Tuesday, December 06, 2011

France and Germany are not kidding. And neither is the S&P.

French president Nicolas Sarkozy and German chancellor Angela Merkel remain adamant that the European Union must act this week to spare the continent a significant financial crisis. As the Los Angeles Times reports, the message of austerity is a stern one.
Compromising on their policy differences, French President Nicolas Sarkozy and German Chancellor Angela Merkel said at a joint news conference in Paris on Monday that the European Union — or at least the inner core of 17 countries that share the euro — requires greater budgetary discipline.

Sarkozy said there was no alternative to deeper integration, vowing a "forced march to reestablish confidence in the Eurozone and the euro."

But the move would require national governments to surrender significant control over their budgets and economic policy to centralized European institutions. It is likely to meet great resistance from Britain and the nine other EU countries that do not use the euro, leading to the possibility that only the Eurozone countries will agree to a closer union.

The Franco-German push for a new treaty may have received an indirect, if unpleasant, push when credit rating agency Standard & Poor's put the entire Eurozone on negative creditwatch Monday. The threat of a downgrade included triple-A-rated France and Germany, sparking further alarm that borrowing costs could rise throughout the zone and make cutting debt levels even harder.
But Mr. Sarkozy is facing an equally blunt message at home. The Washington Post examines that issue.
Sarkozy and his lieutenants described the decision to work hand-in-hand with the rigorous Chancellor Angela Merkel as an often difficult mission but a recognition of reality. Germany is the European Union’s biggest economy, they pointed out, and Merkel’s insistence on deficit controls at the end of the day is the only way to bring European debt levels down far enough to restore credibility in the markets.
Whatever the outcome of the joint French-German proposals put forth Monday — likely to become clear after an emergency E.U. summit Thursday — Sarkozy’s hand-in-hand coordination with Merkel has revealed that the ghosts of World War II are still alive in France. Indeed, several of Sarkozy’s political opponents have accused him of capitulating to an arrogant and resurgent German powerhouse.
Arnaud Montebourg, a rising star of the Socialist Party known for his nationalistic views, accused Merkel of waging “Bismarck-style diplomacy” in browbeating Sarkozy during marathon meetings between French and German officials over recent weeks. Otto von Bismarck was a 19-century German leader famed for using the country’s power ruthlessly to further its interests in an uncertain constellation of European alliances.
Keep in mind that French voters go to the polls in April, when they will either re-elect Mr. Sarkozy or replace him. Polls throughout the fall have shown that his Socialist challenger, Francois Hollande, is ahead. But the Financial Times says Mr. Sarkozy appears comfortable with his handling of the financial mess

A summit later this week involving Mr. Sarkozy, Ms. Merkel and a host of other European leaders will provide a clear indication of whether the French or German leaders can continue to feel at is, if they feel it at all. 

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