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Hollande Issues Challenge to Germany

European Central Bank, Frankfurt

Hollande wants European Central Bank to facilitate Eurozone borrowing

I’m focusing on politics in Europe these days, not just because I just returned from that part of the world, but because they are both more interesting and consequential than politics in the US. A case in point: newly-elected Francois Hollande just threw down the gauntlet with Germany, offering his ultimatum to Chancellor Angela Merkel on the future for Europe:

Q: Your solutions to boost growth, however, seem different from those recommended by Mario Draghi, or Angela Merkel …

Hollande: Structural reforms are needed to improve competitiveness, tax reform, and strengthen our industry. This is the meaning of the pact productive as I suggested.

The supply-side economics is not separable from a more direct stimulation of demand. Not with the Keynesian formulas of the past: the means may be additional public spending, since we want to control them, or tax breaks, which we are not allowed. But the implementation of instruments at European level, this means increasing the capital of the European Investment Bank, the mobilization of structural funds, the tax on financial transactions that would fund the work of infrastructure. Europe could finally decide to waive the loan: this is the challenge of ” Eurobonds “or “project bonds.”

Q: German Chancellor opposed this last solution …

Hollande: On this issue, we will have discussions with our partners, and particularly with our German friends, but they can not put two locks at a time, one of the “Eurobonds” and another on the direct debt by refinancing ECB.

Here’s what this means. Hollande wants the ability to collectively finance sovereign debt through Eurobonds, which would reduce debt spreads between Eurozone nations and aid the more troubled countries, or he wants the European Central Bank to do the financing directly. This is a challenge to the current order. Merkel, as the interviewer suggests, opposes both of these measures. This is at least one way out of the policy box for Europe, through a monetary channel. It doesn’t fully address the fiscal situation, but coupled with Hollande’s skepticism over the EU fiscal pact ratification (he prefers “a treaty on growth, employment and energy”), this represents a full-spectrum challenge to Germany.

Arthur Goldhammer, who is worth paying attention to on issues of French politics, says that this is the opening salvo for the debate on the future of Europe. Germany will reject this and attempt to use the ECB to bring Hollande to heel. The other countries on the periphery of Europe, in various unsettled states, may be determinative here. Either way, we’re actually having a useful conversation now, the first in many years in the global economy.

Hollande’s domestic position will have a lot to do with this as well. Parliamentary elections follow the Presidential election in France, and it’s unclear yet whether Hollande will have a governing majority for his programs. The far left and far right may end up making enough gains that he will need a unity government, perhaps even with Sarkozy’s former party.

CommunityThe Bullpen

Hollande Issues Challenge to Germany

I’m focusing on politics in Europe these days, not just because I just returned from that part of the world, but because they are both more interesting and consequential than politics in the US. A case in point: newly-elected Francois Hollande just threw down the gauntlet with Germany, offering his ultimatum to Chancellor Angela Merkel on the future for Europe:

Q: Your solutions to boost growth, however, seem different from those recommended by Mario Draghi, or Angela Merkel …

Hollande: Structural reforms are needed to improve competitiveness, tax reform, and strengthen our industry. This is the meaning of the pact productive as I suggested.

The supply-side economics is not separable from a more direct stimulation of demand. Not with the Keynesian formulas of the past: the means may be additional public spending, since we want to control them, or tax breaks, which we are not allowed. But the implementation of instruments at European level, this means increasing the capital of the European Investment Bank, the mobilization of structural funds, the tax on financial transactions that would fund the work of infrastructure. Europe could finally decide to waive the loan: this is the challenge of ” Eurobonds “or “project bonds.”

Q: German Chancellor opposed this last solution …

Hollande: On this issue, we will have discussions with our partners, and particularly with our German friends, but they can not put two locks at a time, one of the “Eurobonds” and another on the direct debt by refinancing ECB.

Here’s what this means. Hollande wants the ability to collectively finance sovereign debt through Eurobonds, which would reduce debt spreads between Eurozone nations and aid the more troubled countries, or he wants the European Central Bank to do the financing directly. This is a challenge to the current order. Merkel, as the interviewer suggests, opposes both of these measures. This is at least one way out of the policy box for Europe, through a monetary channel. It doesn’t fully address the fiscal situation, but coupled with Hollande’s skepticism over the EU fiscal pact ratification (he prefers “a treaty on growth, employment and energy”), this represents a full-spectrum challenge to Germany.

Arthur Goldhammer, who is worth paying attention to on issues of French politics, says that this is the opening salvo for the debate on the future of Europe. Germany will reject this and attempt to use the ECB to bring Hollande to heel. The other countries on the periphery of Europe, in various unsettled states, may be determinative here. Either way, we’re actually having a useful conversation now, the first in many years in the global economy.

Hollande’s domestic position will have a lot to do with this as well. Parliamentary elections follow the Presidential election in France, and it’s unclear yet whether Hollande will have a governing majority for his programs. The far left and far right may end up making enough gains that he will need a unity government, perhaps even with Sarkozy’s former party.

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