Opinion - Europe Economy

France does not need a power struggle with Germany

Key Points
  • Acting alone, there is nothing France can do to change Germany’s mercantilism.
  • To save his presidency and to beat back the challenge from his right wing adversaries, the French President Emmanuel Macron should focus on economy, expand foreign markets for French goods and services and leverage his position of Europe’s most credible political leader.
  • Germany is undergoing a deepening social and political crisis created by misguided economic and immigration policies; nothing indicates that Berlin knows what to do about it.
German Chancellor Angela Merkel and French President Emmanuel Macron during a press conference in the German chancellery on Volkstrauertag, Germany's national day of mourning for victims of war, on November 18, 2018 in Berlin, Germany.
Michele Tantussi | Getty Images News | Getty Images

Europe's "demons haven't been banished, they are merely sleeping," recently retired president of the European Commission Jean-Claude Juncker warned six years ago.

He's also said that "anyone who believes [that] the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error."

This is the man who once proudly declared that "Europe is the love story of my life."

A long-serving prime minister of Luxembourg, Juncker was also known as an indefatigable mediator of French-German disputes.

One such famous event was a nearly pugilistic encounter between the French President Jacques Chirac and the German Chancellor Helmut Kohl as they clashed about the European Central Bank presidency during a meeting in Dublin, Ireland in December 1996. Juncker was dubbed the "Hero of Dublin" by the international media for how well he handled the mediation between the other two leaders.

His mediation efforts could now be needed more than ever, as the French President Emmanuel Macron seems to have lost patience in dealing with his German colleagues.

That's a sad coda to an effort for a united Europe. Macron fought hard to show that it was not true that Germany was using its strong economic position to reinforce its EU's political dominance. But last week, he sounded like he admitted to having failed in that important mission.

Macron's costly German mistake

Even before he became president, Macron traveled to Germany to assure his future partners he would consolidate the French public finances and reform product and labor markets to narrow the structural gap between the French and German economies.

To impress the Germans, he pursued fiscal austerity and harsh labor market reforms. He also proposed measures to anchor France and Germany into a quasi-irreversible European institutional structure. Macron apparently wanted to guarantee that "populists" and euroskeptics would not be able to dismantle his work.

Predictably, France's high unemployment, rising poverty, social unrest and nearly a year of violent demonstrations have damped Macron's reformist zeal. He has also reversed the fiscal discipline he imposed to satisfy the German drive to balanced public sector accounts within the euro area.

At the same time, Macron's proposals about strengthening the European Union never had a chance; they were peremptorily rejected by Berlin.

Facing the second half of his five-year term, Macron is caught up in a dead heat with the right-wing National Rally leader Marine Le Pen — a fervent euroskeptic and a virulent critic of what she sees as the French subservience to Germany.

The latest opinion poll shows that, if the vote was held now, the two bitter rivals would get roughly the same share of votes in the first round — but Macron would eventually win the runoff, a risk he apparently does not wish to take.

The risk is significant indeed. At the moment, the French economy has stabilized around a quarterly growth rate of 0.3%, and the outlook for a 1.3% annual growth this year and next remains an optimistic scenario in view of a tightening fiscal policy.

Germany's deep crisis

Under those conditions, it is implausible to expect a notable decline of unemployment. France's likely jobless rate of 8.5% will remain the fourth largest (after Greece, Spain and Italy) in the euro area. That bodes ill for general living standards.

The poverty report issued in September shows that 14.7% of the French population — 9.3 million people — lived below the poverty line. That's a considerable increase from a 14.1% poverty rate observed over the last three years.

That raises several issues in French-German relations.

First, Berlin insists, directly or through its sidekicks at the EU Commission, on calling out Paris for excessive budget deficits estimated at 3.2% of GDP this year and 2.3% in 2020.

Macron spoke derisively last week about that procedure — which can lead to economic sanctions — as a debate of another century, where budget rules have nothing to do with sound economic analysis.

Second, Germany's refusal to stimulate its domestic demand means that it will continue to live off its trade partners, as shown by its exports soaring at an annual rate of 4.6% in September.

France is by far Germany's largest euro area customer; its 40.1 billion euro deficit on German trades in 2018 accounted for nearly one-half of Berlin's trade surplus with the monetary union.

Is there any leverage for Macron here?

Third, German fiscal policy pressures on France, and Berlin's large economic benefits from the euro and the euro area trade surpluses are powerful arguments for Marine Le Pen and the rest of Macron's adversaries.

They are raising the question of France's submission to Germany — a resonant and dangerous issue — where the euro and the EU serve as instruments of German domination.

Macron directly spoke or alluded to some of those problems last week. The German media called that an "unsparing" attack on German leadership, and a serious turn of events at a time when Germany was commemorating the fall of the Berlin Wall.

Germans apparently saw nothing coming, although it has been quite clear for some time that Macron was under increasing political pressure from social unrest, sluggish economy and precarious public finances.

That shows the Germans don't care that their economic policies are a large part of Macron's problems.

Investment strategy

With overflowing government coffers and the world's largest trade surplus, Germany is defiantly settling for a 0.7% growth rate that is less than half of its noninflationary growth potential of 1.7%, while extracting the purchasing power from its trade partners and remaining a drag on world economy.

That is an unacceptable behavior of the fourth-largest world economy. Paris knows all about that, and so do Washington and the world forums designed to promote a stable and balanced world economy.

Macron should not pick a fight with Germany because, acting alone, he can do nothing about changing Germany's mercantilism.

To save his presidency and to beat back the challenge from his right-wing adversaries, Macron should focus on the economy, expand foreign markets for French goods and services, and leverage his current position of Europe's most credible political leader.

Germany is undergoing a deepening social and political crisis created by misguided economic and immigration policies. At the moment, nothing indicates that Berlin knows what to do about it.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.