Next Phase in Merkel’s Desperate and Risky Gamble

The conflict within the Eurozone has been simmering for weeks. On one side: German Chancellor Angela Merkel and her efforts to protect and promote her oeuvre. On the other side: Socialist François Hollande who is running against President Nicolas Sarkozy in the French presidential elections. But now, Merkel has raised the stakes by roping in three powerful allies and lining them up against Hollande—a desperate and risky gamble to keep Sarkozy in power.

She has been riding a wave of economic strength at home, with unemployment at a two-decade low. And from that foundation, she has labored to create a fiscally united Europe of balanced budgets and “structural reforms”—a euphemism for lowering the cost of labor, including wages and benefits in southern Eurozone countries. It’s her prescription for getting out of the debt crisis. And throughout, Sarkozy held his nose and supported all of her remedies, whether he liked them or not, and together, they pushed through the fiscal-union pact that 25 of the 27 EU members signed in record time.

But Hollande is threatening to unravel her oeuvre: he wants to institute Eurobonds to spread risks; he rejects austerity policies and insists on stimulus; and he wants to renegotiate Merkel’s sacrosanct fiscal-union pact.

As President of France, he may find support among EU states for his policies. To prevent that, Merkel has set out to beat him on French soil before it’s too late. In early February, during a joint TV interview with Sarkozy at the Elysée Palace, the official residence of the French president, they both berated Hollande. Quite a show amid the gilded splendor of the palace—and a first in French history.

And now it has leaked out that Merkel has advanced to the next phase in her fight against Hollande: She roped in three powerful allies, Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy, and British Prime Minister David Cameron. All are conservatives, and they were “scandalized” by Hollande’s plan to renegotiate the fiscal-union pact—though ironically, Cameron himself had refused to sign it. And they have entered into a confidential verbal agreement to boycott Hollande. Their motto: don’t give him a platform. And they agreed not to receive him when he visits their countries. A nasty slap in the face.

Top French presidential contenders frequently travel abroad and meet with leaders of other countries to appear, well, presidential. This included a rather amateurishly scripted trip by Ségolène Royal to China in 2007 when she ran against Sarkozy. So Hollande has been trying for months to get an appointment with Merkel. In vain—though the leaders of the opposition SPD received him when he was in Germany. Rajoy, Monti, and Cameron have also spurned him.

But the boycott heightens the risks in Merkel’s desperate gamble: the latest polls show just how much of a steamroller Hollande has become. During the first round on April 22, when a number of candidates fight it out for the top two spots, Hollande would obtain 30.5% of the vote, and Sarkozy 23%, well ahead of the rest of the field. In a face-off between the two in the second round on May 6, Hollande would demolish Sarkozy with 58% of the vote against 42%. In French politics, this kind of lead against an incumbent is a phenomenon.

Hollande reacted on Sunday morning: “We’re a great nation, and a great country, whose choices will not be determined by the heads of state and governments that are our friends.” And he issued a veiled threat: “There comes a moment when Germans say it’s better to allow the French to choose freely, without pressuring them, so that the relations between France and Germany can remain relations of friendship.”

These machinations show just how brittle the Eurozone has become. And now Sarkozy and Merkel both face economic headwinds in their own countries, as evidenced by an all-important industry. In France, new vehicle registrations have plunged for three months in a row, with French automakers suffering the most. While German automakers were still basking in last year’s glow of record worldwide sales and profits, registrations in February collapsed brutally. And it’s just the beginning.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.