BACKGROUND:The Franco-German alliance will not yield to US pressure despite Obama's efforts, writes LARA MARLOWE

PRESIDENT NICOLAS Sarkozy stated his goal for the G20 summit in a speech this week. “I don’t want anything to do with a summit that decides not to decide anything,” Sarkozy told supporters of his UMP party. “We’ve run out of time. We must re-establish confidence and that won’t be done without new rules to end the excesses of the past 20 years.”

On a pre-G20 trip to Washington at the beginning of the week, prime minister François Fillon rejected the idea of a new French stimulus package, saying “we should not create a bubble of public debt”.

The French emphasis on “moralising capitalism” through new regulations, and Fillon’s rejection of a “bubble of public debt”, are symptomatic of the profound division between the euro group and the Obama administration regarding the correct response to the crisis. As President Barack Obama has repeatedly made clear, he wants the colossal US stimulus package to be matched by a commensurate European effort. And Europe, led by Sarkozy and the German chancellor, Angela Merkel, says No.

Much has changed since the first G20 summit on the global crisis was held in Washington, at Sarkozy’s instigation, last November. The outgoing Bush administration had no real policy. “A front opened up between continental Europe – the euro zone – and the US with the arrival of the Obama administration,” explains Éloi Laurent, an economist at the influential French think tank OFCE. “At the end of last year, Sarkozy was closer to the American, Keynesian line. He has since rallied to the German position.”

There are two reasons for the French leader’s change of heart. While president of the European Council, Sarkozy was unable to convince his European partners to co-ordinate budgetary policy, with a view to then co-ordinating with the US. And the domestic situation in France has worsened. “France does not want to or cannot make more of a budgetary effort now,” says Laurent. Up to three million people marched in the most recent French “day of action” on March 19th, and Sarkozy fears that if he abandons his discourse of rigour and restraint, there’ll be no stopping the haemorrhage of public funds.

The rationale behind the Franco-German position, Laurent says, is that the crisis was caused by the US and that the US, not Europe, must pay for it. Franco-German orthodoxy is rooted in “the culture of Maastricht” inherited from the Bundesbank – budgetary and price stability and monetary discipline. “In normal times it isn’t very efficient,” says Laurent. “In times of crisis it’s a handicap.”

At face value, the French and German stimulus packages are tiny – 0.6 per cent of French GDP; 1.5 per cent of Germany’s. But in a joint statement, Sarkozy and Merkel used a recent IMF study which included “automatic stabilisers” – unemployment payments and welfare benefits – to claim Europe’s stimulus effort constitutes 3.3 per cent of GDP, putting them almost on a par with Obama’s $787 billion package.

The Europeans are wrong to think that Europe is less affected by the crisis than the US, says Laurent. “At 1.1 per cent, growth was stronger in the US than in the euro zone in 2008,” he notes. “And IMF forecasts indicate the recession will be deeper in Europe than in the US in 2009.” The German economy, which accounts for 25 per cent of wealth in the euro zone, has been devastated by the dramatic slowdown in world trade.

Opposing philosophies on economic stimulus are “irreconcilable” and will not be resolved next week in London, Laurent says. There will be agreement on cracking down on tax havens, and on doubling the IMF’s working capital from $250 billion to $500 billion. If Sarkozy and Merkel get their way, there may be new rules on regulating hedge funds and ratings agencies as well.

“The Europeans may save face,” Laurent predicts. “But they won’t save their economies. The risk is that for reasons of pride and ego, they won’t agree to stimulus measures, to prove to their population they’re not taking orders from Washington, and a month or two later, in an ever worsening situation, they’ll have to do it. . . If we allow our economies to sink into deep economic depression, it will take 10 years to recover, and we’ll be saddled with huge deficits anyway. Public debt can be solved by only one thing, and that’s economic growth.”

Laurent is one of many economists who have sided with Obama against Sarkozy and Merkel. The Nobel Prize laureate Paul Krugman recently pleaded for stronger European measures in a New York Timescolumn entitled "A Continent Adrift". Dominique Strauss-Kahn and Olivier Blanchard, the director general and chief economist at the International Monetary Fund (IMF) – who are both French – are also urging Europe to spend more on economic stimulus packages. Charles Wyplosz, professor of economics in Geneva, has just published an article entitled "Why the Americans Are Right".