03 June 2013

Reuters: Franco-German EU deal puts onus on Hollande to reform

The Franco-German deal to strengthen the eurozone has ended months of bickering between Paris and Berlin and raised the onus on French President François Hollande to embark on potentially explosive social and economic reforms.

German Chancellor Angela Merkel, Europe's most powerful politician, made a string of symbolic concessions to France in joint proposals for closer economic policy coordination outlined last week, in return for a clear commitment to reform. She did so because bolstering the stagnant French economy has become a top German priority.

Departing from past positions, Merkel accepted a full-time president of the Eurogroup of euro area finance ministers, more frequent summits of eurozone leaders, greater coordination of social and tax policy, a slowdown in the pace of deficit reduction and a commitment to reciprocity in EU external trade.

Furthermore, she cleared the way for the next stage of a European banking union by accepting a "resolution board" that will be empowered to take decisions on restructuring or winding up failed banks, financed by contributions from the banking sector and backstopped by the eurozone's rescue fund.

Merkel made a lot of concessions to France, but by doing so she has given Hollande the face-saving political cover he needs to move ahead with reforms that are extremely sensitive, especially for the left. The French president promised to use the extra two-year leeway for reducing France's budget deficit granted by EU authorities to reform the pension system, welfare benefits and tax breaks in negotiation with unions and employers. Whether a Franco-German deal on Europe will make it easier for Hollande to overcome resistance to entitlement reforms from organised labour, the left and the street remains to be seen.

As the Germans see it, Hollande understands what reforms are necessary but has to convince a domestic audience that is under the false impression that enough has already been done.

Merkel's Paris concessions reflect a strong desire to avoid being seen as the sole driver of unpopular austerity policies. In the same vein, Germany has launched bilateral initiatives with Portugal, Spain and Italy to help overcome high youth unemployment.

The European Commission, relieved to see the main motor of European integration spring back into life after stalling during Hollande's first year in office, welcomed the Franco-German paper as giving momentum to its own blueprint for pulling Europe out of crisis.

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Franco-German paper © Bundesregierung

© Reuters