Joined at the hip, but pulling apart? Franco-German relations, the Eurozone crisis and the politics of austerity

TL;DR: In this article, the analysis of French macroeconomic policy developments under Hollande's presidency under conditions of capital mobility, and the political economy of European economic governance is discussed, focusing on the crucial Franco-German relationship because of its centrality to the evolution of the euro since its inception.

Abstract: This article situates analysis of French macroeconomic policy developments under Hollande’s presidency within a wider context of macroeconomic policy autonomy under conditions of capital mobility, and the political economy of European economic governance. It focuses on the crucial Franco-German relationship because of its centrality to the evolution of the euro since its inception. The analysis unearths different state traditions informing the distinct economic ideas about austerity, economic policy, economic governance and regulation that underpin French and German visions for future European economic integration and European economic policy. It establishes the historical and ideational conditions of German approaches to European integration and European Monetary Union, and how these have shaped continuities within French European economic strategy, and Hollande’s approach to the architecture of the euro, focusing in particular on fiscal policy dimensions and their recent evolutions. The discussion explores the foundations of German veto power within European agreements by ‘kicking the tyres’ of the German ordo-liberal political economic settlement and its social underpinnings, finding evidence of corrosive tendencies of declining mass party support linked to anaemic output and productivity growth, rising inequality and deficient demand undermining German export surpluses. Yet, time is an important factor in politics, and these corrosive tendencies are unlikely to generate a change in Franco-German relations during Hollande’s Presidential tenure.

Summary

Introduction

• It focuses on the crucial Franco-German relationship because of its centrality to the evolution of the Euro since its inception.
• The discussion explores the foundations of German veto power within European agreements by ‘kicking the tyres’ of the German Ordoliberal political economic settlement and its social underpinnings, finding evidence of corrosive tendencies of declining mass party support linked to anaemic output and productivity growth, , rising inequality and deficient demand undermining German export surpluses.

Keywords: Economic Policy, Eurozone Crisis, Franco-German Relations; French Poli-

• Tics, German Politics, Political Economy, European Union Word count (excluding bibliography): 10,040 Introduction Economic policy under Hollande’s presidency needs to be understood in the context the politics of macroeconomic policy for advanced European economies in a post-Bretton Woods order where policy autonomy is limited.
• The authors then in section four explore contemporary French economic policy under Hollande, before analysing Franco-German interactions in relation to the EU fiscal rules regime and the Fiscal Compact and Treaty on Stability, Coordination and Governance (TSCG).
• These corrosive tendencies may lead to a re-evaluation of Germany’s European economic strategy.
• Time is an important dimension in politics (Pierson 2004; Jessop, 2005), and it is unlikely that glacial shifts in German political economy will evolve on a timescale helpful to Hollande.

The Politics of Macroeconomic Policy under Conditions of Globalising Finance

• This section explores the determinants of macroeconomic policy autonomy for advanced European economies in a post-Bretton Woods world characterised by heightened international capital mobility, as a necessary precursor to a fuller appreciation of the politics of economic policy under Hollande.
• A range of international political economy (IPE) scholarship has for many years sought to explain the constraints imposed on government economic policy autonomy by global financial markets, and to understand the degree of enduring room to manoeuvre.
• 1 Randall Henning (1998) has demonstrated that European cooperation on fixed exchange rates and ultimately monetary union was motivated by no less than seven episodes of US macroeconomic policy having destabilizing consequences for European economies, with particular pressure on France and Germany being immediately relevant to outcomes.
• The constellation remains hegemonic because of the extent that it still rests on consent.
• The European approach to preserving economic policy autonomy and capabilities from the 1970s onwards favoured the most powerful export-economy of the bloc: Germany.

The European Context of French Austerity Politics: Patterns of Remarkable Continuity

• In German Political Economy and European Integration Having established the international political economic context of post-Bretton Woods macroeconomic policy for advanced economies, this remainder of this article ‘drills down’ into these issues in the context of Franco-German relations within the process of European integration and EMU.
• This ideational continuity helps explain the stability of Germany’s stance, and the re- markable similarity between the original terms under which the Federal Republic agreed to the European Monetary System (EMS) in 1979 and contemporary German approaches to Eurozone crisis management.
• The EDP requires states to enter ‘Economic Partnership Programmes’ (EPPs) with the EU, the objective of which is to devise an action plan to eliminate the excessive deficit.
• Internally, the revaluation reduced the costs for the import of consumer goods and made it possible for unions to deliver real social wage increases to its members whilst agreeing to restraint in wage increases as dictated by the export constraint.
• Consistent with the framework for analysis outlined above, it is crucial to understand the social foundations of Germany’s European ordo-liberal economic policy stance.

Fraught Pursuit of Fiscal Policy Space

• These two elements – the crucially important powerful role that Germany plays within European integration processes, and the particular content of the economic ideas underpinning German economic policy at the national and European level, are fundamental to understanding the comparative politics of austerity in Europe.
• The parallels between Jospin’s and Hollande’s electoral and policy strategies and the dilemmas they face reflect the post-Bretton Woods condition of French policymaking outlined above.
• The combination of this French reputation for profligacy and historical record of ‘unrepentant sinning’ on the public finances (see Clift 2006), compounded by jitteriness at markets regarding some of Hollande’s more economically radical campaign pledges threatened to erode confidence in French creditworthiness.
• Fiscal consolidation under Hollande was front-loaded, with 2013 and 2014 particularly contractionary, but the budgetary stance remaining restrictive throughout the quinquennat (Heyer, Plane & Timbeau 2012: 13, table 2).
• The Fund’s Keynesian-influenced rethinking of fiscal policy effectiveness has been backed by empirical assessments of post-crisis fiscal multipliers (which capture the adverse effect on growth of fiscal retrenchment) which provoked much international policy debate (IMF 2012a; Blanchard & Leigh 2013), including within the French government and administration.

Contemporary Franco-German Relations, the Politics of Austerity & EU Fiscal Rules

• 3 Interviews with Senior French Finance Ministry officials, Paris, September 2013.
• This is problematic not just for France but for the comparative politics of austerity in the Eurozone, since the Franco-German relationship is, as noted earlier, crucial to providing the stability and solidity the Euro needs.
• In the eyes of French policy elites who still harbour dirigiste activist fiscal policy aspirations, utilisation of a structural balance framework carves out a role for countercyclical fiscal policy, as well as sheltering automatic stabilisers from fiscal adjustment efforts.
• The IMF, OECD, European Commission, OFCE and French and German Governments all have different assessment techniques for potential growth rates and output gaps, plugging in different assumptions.
• There is some disappointment that the IMF, which has in other ways become more enthusiastic about activist fiscal policy, has not aligned more closely with the French finance ministry’s higher potential growth forecast for France, since the policy implications would be to open up more ‘fiscal space’ for activist policy without coming into conflict with structural balance targets.

The Limits of German Power within EU Economic Governance: Corrosive Tendencies

• Crucial to the prospects of French agency within the politics of austerity, then, is Germany’s stance on the political economy of European economic governance.
• Notable here since the mid-1990s is weak productivity growth, and a reversal of the trend whereby wage increases are higher than productivity growth, signalling the shift to a leaner competitive corporatism (Figure 2): Figure 2 about here.
• Previously, within the structural coupling to other European economies in the EMS, the demand-pull of French ‘profligacy’ was the other side of the coin of German ‘responsibility’ (Deubner, Rehfeld & Schlupp 1992).
• This however, has coincided with a substantive increase in inequality.
• Tensions within this German political economic settlement may have implications for Germany’s hegemonic mass parties, whose success always has depended on hailing and bridging a broad range of constituents in composite electoral coalitions under the umbrella of the ‘social market economy’.

Conclusion

• Hollande’s 2012 campaign was fought, somewhat anachronistically, on commitment to both a harsh fiscal consolidation and a re-orientation of economic policy in a more growthoriented direction.
• German status as the economic powerhouse of Europe and key creditor country at the summit of an informal creditor grouping who call the shots of Eurozone crisis response (Dyson 2013) assures the dominance of its economic ideas.
• This current state of Franco-German relations hinders French efforts to alter the politics of austerity domestically.
• The aspirations for an injection of Keynesian insight into French and European economic policy have been tempered by the German ordo-liberal model of political economy, and its pervasive influence over Eurozone crisis management.
• As the IMF put it, ‘on purely cyclical grounds, a more measured pace of fiscal adjustment would be appropriate, but European and market imperatives have reduced fiscal space at this juncture’ (IMF 2012b: 30).

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Meadows, Katherine E., Nadappuram, Binoy Paulose and Unwin, Patrick R.. (2014) A
new approach for the fabrication of microscale lipid bilayers at glass pipets : application
to quantitative passive permeation visualization. Soft Matter, Volume 10 (Number 42).
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1
Joined at the Hip, But Pulling Apart? Franco-German Relations, the Eurozone Crisis,
and the Politics of Austerity
Ben Clift (B.M.Clift@Warwick.ac.uk) & Magnus Ryner (magnus.ryner@kcl.ac.uk)
Published in French Politics Volume 12, Issue 2 (June 2014), pp. 136-163
doi:10.1057/fp.2014.8
Abstract
This article situates analysis of French macroeconomic policy developments under
Hollande’s presidency within a wider context of macroeconomic policy autonomy under
conditions of capital mobility, and the political economy of European economic governance.
It focuses on the crucial Franco-German relationship because of its centrality to the evolution
of the Euro since its inception. The analysis unearths different state traditions informing the
distinct economic ideas about austerity, economic policy, economic governance and
regulation which underpin French and German visions for the future European economic
integration and European economic policy. It establishes the historical and ideational
conditions of German approaches to European integration and European Monetary Union
(EMU), and how these have shaped continuities within French European economic strategy,
and Hollande’s approach to the architecture of the Euro, focusing in particular on fiscal
policy dimensions and their recent evolutions. The discussion explores the foundations of
German veto power within European agreements by ‘kicking the tyres’ of the German Ordo-
liberal political economic settlement and its social underpinnings, finding evidence of
corrosive tendencies of declining mass party support linked to anaemic output and
productivity growth, , rising inequality and deficient demand undermining German export
surpluses. Yet, time is an important factor in politics, and these corrosive tendencies are
unlikely to generate a change in the Franco-German relation during Hollande’s Presidential
tenure.
Keywords: Economic Policy, Eurozone Crisis, Franco-German Relations; French Poli-
tics, German Politics, Political Economy, European Union
Word count (excluding bibliography): 10,040
Introduction

2
Economic policy under Hollande’s presidency needs to be understood in the context
the politics of macroeconomic policy for advanced European economies in a post-Bretton
Woods order where policy autonomy is limited. Below we set out how European economic
integration emerged as a response to post-Bretton Woods US hegemony and monetary power,
and how, within European monetary integration, German monetary power shaped the eco-
nomic policy choices faced by governments. This article focuses on the crucial Franco-
German relationship because it has been central to the evolution of the Euro since its incep-
tion, and argues that the historical, social and ideational conditions of German approaches to
European integration and European Monetary Union (EMU) have shaped the limits of the
politically possible for other European partners. Appreciation of these broader historical and
structural conditions under which contemporary European governments make economic poli-
cy choices directs analytical attention towards different state traditions through which eco-
nomic policy choices and constraints are refracted. It is these specific national social and ide-
ational conditions which inform the distinct economic ideas about austerity, economic policy,
and economic governance and regulation.
Understanding the political economy of European economic governance, and the poli-
tics of austerity in Europe since the outbreak of the Eurozone crisis, requires fine-grained
appreciation of the economic ideas underpinning both French and German visions of Europe-
an economic policy and the future European economic integration. It is against this backdrop
that the analysis below delineates the positioning and policies of the Hollande presidency
towards the architecture of the Euro, focusing in particular on fiscal policy dimensions and
their recent evolutions. The analysis moves beyond the surface events of Hollande’s policy
initiatives to discern and explain underlying patterns and continuities between French Social-
ist economic policy under Hollande, Jospin and Mitterrand. In this light, Hollande’s econom-
ic policy is a case of ‘the more things change, the more they remain the same’.
Contemporary French economic policy is the latest iteration of a long-standing di-
lemma of trying to open a ‘fiscal space’ for growth-oriented policies from within European
economic and monetary arrangements where key centres of power, notably the German Gov-
ernment, the European Commission, and the European Central Bank prioritise fiscal disci-
pline and austerity. The dilemma is a long-standing one, going back to Mitterrand’s famous
U-turn of 1983, but the politico-economic effects are amplified by the magnitude of post-
financial crisis imbalances. Foremost amongst these is the large German balance of payments

3
surplus which the IMF view as problematic, and belatedly even the European Commission
recognise as requiring redress through measures to boost German domestic demand (Europe-
an Commission 2013).
Relating this dilemma to Franco-German bilateral relations draws attention to the po-
tential for French agency, and how any French capacity to increase the fiscal space would
depend on the Franco-German axis that has been so foundational for EU integration. Unfor-
tunately for Hollande, the current conjuncture is not propitious, since a German socio-
political consensus sees its strict ordo-liberal stance comprising anti-inflationary monetary
policy and tight fiscal discipline as vindicated by the financial and Eurozone crisis. The Ger-
man ‘crisis of competitiveness’ interpretation erroneously identifies the roots of the Eurozone
crisis in every case as exclusively down to profligate governments having been insufficiently
vigorous in their pursuit of supply-side structural economic reforms, hence Germany’s insist-
ence of one-sided adjustment by deficit countries as quid pro quo for initiatives such as the
European Stability Mechanism (ESM). Germany’s reluctance to recognise that its trade sur-
plus represents a problem, is arguably exacerbating the crisis and storing up problems of ris-
ing inequality for the German economy, and persistent mass unemployment and stagnation
for ‘Southern’ Eurozone political economies (Stockhammer, 2011, 2012, 2014; Blyth, 2013;
Scharpf 2013: 134).
In the first section, we set out the broader problematique of advanced economy mac-
roeconomic policy autonomy in a world characterised by international capital mobility. In
light of this, section two considers the historical and ideational conditions of German ap-
proaches to EMU, which provides a necessary backdrop for understanding contemporary
austerity politics in comparative perspective. We propose a set of crucial determinants of
post-Bretton Woods political economy that condition the Eurozone, and spell out how these
assign a pivotal role to Germany and balance of payment surpluses. Thereafter we delineate
French strategy to try and move the German position by shifting the economic ideas and in-
tellectual underpinnings of approaches European economic integration and EMU. We then in
section four explore contemporary French economic policy under Hollande, before analysing
Franco-German interactions in relation to the EU fiscal rules regime and the Fiscal Compact
and Treaty on Stability, Coordination and Governance (TSCG). In the final section, we high-
light corrosive tendencies within German political economy, raising questions about whether
the so-called economic powerhouse of Europe is in as healthy a condition as often assumed.

4
These corrosive tendencies may lead to a re-evaluation of Germany’s European economic
strategy. However, time is an important dimension in politics (Pierson 2004; Jessop, 2005),
and it is unlikely that glacial shifts in German political economy will evolve on a timescale
helpful to Hollande. In the medium term, short of a truly cataclysmic collapse of the Euro-
zone, German policy is unlikely to change direction.
The Politics of Macroeconomic Policy under Conditions of Globalising Finance
This section explores the determinants of macroeconomic policy autonomy for advanced
European economies in a post-Bretton Woods world characterised by heightened
international capital mobility, as a necessary precursor to a fuller appreciation of the politics
of economic policy under Hollande. A range of international political economy (IPE)
scholarship has for many years sought to explain the constraints imposed on government
economic policy autonomy by global financial markets, and to understand the degree of
enduring room to manoeuvre. Such scholarship usually begins with mainstream
macroeconomics and Marcus Fleming’s (1962) and Robert Mundell’s (1963) open-economy
neo-Keynesian (IS-LM) formulation of the intrinsic incompatibility of exchange-rate
stability, capital mobility, and national policy autonomy. The ‘stringent logic’ of this ‘unholy
trinity’ imposes, according to Benjamin Cohen ‘an increasingly stark trade-off on
policymakers’ which allegedly leads governments to eschew expansionary fiscal and
monetary policies in favour of tight money and balanced budgets (Cohen 1993: 147; see also
Oatley 1999). Cohen derived a broader politico-economic analysis when he subsequently
argued that ‘it is time to move beyond broad generalizations about the logic of the unholy
trinity to more disaggregated analysis of the complex linkages between global finance and
domestic performance (Cohen 1996: 283-4). A crucial aspect of these ‘complex linkages’ is
the degree of credibility economic policy settings enjoy with financial market participants.
This is an important determinant of the nature and degree of enduring macroeconomic policy
autonomy (or conversely the constraints thereon), and understanding it draws our gaze to the
institutional and ideational context in which ‘credibility’ is constructed (Mosely 2003; Clift &
Tomlinson 2004, 2007).
The context of power relations within the wider world economy within which this
process of credibility construction takes place is an important aspect affecting macro-
economic policy choices. In specifying what factors matter, and when for macroeconomic
policymaking, we foreground how US hegemony structured the environment within which

Frequently asked questions

Q1. What are the contributions in this paper?

This article situates analysis of French macroeconomic policy developments under Hollande ’ s presidency within a wider context of macroeconomic policy autonomy under conditions of capital mobility, and the political economy of European economic governance. 

Q2. What are the key causes of the increase in inequality and poverty in Germany?

Labour market changes, such as the gross distribution of wages, and an increase of jobless households from 4 percent in 1995 to 19 percent (the highest in OECD), were key causes. 

Q3. What is the role of the structural balance framework in the French fiscal policy debate?

In the eyes of French policy elites who still harbour dirigiste activist fiscal policy aspirations, utilisation of a structural balance framework carves out a role for countercyclical fiscal policy, as well as sheltering automatic stabilisers from fiscal adjustment efforts. 

Q4. What was the effect of the revaluation on the wages of German workers?

the revaluation reduced the costs for the import of consumer goods and made it possible for unions to deliver real social wage increases to its members whilst agreeing to restraint in wage increases as dictated by the export constraint. 

Q5. What is the reason why Germany abandoned its scepticism towards the EMS?

after the collapse of the Bretton Woods, Germany abandoned its pre-WernerReport scepticism towards European monetary unification and took the lead in instituting the EMS. 

Q6. Why does the structural balance framework retain more attachment to nominal targets?

it retains more attachment to nominal targets, partly because in the current conjuncture their policy corollary is a more steadfast commitment to fiscal consolidation. 

Q7. What is the role of the IMF in the rethink of fiscal policy?

The Fund’s Keynesian-influenced rethinking of fiscal policy effectiveness has beenbacked by empirical assessments of post-crisis fiscal multipliers (which capture the adverse effect on growth of fiscal retrenchment) which provoked much international policy debate (IMF 2012a; Blanchard & Leigh 2013), including within the French government and administration. 

Q8. What is the role of the German ordo-liberal model in the Eurozone?

The aspirations for an injection of Keynesian insight into French and European economic policy have been tempered by the German ordo-liberal model of political economy, and its pervasive influence over Eurozone crisis management. 

Q9. What is the extent to which the French government has been questioned?

The extent to which growth and demand concerns are successfully reconciled to the fiscal consolidation effort within Hollande’s strategy has been widely questioned, not least by the bond ratings agencies, as French growth outcomes continue to disappoint. 

Q10. What is the reason why the fiscal compact was not renegotiated?

German aversion to a reorientation away from austerity-oriented European economic policy priorities helps explain why the fiscal compact did not get renegotiated, and why the LPFP faithfully transposed it into French law. 

Q11. Why has growth-oriented macroeconomic policy not been in evidence?

Growth-oriented macroeconomic policy has not been in evidence due to the limits on policy space imposed by the economic conditions, uncertainties surrounding the Eurozone crisis, the state of French public finances. 

Q12. What could have been done to end the automatic policy reflex?

This could have put an end to the automatic policy reflex to protect the banks by socialising their losses, recognising moral hazard as a problem of the banks, not of profligate governments. 

Q13. What is the obvious indicator of stress of the German model?

The most obvious indicator of stress of the German model is its anaemic growth rates, notwithstanding the post-financial crisis rhetoric of a ‘German miracle’ continued (Figure 1). 

Q14. What was the view that the financial markets were so irrational?

There was a view that the financial markets were so irrational, and their propensity to distrust French fiscal prudence so deep-seated, that almost super-human demonstration effects were required. 

Q15. What was the IMF’s rethink about fiscal policy efficacy?

Within the international macroeconomic policy rethink, the IMF had engaged in anextensive and somewhat Keynesian rethink about fiscal policy efficacy since 2008 (see e.g.Spilimbergo et al 2008). 

Q16. What was the main reason for Germany’s reticence to join the EMS?

Before the late 1970s, Germany had been reticent about closer European monetary cooperation in the absence of close convergence on macroeconomic fundamentals. 

Q17. What was the effect of the view that the financial markets were fickle?

Politicians and officials were powerfully affected by the view that the financial markets were fickle and irrational, and that their propensity to distrust French Socialists on fiscal prudence was ingrained.