François Hollande flies to Berlin next week. Will France’s new president read Angela Merkel the riot act on austerity? In Franco-German parlance, the meeting could represent Europe’s rendezvous with the zeitgeist. After months of rescue measures with austerity writ large, the mood appears to be shifting.
In what direction?Hollande's win has emboldened many European leaders to declare that cuts alone won't return euro zone members to growth. That has triggered more debate about how best to encourage growth.
So another dry economic debate and political battle of will looms?Indeed. Think of European economies as a parched park with two teams of gardeners arguing over how to redress years of stunted growth. Europe's centre-left is certain that fertiliser, manure and hormones – bought on credit if need be – will get things growing again. Spend now to reap later. Merkel represents a more cautious German school that favours prudent pruning through structural reforms. Merkel won over the departed Nicolas Sarkozy and other centre-right European leaders to this logic, ensuring it has dominated the agenda. Last Sunday's election in France, not to mention that in Greece, appears to call that consensus into question.
So is it all aboard the European growth express?Hang on: everyone agrees growth is good, the argument is over how best to achieve it. Hollande began his campaign with strident calls for an end to austerity in Europe and a renegotiation of the fiscal treaty. As the campaign progressed, particularly following approaches from Berlin, Hollande toned down the rhetoric. On Tuesday he travels to Berlin with a more modest plan for targeted European investment to create jobs and promote growth, raising money from tax on financial transactions and by reassigning unspent EU structural funds. The EU should increase the lending capital of the European Investment Bank, he says, and agree the details of "project bonds", a new way to raise private capital for public use.
Sounds like deja vu all over againThat's because Hollande didn't invent the growth agenda: many of his proposals were under discussion long before his election. But Hollande is the first European leader to be elected with a growth mandate. Germany knows it has to react to the new reality.
How does the German chancellor feel about that?Fine. Caricaturists have had a field day portraying Merkel as a dominatrix. But her record in office shows she is in fact the ultimate political pragmatist. When the wind changes, she changes too. Additional growth measures, yes, but not with borrowed money. And the fiscal treaty is not to be reopened.
Will she stick to that, being the ultimate pragmatist?Merkel is an old hand who knows the euro-zone brief inside out. On the other hand, Hollande can't afford to be seen to flag on the growth front. If French voters – or the markets – are not impressed by the growth agenda, Merkel's hopes of sticking to the plan could fall apart. Berlin may think it has agreed a growth strategy with Paris, but last-minute surprises – and press-conference stunts – cannot be ruled out.
Derek Scally
