reunification in 1990, France even pushed for the creation of the euro as another way to strengthen Paris’ links with Berlin.

Over the past decade, however, that relationship has shifted. Germany emerged in the wake of the 2008-09 financial crisis as the European Union's most important political and economic power, while France struggled with a weakening economy and a string of ineffective, unpopular leaders. Berlin didn't want to be seen as Europe's hegemon, in light of its history, and made sure to keep Paris involved in decisions over how to deal with the problems in the eurozone. Even so, Germany pressured its peers in Southern Europe into introducing painful economic and institutional reforms that may not have happened had France been in charge.

Ten years after the crisis began, France has come to terms with Germany's higher profile in European affairs. But accepting a position as Europe's co-leader is not the same thing as accepting the role of second in command. As the leaders of the European Union begin hashing out the bloc's future in the coming year, Paris will push to negotiate with Berlin on more equal terms. The question is whether the Franco-German alliance that managed to keep the bloc together in the past will be enough to preserve its unity in the future.

Unequal Footing

France traditionally has been worried about an ascending Germany. In the 19th and 20th centuries, its concerns stemmed mainly from the military implications of Germany's rise. In the 21st century, by contrast, they are mostly related to economic and political issues. Since the creation of the eurozone, France's trade balance has turned from surplus to deficit, while Germany's trade surplus has broken one record after another. France's gross domestic product grew by an average 0.8 percent each year from 2007-2016, fully half a percent lower than Germany's average annual growth rate for that period. Unemployment in France, meanwhile, is twice as high as it is in Germany, and French voters are more dissatisfied with the political and economic status quo and less content with the European Union than their German neighbors are. (Their discontent explains why Euroskeptic and anti-globalization parties on the left and right alike performed so well in the French presidential election.)

France's economic trouble is due in part to the country's difficulty introducing reforms to become more competitive, but the problem also has a European dimension to it. To enact the policies in the bloc that Paris believes will help its economy, France needs Germany's support. But unlike France, which tends to favor public spending to stimulate growth through consumption, Germany prefers fiscal discipline, low inflation and modest labor costs.

An Opportunity Arises

Now, for the first time in a decade, Paris may be in the position to pursue a more balanced relationship with Berlin. France's economy is growing again, and French President Emmanuel Macron, whose party has a solid majority in the National Assembly, has demonstrated his willingness to introduce the measures necessary to make that growth more sustainable. His vision for reforming the European Union has won the support not only of the French electorate but also of Southern European countries. On top of Macron's plans to increase public spending by introducing a separate budget for the eurozone with a finance minister to manage it, Italy and Spain added their own proposals, including common unemployment insurance and deposit insurance systems across the bloc. As the United Kingdom, a country whose views on the economy are close to those of Northern European states, prepares to leave the European Union, these southern countries will have a chance to increase their influence in the bloc.

Germany's current political upheaval could also be an opportunity for France. If talks to form a coalition government fail and Germany holds an early election, the process of eurozone reform would be delayed by several months since the bloc can't make any big decisions without Berlin. At the same time, though, Germany's focus on domestic issues has created a temporary power vacuum in Europe that France is trying to fill. Macron has been on a diplomatic offensive in recent months pitching his ideas for the European Union's future to leaders across the Continent. With Germany temporarily out of the picture, Paris will be able to intensify this strategy.

Compared with its recent predecessors, the current French government is more willing and ready to push its proposals for the European Union. Paris can argue that, unless the bloc implements significant reforms in the next few years, anti-EU forces could win the French presidency in 2022 and threaten the bloc's continuity. From Germany's perspective, moreover, a more balanced relationship between Berlin and Paris would placate Southern Europe after a decade of austerity policies.

Enduring Challenges

Nevertheless, France faces several obstacles to its agenda. To begin with, Paris' allies in Southern Europe are in no position to reshape the European Union. Italy will hold a general election in early 2018, and the vote could bring to power parties more willing to clash than to negotiate with the bloc. Though Spain has one of the fastest-growing economies on the Continent, the minority government in Madrid is too focused on preserving the country's territorial integrity to have a strong voice at the EU level. Portugal is too small to influence the bloc's affairs, despite its decent economic growth rate, while Greece is still under a bailout program.

What's more, Germany's temporary absence from the Continental debate won't change the strategic priorities of countries in Northern Europe. Member states such as the Netherlands, Austria and Finland are wary of measures that would distribute financial risk across the eurozone and transfer resources from Northern to Southern Europe. Like Berlin, the governments of these countries believe risk-sharing measures can be introduced only if the Continent has also devised more efficient methods for monitoring its member states' fiscal policies. Many Northern European leaders believe the bloc's fiscal rules are too often bent and that the institutions tasked with enforcing them are too politicized. (With that in mind, Germany's former finance minister, Wolfgang Schaeuble, recently proposed turning Europe's permanent bailout fund into a European Monetary Fund so that technocrats - and not politicians in the European Commission - would oversee members' fiscal policies.) Southern European countries, on the other hand, believe the bloc's fiscal requirements are arbitrary and unnecessarily rigid and see public spending as a tool to stimulate growth and keep social unrest under control.

Because of these challenges, France will not get everything it wants. Many of its proposals will be watered down or adapted to appease Germany and its northern allies, while others still will be postponed. Regardless, the debate next year to reform Europe could be the closest a discussion of the bloc's future has gotten to a negotiation between equals since the start of the financial crisis. Germany and France are already on the same page on some issues, such as proposals to close tax loopholes for internet companies, plans to harmonize the tax systems among member states and measures to increase vetting for non-EU investors purchasing companies in the bloc. Considering their diverging strategic interests, however, it's unclear how long Berlin and Paris can keep up their alignment.

Unity or Fragmentation?

Beyond their differing views and economic disparity, the growing diversity among the European Union's members is working against the Franco-German alliance, too. The bloc has become much more complex and interconnected but also much more heterogeneous over the past decade and a half. In turn, the challenges to Continental unity have multiplied. The return of economic growth in the eurozone doesn't mean the disappearance of risk from the currency area. Italian banks still have large numbers of nonperforming loans in their balance sheets, and Greece will need help to alleviate its debt burden. As a result, future initiatives to deepen integration in the eurozone could exclude some of its members, focusing instead on a select group of countries.

Outside the eurozone, meanwhile, EU members in Central and Eastern Europe face a dilemma. They must decide whether to deepen their ties to Western Europe at a cost to their national sovereignty or to resist its attempts at centralization and risk isolation. France already has suggested that it would be willing to lead a coterie of countries toward greater integration while other members stay behind. But Germany wants to keep the European Union as united as possible, even if this comes with compromises and half-measures. As an export-driven economy, Germany can't afford to endorse measures that could eventually cause the EU single market to fall apart.

Without question, the partnership between Germany and France remains the most important strategic alliance in Europe today. It is also a synthesis of the political and economic disagreements that divide the bloc's northern and southern members. There was a time when an understanding between Paris and Berlin would be enough to get things done in the European Union. In the coming years, though, they will deal with issues that go beyond their shared interests and their perennial divides. Franco-German cooperation will continue to be crucial for the future of Europe. Whether it will be enough to keep the Continent united may be another story.

"Negotiating the EU's Future on Even Ground" is republished with permission of Stratfor.

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