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Germany is propping up anti-EU forces by throwing its weight around

Francois Fillon delivers a speech to the media after his victory against Mayor of Bordeaux Alain Juppe in the second round of votes for the Primary Election of the right wing Les Republicains on November 27, 2016 in Paris, France.
Vincent Isore | IP3 | Getty Images
Francois Fillon delivers a speech to the media after his victory against Mayor of Bordeaux Alain Juppe in the second round of votes for the Primary Election of the right wing Les Republicains on November 27, 2016 in Paris, France.

François Fillon, the front-runner in next May's French presidential elections, has a plan to secure the euro, and to make the euro area the hard core of a united "Europe of nations."

Mr. Fillon is making a bold attempt to reassert the French leadership in European affairs, and to stop the advance of the hard-right Front National, whose anti-European Union (EU) leader, Marine Le Pen, is widely seen as a force to reckon with in the second round of a contest on May 7, 2017.

This sounds like a great piece of statecraft, but why is it that Mr. Fillon's proposed euro area reforms are "dead on arrival in Berlin?" There are two key issues.

First, Mr. Fillon wants to establish an economic (and political) government of the euro area as a counterweight to the German-built European Central Bank (ECB), which is solely responsible for price stability and for the regulatory and supervisory functions in the monetary union. The new body, proposed by Mr. Fillon, would consist of the heads of government, with its own secretariat, and would be independent of the EU Commission in Brussels.

No kidding, says Berlin. The Germans see that as a long-standing French gambit to bring the ECB under some sort of political control by a top level "economic government." Germans don't want that. They prefer the current "economic government" -- an informal forum of euro area finance ministers called the Eurogroup, where they control the agenda and the proceedings.

Here is the latest example of that. In anticipation of Monday's Eurogroup's meeting in Brussels to discuss Greece's lending program, the German Finance Minister Wolfgang Schaeuble was dictating last Saturday the terms of the financial package: Greece must do structural reforms; it needs no debt relief. Germany is just one of the members of that group that has its own (Germany's handpicked) chairman, who is the forum's official spokesman. Where was he?

Why this German one-upmanship? Just to show who is the boss?

That is a wonderful election campaign gift to Marine Le Pen, and to all other European political forces that are fed up with Germany's unsolicited EU lordship.

Second, and this is a total non-starter for Berlin, Mr. Fillon wants to change the ECB charter – a heavy step that would require a treaty change – to add economic growth and employment creation to the bank's responsibility for stable prices.

Can you hear a big laugh all the way across the Rhine?

Don’t like François? Try Marine & Beppe show

Fine, but a pause for thought before bursting into a Bierstube laughter may be a good idea. Give Mr. Fillon a break for your own good. He is a smart and experienced conservative politician occupying the forefront of French and European politics since 1981, when, at a tender age of 27, he was elected as the youngest member of the French National Assembly.

Using the knowledge from that long experience, Mr. Fillon is reheating old French euro area reform proposals to fight Marine Le Pen. The "blonde" (as her admirers call her) is no friend of Germany; she is, arguably, the most frightening weapon of massive and terminal EU destruction.

And what did Mr. Fillon get for his effort to forge a compromise in a strained French-German relationship on key European issues?

He got a magisterial callout that he must be talked to because Germany does not like what he said.

That's another dream gift to Marine Le Pen, and an unacceptable, dangerous and humiliating German interference in the French election process.

A bit of comity would be better, wouldn't it? It is one thing for German politicians to run around Europe with diktats to small countries desperate for EU membership and money, but it is quite another to use the same dialectic with a veto wielding UN Security Council member, an authentic and autonomous nuclear power, the world's fifth-largest economy and by far Germany's largest European trade partner.

And it's not just Marine. Italy's Beppe Grillo is watching, too. A widely read German magazine called the Italian founding leader of the soaring Five Star Movement "the most dangerous man in Europe" for his refusal of Berlin/Brussels strictures and German meddling in Italian affairs. Beppe may have started out as a deadly serious joke of a standup comedian, but he led his party since 2009 to more than 30 percent of popular vote at this writing. His party also won 19 out of 20 contests in last June's regional elections, topping it all off with Rome and Turin town halls.

Marine & Beppe: bluffing blowhards?

Current events in Italy will also give a boost to Mr. Fillon's euro area agenda. Taken together, the Five Star Movement, the Northern League and Forza Italia, all virulently anti-German EU political forces, are now polling at about 54 percent. The probability for Italexit (or a Frexit) is low, but this gathering wave of grassroots protest will force the EU, and especially the euro area, to be more responsive on issues of economic growth, employment and a host of social contingencies.

That's Europe – a trailblazer of post-modern welfare states.

Mr. Fillon sees that. He is no populist hot-head; he is a fiscal conservative advocating an integrated union of nation states sharing a European sovereignty.

But that's not true of Marine Le Pen, and of some of Mr. Fillon's party (Les Républicains) colleagues who think that his proposed euro reform is not paying enough attention to social issues.

And then a frontal assault will soon be coming from angry and disoriented French left-wing parties. That will be ugly, because there is no love lost between them and Germany. Their star economic adviser, Thomas Piketty, of the growing rich-poor divide fame, came out swinging last Friday (December 2) with a statement that Germany's fiscal austerity policies sank the French economy and destroyed François Hollande's presidency. The height of irony is, Piketty says, that the fiscally virtuous Germany has never paid its foreign debt.

Investment thoughts

German media are painting a picture of a confused, irate and fearful CDU/CSU leadership in the run-up to September 2017 elections. Still, even if that were true, Berlin should not meddle in French elections and insensitively throw its weight around. If it does that, it will just give support to anti-EU forces of left and right. That could be a kiss of death to François Fillion, a thoughtful conservative and a deeply-committed European.

Meanwhile, by virtue of fortuitous timing, events unfolding in Italy will greatly influence the European political and economic agenda. Investors should keep in mind that the ECB will not allow any devastating systemic tremors, even though the Italian political landscape will remain unsettled for the foreseeable future.

The euro area reforms along Mr. Fillon's lines are inescapable. I believe that, beyond the current election posturing, there is a political will to work that out. Chaos, recessions, soaring unemployment and social unrest of a foundering euro area are in nobody's interest. The end of the common currency would be the end of a genuine customs union and a homogeneous single market -- the key pillars of the EU.

Please note that Marine Le Pen and Beppe Grillo are primarily railing against the incompetence of their own leaders and what they made of the EU for France and Italy. But Marine Le Pen is praising Chancellor Merkel's management of the German economy and a strong (she would say "selfish") defense of German interests, while berating the "submissive and brainless" French politicians. Beppe Grillo is saying the same thing in the key of the brilliant Italian humor when narrating heart-wrenching stories. With a martial picture of Otto von Bismarck (aka, Germany's "Iron Chancellor") he is imploring: "German brothers … please invade us … to kill corruption … and bring some order to Italy …"

Believing in euro's perennity as a viable transactions currency and a store of value looks like a formidable act of faith in view of current political events in Italy, France and Germany.

I am ready for that leap. I don't believe that today's Europeans will allow their leaders to destroy what preceding generations have built with peace, exemplary dedication and great sacrifice over the last 60 years.

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