France is at terrific odds with Germany over the eurozone's debt woes, a sign that what started as a Greek debt crisis is becoming a crisis of European unity, with unforeseen social and political as well as economic downsides.
The euro has lost 14 percent of its value against the dollar since the start of the year and is hovering near a four-year low on concerns that the mounds of government debt in a number of eurozone countries amounts to a ticking time bomb. The euro has continued to slide despite the creation of a $1 trillion reserve bailout fund and a $140 billion bailout for Greece earlier this month. The unveiling of austerity plans in Italy, Greece, Spain, Portugal, and Ireland has also done little to reassure investors.
European solidarity is in danger – though some analysts say that unity on the continent has always been achieved by hammering out differences in periods of crisis.
“We’ve seen a fiscal, an economic, and a social crisis...and a political crisis inside nations could be next," says Éloi Laurent of the French Economic Observatory in Paris. "We’ve seen it in Greece, and we already have a political crisis at the European level, which is a union in shambles."
US Treasury Secretary Timothy Geithner travels to Berlin tomorrow for consultations in the wake of a new set of German restrictions on market speculation. German Chancellor Angela Merkel yesterday announced a ban on naked short selling of certain kinds of debt. A naked short sale is when an investor promises to deliver an asset at its current market price to another investor, effectively "selling" something he doesn't own in the hope that the price will decline quickly, allowing him to cover his trade at a profit. Merkel's ban infuriated European finance chiefs for its unilateral and non-consultative nature.
Last week Merkel called the crisis Europe’s biggest test in 50 years, which irritated France. President Nicolas Sarkozy even threatened to withdraw from the eurozone, in what was seen as a rhetorical flourish underscoring the depth of French feeling and disagreement with Berlin.
“Merkel is sabotaging [rescue efforts] in order to prove to her domestic audience that everyone should follow Germany’s economic lead,” says Mr. Laurent. “Well, every country can’t be Germany. This is a beggar-thy-neighbor policy. Merkel is saying ‘I have no interest in the Europeans, I am only interested in my own government.' "
What has become a bitter test for Europe started this winter when the Greek government admitted its deficits were far greater than it had been reporting. The country almost certainly would have defaulted on debts that came due this month if not for the bailout it eventually received. Eurozone states, at the behest of Germany and the IMF, demanded steep spending cuts from Greece as the price of its bailout.
The episode caused markets to more closely look at Portugal, Italy, Ireland, Greece and Spain – the so-called PIGS that, while financially healthier than Greece, all have large budget deficits of their own. Investors didn't like what they say and the euro fell drastically.
The European Central Bank (ECB) is administering that $1 trillion emergency reserve for the euro, and is also being allowed for the first time to intervene in Europe's sovereign debt markets. Thomas Klau of the European Council of Foreign Relations sees this as a useful step. “The ECB must continue to demonstrate its independence, and to participate and be flexible.”
But the economic crisis is coming at a time of a European identity crisis, with voters looking more toward populist messages and away from the post-1989 days of European unity. There’s an old “north-south” divide partly at work with the Netherlands, Luxembourg, and Germany critical of Spain, Italy, and Greece – in what appear to be old cultural stereotypes playing out. Great Britain has a Tory ‘Euro-skeptic’ prime minister; Germans speak of becoming a normal nation less tied down by guilt.
“It’s complicated," says Karim Emile Bitar, the president of KB Consulting in Paris. "In the context of a family, if you have a brother that shows up after 30 years and needs help, you loan him the money. But if someone shows up and tells you he is your half-brother and that you are obligated to bail him out… well, the bonds are not solid enough for Germans to bail out Greeks. The guy in Normandy doesn’t yet feel connected to the guy in southern Italy.”
With each country going its own way and determining its own austerity measures, the eurozone lacks a unified response to the crisis. Many analysts say the austerity plans of Italy, Spain, Greece and others are a mere short-term solution. "It isn’t coordinated stimulus, it is coordinated depression, which looks like coordinated stupidity,” says Mr. Laurent.
Mr. Geithner, ahead of his European visit, offered calming words, “Europe has the capacity to manage through this,” he told reporters last week. “And I think they will.”
But resolve won't come without cooperation from France and Germany.
The French and Germans “are keenly aware of the fact there will be no reform of eurozone governing systems without France and Germany thrashing out a compromise," says Mr. Klau of the European Council on Foreign Relations. "If it plays out openly that will fuel instability, and I think part of this debate has been counterproductive.”
Former French President Giscard d’Estaing recently said that the spirt of amity in Europe should be restored. "The European system, unfortunately has distanced itself a bit from the practice that we created, which was Franco-German intimacy. We moved away from this practice, and I wish that we would return to it."