Merkozy goes bust

On Sunday, the entity known as Merkozy committed suicide at the Place de la Concorde, in Paris. It had been reported that he/she had been in poor health for several weeks.

Gone are the days when the indivisibly “merged” authority of the French and German government leaders ushered in the new Europe of “golden rules” and automatic budgetary sanctions, when Angela was expected to voice her support for her "dear Nicolas" at political meetings. Now the fate of the entity, which has fallen victim to its own internal contradictions, is inevitable.

In demanding a more active role for the ECB in the struggle against deflation, Sarkozy to all intents and purposes declared his intention to do battle with Germany to sustain his position in national politics.

The independence of the ECB is an indispensable condition for the presence of Europe’s leading economy in the euro zone. It is the one issue on which no compromise is possible, so announcing that the status of the financial institution ought to be changed was tantamount to firing a silver bullet to kill off Merkozy.

The French President was well aware of what he was doing. In the autumn of last year, he had already attempted to raise the question of making the ECB a European lender of last resort — a suggestion which received such an icy reception from the German government that he had no option other than to back down.

The rift between the couple

For Germany, the lessons of history are incompatible with candidate Sarkozy’s proposals for the way forward in Europe.

The view on the other side of the Rhine is that the euro zone will only be viable if it embraces the principles of Ordoliberalism which paved the way for West Germany’s success in the 1950s and 1960s: a low-profile state, a conservative wages policy, rigourous budgetary discipline and a strictly independent central bank with a mandate that is limited to monetary policy and the fight against inflation.

Nicolas Sarkozy endorsed this Weltanschauung ("world view") when he accepted the fiscal compact proposed by Berlin.

The agreement was a second attempt to establish German-style competitiveness in the economic and monetary union, and it implied that certain countries would no longer use domestic demand subsidised by the state to shore up economic growth.

Furthermore, it was the price that had to be paid to save the euro. As it stands, it is no longer possible to adopt a position which demands that the role of the ECB be changed, and, at the same time, purports to safeguard the single currency. Germany will never agree to compromise the strict independence of this institution, which was one of the non-negotiable conditions for the creation of the single currency.

Berlin would prefer to exit the euro, and there are two reasons for this stance: one is the trauma of hyperinflation in the 1920s, and the second is a desire to avoid being a cash cow that will continually have to foot the bill for less competitive countries.

As a result, the rift between the couple which seemed so united in Deauville has continued to widen. On Monday, Angela Merkel was clearly intent on keeping her distance from the man who used to be "dear Nicolas", while a government spokesman dryly reiterated her government’s policy: "Germany’s position on the ECB and its independence is well known. And Paris is well aware of this position which is a longstanding one."

Key motive for the Merkozy suicide

In other words: we are not about to change and we have the merit of being coherent. It is difficult to see how Merkel’s response could have been different. Every week the Bundesbank (a.k.a the Buba), whose prestige on the other side of the Rhine is hard to imagine in France, criticises her budgetary and European policies.

A decision to overlook Nicolas Sarkozy’s speech would have been tantamount to ignoring this fact: and from the point of view of domestic politics it would have been a very dangerous move, because not only is Ms. Merkel’s party very sensitive to criticism from the Buba, but there is absolutely no doubt about the impossibility of acceptance for any initiative that would undermine the independence of monetary policy.

Here we are touching on the key motive for the Merkozy suicide: like her former friend, Angela Merkel wants to hang on to her post in elections slated for September 2013. Her chances of continuing as Chancellor depend on two factors: she must ensure that her mandate is not contested by her own camp, and, at the same time, she must be careful to avoid a clash with the social democrats who will feature in another "grand coalition," which she intends to lead.

With this in mind, a victory for Nicolas Sarkozy is no longer the imperative that it was two months ago. On the contrary, in distancing herself from the UMP candidate’s sabre-rattling, she has demonstrated her good will to the SPD (social democrats) and shown an unswerving adherence to Ordoliberalism that will be welcomed by her own camp.

So Merkozy has now been consigned to history. The only remaining hope for the special entity would be an election victory for Nicolas Sarkozy, in which case, the promises made over the last two months of the presidential race could, of course, be quickly forgotten.

Fiscal compact

Berlin ready for gesture on growth

In the wake of François Hollande’s assertion that he will renegotiate the fiscal compact if he becomes the next French President, “Germany has not ruled out the inclusion of a clause on growth” in the treaty, notesLa Croix. The French financial daily explains that although Germany “is hostile to a renegotiation on budgetary discipline”, it is not immovable in its opposition to the “addition of a clause which stipulates targets for growth”.

For such a clause to be included, proponents of the change will have to propose a new draft of the treaty, which was originally signed on 2 March, at the next summit of government leaders to be held on the 28th and 29th of June. La Croix warns that if the new text “gains the support of a consensus”, this will pose significant difficulties “for countries that have already ratified the fiscal compact”. As it stands, only Portugal has ratified the treaty, but further negotiations will also delay its coming into force.