Eurozone Watch

Last Monday, French President Nicolas Sarkozy once again pushed for an old French idea, the "gouvernement économique" for the Eurozone. In his speech in front of the European Parliament, the acting EU Council President reinterated the French quest that the governance structures of the European Monetary Union should be strengthened in order to allow for more politics in the management of the Eurozone economy.

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The French Finance Minister Christine Lagarde last week announced that Paris would use its Presidency of the European Council starting on July 1, 2008 to push for a common corporate tax base. Despite its looks, this is yet not another brand new initiative by Nicolas Sarkozy – in addition to the other French EU Presidency priorities in the fields of European Security and Defence, Environment/Climate Change, Energy, Immigration and the Union for the Mediterranean.

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The reporting – at least in the German press – raised the impression that Monday’s dinner in Hanover between the German chancellor Merkel and French President Sarkozy lead to new peace and love in the German-French couple which has demostrated its very deep divisions recently. How credible is this news?

First of all, contrary to some media’s reporting, it is unlikely, that all disputes over the Mediterranean Union (MU) have been buried over dinner. Given the fierce and public dispute between both sides over fundamental strategic and structural decisions of the new Mediterranean policy France wants to launch, it is simply not credible to assume that the French side totally surrendered to German requests to make the initiative more or less simply a re-launch of the Barcelona process (i.e. the current EU Mediterranean policy within the EU framework).

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Only few media today recorded yesterday's celebration of the 45th anniversary of the Elysée-Treaty, which back in 1963 laid the foundations for the closest and most impactful bilateral relationship within the EU in the post-war period. This small interest is hardly surprising, as festivities did take place, but were downscaled in the sense that the German and French Heads of State and Government kept away and this occasion was not used for any kind of political declaration. Celebrations were left to the two coordinators for Franco-German relations, Secretary of State Günther Gloser and the French junior minister for European Affairs, Jean-Pierre Jouyet, and also to the many actors who make the relationship work in practice (meaning both in politics, the administration, the military, civil society and so on).

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The general perception about the relative merits of the US economy on the one hand and the continental European economies on the other hand is simple: The US is a very dynamic economy which has been growing briskly over the past decade while Europe is sclerotic and always lagging behind. While markets in the US are free to allow for a swift process of innovation and growth, overregulation and a large government sector in Europe keeps growth down.

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For those who were hoping that the euro economy would get through the global credit crisis unscarred, the past week has brought bad news: Survey data in Europe instead point to a significant dent in growth. Now the interesting question is whether the economy will recover quickly or whether the consequences of the credit crisis will linger on.

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Fifth part on our series on Sarkozy and Europe

Yesterday, Nicolas Sarkozy suggested an overhaul of the French social system to a press conference organised by the Association of journalists working on social issues (Ajis) in the Senate. His main proposals summarise as follows (read full speech):

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Fourth part of our series on Sarkozy and Europe

At Eurozone Watch, we have been saying since our very first comment on Nicolas Sarkozy that any great hopes of him being a true liberal politician are misplaced. In his fourth month in office he has (again) proven our point that he has two faces: Whilst apparently standing for (selective) liberalisation in France, he is transposing his true protectionist thinking to the European level.

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Yesterday, statistical offices all over the eurozone published GDP figures for Q2. As had already been harbingered by the Italian GDP figures, growth slowed significantly in the euro-area from 0.7 percent quarter-on-quarter at the beginning of the to only 0.3 percent, the slowest quarterly growth rate since 2004 (see here for Eurostat details).

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We have just published an article in the German weekly DIE ZEIT calling for a reform of European budgetary rules in order to limit the national governments' pro-cyclical fiscal policies.

We start from the observation that fiscal policy once again is turning pro-cyclical in a number of European countries. Germany is cutting corporate taxes and increasing discretionary spending at a moment when the economy is growing with rates close to 3 percent (see our post here). France's new president Nicolas Sarkozy is cutting income taxes for home buyers and overtime payment in a boom, providing an ill-timed boost to the economy (see post here) and the Italian government has just increased their deficit target from 2.3 to 2.5 percent of GDP inspite of strong tax revenues (the money supposedly will go into more social spending).

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