The European Council on Foreign Relations

The French firewall

Date: 26th October 2011  |  Author: Jose Ignacio Torreblanca,

Categories: Euro Crisis, Germany in Europe, Reinventing Europe,
Tags: eurocrisis, eurozone , eurozone, merkel, merkel , sarkozy, summit

An end to the euro crisis is not far away. The outgoing president of the European Central Bank (ECB), Jean-Claude Trichet, says: “We are facing a systemic crisis.” And that can have only two possible ends: the end of the system, or a change in the system. So the various summits of this week may be the last acts of the collapse, or the beginning of recovery.

The question of whether the firewalls were too small or the fire too big is secondary; the fact is that in recent years the market blaze has crossed all the barriers that the EU authorities had built. The crisis first jumped the Atlantic, leaving a trail of scorched banks, then moved on to the public sector, hitting Greece, Iceland, Ireland and Portugal. Lately the fire has been two-pronged, with one front in Spain and Italy and the other turning on a European financial sector doubly threatened by tight credit and by the huge volume of acquired sovereign debt. The last scene is still to come, but we can guess at some of it.

If the crisis reaches France, which will surely happen if Greece goes bust in a disorderly way or far-reaching decisions are not made, the system will collapse. The banks and sovereign debt of France, sheltered so far by an AAA rating and a minimal risk-premium differential with Germany, represent the last firewall before the system’s implosion. So Sarkozy is nervous.

It is no secret that the vacillations of EU leaders have aggravated the crisis. We complain about the ratings agencies and their undermining of investors' confidence in our countries, but at bottom our own diagnosis as citizens is not far different: the tiny crack opened in the Greek sector of the euro zone has broadened into a gaping breach, through which the confidence of citizens and investors alike has hemorrhaged. Sarkozy and Merkel have been facing the task of closing that breach — which in turn would have an important impact on the global situation. The firewall represented by the French debt and its financial sector has now become the immediate concern of Angela Merkel and Nicolas Sarkozy. We are looking at a tremendous tug-of-war between the two, which has all of financial Europe holding its breath. What appears to be on the agenda is not just the more immediate solutions to the crisis, but the question of whether the short-term solutions (beef up the ECB’s securities-purchase program, increase the financial stability fund, recapitalise the banks) are the seeds of long-term solutions — that is, a change in the system.

This change of system, including a grand politico-economic pact that would complement the economic and monetary union with those elements of economic governance it still lacks, is now more likely than it may seem because, fortunately, the German government understands that the euro’s last line of defence is in Paris, not in Berlin. With the wolf at the door, discussion in Germany has begun to shift toward a search for a stable, lasting solution to this crisis. This solution is now demanded in Germany by actors who cover the whole political spectrum, from the Industrial Confederation to the Greens: Social Democrats, Christian Democrats and even some Liberals, until now very reticent.

The exact content of this pact (surely requiring a new Treaty) is still imprecise, but it will be founded on exchanging monetary liquidity for fiscal austerity and greater external supervision. What is clear is that it will be a pact by two, and for two, tailored to Franco-German needs, leaving almost zero margin for maneuver to countries such as Spain and Italy. If everything goes smoothly, as has been the norm in the last 50 years, France will hide its weakness behind Germany and Germany its strength behind France, and we will all say it is an optimal deal.

This post first appeared in El Pais in http://internacional.elpais.com/internacional/2011/10/21/actualidad/1319174972_857378.html " target="_blank">Spanish and in English.

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