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France-Germany pact resisted

Gavin Hewitt | 17:47 UK time, Tuesday, 8 February 2011

Europe's leaders are uneasy, edgy, irritable - even a little offended.

On the surface there is cause for a glimmer of a smile. The much-feared bond markets are becalmed.

French President Nicolas Sarkozy and German Chancellor Angela Merkel

Portugal has raised 30% of the funds it needs this year and has avoided being muscled into joining the bail-out queue.

For the past two weeks the European Central Bank has not been buying up bonds from struggling eurozone economies.

And yet nerves remain frayed.

The current bout of angst has its roots in Franco-German schemes to end the eurozone crisis once and for all.

In their own ways both these countries - the shapers and drivers of Europe - have been unsettled too.

Last year France's finance minister actually feared the eurozone might break up. Paris sensed Germany was cooling on the European project.

The bail-outs of Greece and the Irish Republic proved massively unpopular in Germany. All those guarantees before adopting the single currency that they wouldn't have to take on the debts of other countries had proved worthless.

The Germans feared they would become the paymasters in a "transfer union". Not surprisingly, latest polls indicate that 63% of Germans have little or no confidence in the EU.

So French foreign policy was targeted at anchoring Germany to the European project. Essentially the French enticed Angela Markel with a deal. If the Germans were to underwrite any future bail-outs, the French would back them in shaping up the rest of Europe to German standards.

The French had always hankered after closer economic integration. They would get it. The Germans would be able to claim that although they might have to pay now, they would reduce the chance of future bail-outs.

For much of last year officials in Brussels had sniped at the German Chancellor for not putting European interests above national interests. All those pleas for solidarity were largely met with a German stony face.

But Angela Merkel has had something of a conversion. She now not only robustly defends the single currency but makes the case for the euro as a political project.

She and President Sarkozy make the dubious claim that without the euro there would be no Europe.

So a "grand bargain" emerged. Germany would agree to expand the main bail-out fund in scope and size. What Angela Merkel wanted from other countries was a lowering of debts and a re-engineering of their economies to a common standard to make them more competitive.

All of this would be enforced through a "pact of competitiveness".

Last week Germany and France announced there would be a special summit in March where all this could be signed off. As an idea it bombed.

Some countries were simply offended. The Polish Prime Minister Donald Tusk asked Merkel and Sarkozy "whether they really thought they had the right to treat others in this manner".

Martin Schulz, the leader of the Socialists and Democrats in the European Parliament denounced the pact. The European Union, he said, was being reduced to deals between governments.

It didn't help that some of the proposals in the "pact" had leaked out.

There was the idea of a common retirement age of 67. The Austrians were not up for that.

Then there was the suggestion of dropping index-linking wages to inflation. Portugal rejected that at once. So did Belgium. Luxembourg and Spain didn't like that either.

As to the idea of countries absorbing a "debt-brake" into their constitutions: that didn't fly either. The Greek Deputy Prime Minister Theodoros Pangalos said "I reject categorically the thought of an EU decision to intervene in all national constitutions".

The Irish, who are in the midst of an election campaign, are most unlikely to be persuaded to give up their low corporate tax rate.

Everyone got prickly. Belgium's caretaker Prime Minister Yves Leterme said "it was truly a surreal summit". Another leader muttered about not accepting a 'diktat'.

What really happened was this.

It is not difficult for the 17 eurozone heads of government to sit down and agree to a bigger bail-out fund.

The figures are so vast anyway that a few hundred billion more makes little difference. It is hard for voters to determine when money from national accounts actually gets to be paid.

But voters do understand wages, taxes and retirement ages. Suddenly Europe's leaders realised they could be held to account for these plans and that the people who hire them - the voters - might not want to become a "little more like Germany".

So the eurozone's heads of government are full of doubts and questions. These measures may enhance competitiveness but over what period? How long would it take for them to have any impact?

Then "economic governance" - a phrase and idea much-loved by the French - could evolve into "central planning", widely seen as a disaster for Europe.

All of this will lead to weeks of haggling, kites being flown and warnings of the danger of not disagreeing. We are all witnesses to the game.

Germany may appear to have the best cards but it doesn't. It could simply say that without Europe-wide reforms it won't act as guarantor to endless bail-outs.

But its bluff would easily be called. Would Germany allow a country to go under? Most unlikely. So countries may strike a hard bargain.


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