October 20, 2014


The Grand Deficit Charade – Franco-German edition

Michel Sapin and Emmanuel Macron come to visit their counterparts in Germany today with the  proposal for Germany to invest as much as France is to save. In an interview with the Frankfurter Allgemeine they said those €50bn France plans to save over the next three years should be matched by new investments of the same magnitude in Germany. This would be a good equilibrium, the two ministers insist. They say that Europe is facing a demand problem and that there is a collective interest for Germany to invest. Macron draw a parallel to the 1930’s, when Germany pursued an over-ambitious savings policy.

The idea was not received well in German government circles. No, there would be no investment programme and no quid-pro-quo deal for the French retrenchment policy. Such an expenditure would only jeopardise the objective of the German finance ministry to achieve a balanced budget over the coming years. The German side expects the talks between the ministers of both the finance and economic ministries today to focus on why France is lagging behind in its reform efforts instead.

The FAZ interview also shows that French politicians were quite confident that the European Commission would let pass France’s budget plans. Sapin said that France is a strong economic and political power in Europe, e.g. in defence, suggesting that any cutbacks could be destabilising for the eurozone as a whole. Sapin also sees no need to review the rules, as they are “intelligent and flexible” enough to take into account the economic situation. Spiegel has the story that both countries are working on a written deal to enable the Commission to approve the French budget without naming its sources. The deal is said to foresee a detailed roadmap for deficit reduction and structural reform in return for Germany to oppose any sanctions that the European Commission might propose. The German government, despite its strong advocacy of fiscal discipline, is not keen to trigger a full blown clash between the euro zone heavyweights. Berlin played down the report, on the grounds that it was not up to the two capitals to strike a deal on behalf of the Commission. 

Our other stories

We have an extensive coverage today about how the Italian and French governments are planning to push their budgets past the European Commission; we also have stories on the rise of Podemos and its advocacy of Spanish debt restructuring, on Rodrigo Rato, on Martine Aubry, on Alexis Tsipras; on Greek bonds; on the New York Times' ECB minutes leak; on the eurozone money market; on the impact of the new GDP data, and comments from Caroline de Gruyter, Gavyn Davis and Wolfgang Munchau.

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