Originally, François Hollande planned to visit Germany on May 16, the day after becoming President of France, to meet with Chancellor Angela Merkel for some barbed-wire fence-mending—after a campaign during which he declared war on Merkel’s debt-crisis policies. But now, he pushed their date up to May 15, the earliest second possible. At midnight that day, Nicolas Sarkozy will hand him the keys to the Élysée Palace. Then Hollande will take care of some formalities, sleep a few hours, take care of more formalities, and back down from some additional campaign promises.
Already officially out the window is his promise to cap gas prices, now that they’re declining. And he backtracked on his promise to cap executive salaries at state-owned companies—at first, he’d said he’d tolerate up to 20 times the minimum wage of €16,780 per year (hence a salary cap of €335,600), but now, only new contracts would be concerned, not current ones. The sigh of relief from these executives could be heard across the Atlantic. Ever active, he also promised a new measure: layoffs designed to goose stock prices would become “extremely expensive,” though he wouldn’t actually prohibit them.
While Hollande’s honeymoon with the French public is in full swing, Sarkozy is quitting politics. He complained about journalists’ dogging him. “I’m spied on,” he said (ironically, as we will see). “I hope they will leave me alone.” But that’s precisely what they won’t do because, on the first day of Hollande’s presidential term, Sarkozy will lose his immunity that has protected him against a growing pile of malodorous allegations with deadly consequences.
Then in the afternoon, Hollande will fly to Berlin for his first trip to another country as President of France—for his date with Merkel. Well, it will be a working dinner. Some menu items, unpalatable as they appear, are already known: the fiscal union pact and Greece. Dinner will be followed by a dog and pony show during which a smiling Hollande and a dour Merkel will claim that they have kissed and made up, and that they form a perfect couple despite a few minor differences.
While they do have a few things in common—both believe in the EU and in the euro—his demands to renegotiate the fiscal union pact remain uncircumnavigable. “He campaigned on the renegotiation,” said his spokesperson Benoît Hamon. “And we couldn’t be clearer: If the pact isn’t renegotiated, it won’t be ratified.”
But Merkel has yet to flip-flop on that issue. “Growth based on borrowing would take us back to the beginning of the crisis,” she reiterated on Thursday in the Bundestag. Reducing debt and stimulating growth and employment are what it takes to get over the debt crisis, but only growth through structural reforms makes sense, she said in direction of the opposition parties that, in line with Hollande, were clamoring for more spending.
And just then, inflation was heating up if not actual prices but conversations and debates in Germany after the Bundesbank confessed to a sudden tolerance for more inflation in the “medium term.” Inflation in Germany—for the first time since the introduction of the euro—would be “somewhat higher than average in the European monetary union,” said Jens Ulbrich, head of the Bundesbank’s economics department. That was Wednesday. It sent shock waves through Germany. And by Thursday, warnings and clarifications were being shot from all sides.
“There must not be a loosening of the Bundesbank’s inflation policies,” urged Klaus-Peter Flosbach, financial spokesperson for the governing CDU/CSU coalition. Taxpayers who already shoulder the bailouts “must not also be burdened by inflation.” The Bundesbank with its consistent stability-oriented policies was an “important pillar” of the euro system. “That must not change,” he said. “The Bundesbank must remain the guarantor of a stable currency.”
But Finance Minister Wolfgang Schäuble, too, suddenly became tolerant of inflation. And turned into the unlikely hero of German workers when he spoke out for wage increases—with an eye on wage negotiations currently underway across the country. Higher wages would make German workers less competitive and thus would give Greek workers a chance, while simultaneously increasing internal demand, presumably for Greek products, his thinking went. Exactly what the Eurozone needs. The free lunch has arrived. Upward wage pressures, after more than a decade of real-wage declines, are already building up in the pipeline. The government fired the first shot when it bestowed a wage increase of 6.3% over two years (astonishing in recent memory) on government employees. Germany could “permit itself an inflation of 2% to 3%,” Schäuble said to calm edgy tempers, though higher prices for too long wouldn’t be acceptable, and “the Bundesbank wouldn’t accept it either.”
“Inflation Alarm: Bundesbank Softens the Euro,” screamed the Bild, the largest daily paper in Germany. And then more articles: “Where Is My Money Still Safe Today?” and finally, “The Coward Way Out.” Not exactly a chorus of sudden pro-inflation unanimity.
Hollande must be scratching his head. One of his campaign promises—he’d push the ECB to be more aggressive and fund sovereign debt directly—had just taken a leap forward. The sea change in the Bundesbank may well allow the ECB to turn on the printing press once more—and hand out money more directly—to keep the Eurozone afloat. German savers and bond holders be damned. Yields will be pushed down by the ECB, and inflation in Germany will drive real yields into negative territory: financial repression, another price Germans are asked to pay (Americans have been paying it ever since the Fed decided to bail out Wall Street). But Hollande couldn’t have asked for better timing. And he must be thinking, if the Bundesbank can flip-flop, why not Merkel?