Sarkozy’s coup d’etat
By: Wolfgang Münchau 28.10.2008
Largely unnoticed, there was an attempted coup détat of sorts in Europe last week. Nicolas Sarkozy, the French president, let it be known that he wants to remain in his role of president of Europe for another year. No, he will not prevent the Czechs and the Swedes from assuming the European Unions rotating six-month presidency during 2009. But since the two countries are not members of the eurozone, Mr Sarkozy wants to remain the de facto president of the eurozone until the end of 2009 when Spain, a eurozone country, takes over from Sweden.
President of what? It would be too easy to dismiss this as yet another example of Mr Sarkozys hyperactive grandstanding and, believe me, I am sorely tempted. But we should not dismiss it as a mere stunt because events are moving in his favour. Germany was never keen on what the French call gouvernement économique , which is what this is all about. But I am no longer so sure whether the immovable obstacle of Angela Merkel, the German chancellor, will be able to withstand the irresistible force of Mr Sarkozy for much longer. I can think of six reasons why Mr Sarkozy might prevail in the end.
First, last weeks stock market rout may serve as a reminder, if any was needed, that the financial crisis is not yet over, and that the transatlantic economy is in the middle of a long and painful recession. The new US administration and the newly elected Congress will almost certainly endorse a substantive stimulus plan early next year, which will put Europe under pressure to do the same. This will probably require another eurozone summit to draw up the ground rules for national implementation.
Second, the failure to provide money market insurance as part of the recent rescue packages will need to be fixed. After the last agreement, money market interest rates did come down initially, including the all-important three-month euro interbank offered rate, to which many European mortgages are linked. It fell a notch below 5 per cent last week. But so far the money market rates have fallen by less than the 0.5 percentage point cut in the European Central Banks benchmark repurchase rate. This means that the tensions have not eased at all.
Third, I would expect the existing bank recapitalisation schemes to be in need of revision and a eurozone-level agreement might well be necessary to do that. In Germany, for example, the only banks that have so far applied are publicly-owned banks. The trouble with the German scheme is that it sets the wrong incentives because it is voluntary, and imposes a strict salary cap of 500,000 ($632,000, £397,000) a year. Bank executives therefore have an incentive to reduce credit for companies and consumers rather than crawl to the government for help. The scheme will therefore fail in its main goal to recapitalise the banking sector. The need for an effective eurozone-wide scheme is as apparent today as it was three weeks ago.
The fourth reason is the failure of the eurogroup to provide leadership during this crisis. The eurogroup is an informal group of the eurozones finance ministers in which governments discuss issues of mutual concern. But it has been largely absent during this crisis. I understand the latest meetings were unusually bitter and hostile. But you would expect the eurozones only political co-ordinating group to make some positive contribution in a crisis of such scale. Mr Sarkozy is right in pointing out that the finance ministers could never have mobilised 1,800bn for a bank rescue package. In other words, the eurogroup may be necessary but not sufficient.
Reason number five is that Germany is fast losing allies in its fundamentalist opposition to economic governance beyond the stability and growth pact. The Spanish and the Italians favour it, and even the Dutch have been proposing a eurozone-wide action plan. Now that the crisis has hit eastern Europe, I would expect Austria, Slovenia and Slovakia to demand solidarity from within the eurozone too.
The sixth reason is continued uncertainty over the Lisbon treaty. The treaty would establish a permanent presidency of the European Council, which could deal with crises beyond a six-month horizon. Many shudder to think of what would have happened if the europhobic Czech government had been in the EUs driving seat during the present half-year. For as long as the treaty is unratified, EU leaders have no choice but to go outside it in dealing with crises.
Will Mr Sarkozy succeed? Ms Merkel will probably continue to boycott any French efforts in this direction for a while. German officials have developed a habit of reacting negatively in anticipation of what the French might propose. But Mr Sarkozy has been pushing Ms Merkel into a corner. I doubt she will be able to say nein forever without making positive contributions of her own.
For now, Mr Sarkozy will remain president of France alone. But if, or rather when, the crisis deteriorates, his coup détat may well succeed.