For better or worse, the French and the Germans have been reliable allies during the euro crisis. However, divergences in opinions have emerged over the role the European Central Bank should play in addressing the debt problems of Greece and others. Until recently, the European Central Bank has been a relatively good role model for central bank independence and price stability. Germany would like to keep it this way. France, on the other hand, wouldn’t mind if the European Central Bank printed money to make some of the spendthrift countries’ debt go away.
First, the perceptions of the consequences of monetizing the Greek debt differ across the Rhine River. It is well known that Germans hate inflation. It is deeply rooted in their psyche. Part of Germany’s official theory is that Hitler came to power because of the disastrous consequences of the hyperinflation of 1922-1924 during the Weimar Republic. The French, on the other hand, have no such fears. On the contrary, ignoring how inflation chipped away their capital, my parents’ generation often fondly remembers paying their house “grace à l’inflation” during the 1970s.
Second, the official government debt and deficit numbers of France and Germany are substantially different. The Organization for Economic Cooperation and Development projects Germany’s debt at 87.3 percent of G.D.P. with a deficit of 2.1 percent of G.D.P. —possibly sustainable levels. However, France’s levels of debt and deficit are higher and unsustainable (debt of 97.3 percent of G.D.P. and a deficit of 5.6 percent of G.D.P.).
Third, attitudes toward reforming social programs differ too: in recent years. Germany has engaged in significant structural reforms to tackle the rigidity in the labor market as well as demographic pressure on the private and public pension system. France, however, has been reluctant to change any “acquis sociaux,” France’s famous social entitlements.
In other words, France is likely to need a bailout soon and wouldn’t mind setting a precedent. The Germans, on the other hand, are not too excited about the idea of picking up that tab.
Now, as Daniel Hannan explained this morning, the concept of the eurozone was never a good idea to begin with. It might have looked good on paper to the economists who, at the time, worshipped at the altar of “optimal currency area” theory. (Never mind that no evidence was ever provided to show why the size of the eurozone was optimal when there were 15 countries in it and still optimal after many other countries were added.) But it was predictable that the Eurozone would fail. In the end, the differences between rich countries like France and Germany and poor countries like Portugal and Greece made it impossible to sustain. Of course, the eurocrats have explained over the years that the eurozone would never end up in country bailouts, because those are expressly forbidden. Right, like that’s ever stopped anyone.