Atlantic Council

The New York Times yesterday published a letter by Bertrand Delanoë, the mayor of Paris, assailing Caroline Kennedy's status as apparent frontrunner for the Senate seat being vacated by Hillary Clinton.  The author termed it "surprising and not very democratic, to say the least." 

The president of France today announced a plan to get more ethnic minorities into more prominent positions. President Nicolas Sarkozy, impatient with what he said was the slow pace of promoting diversity in France, announced measures Wednesday to put more ethnic minorities on TV screens, in political parties and in elite schools.

French President Nicolas Sarkozy has postponed controversial Lycee reforms after a week of student demonstrations that many feared could escalate into violence.   AFP: Weeks of student protests forced Sarkozy's government to put a plan for high school education reform on ice amid fears that opposition from the streets could spread social unrest like that seen in Greece.

On Monday, Gordon Brown and Nicolas Sarkozy urged coordinated European fiscal stimulus measures to curb a possible recession.  The call came after a summit in London to which Angela Merkel was not invited, another example of the increasing disagreement between the two countries and Germany over an appropriate response to the financial crisis.  The FT:

Mr. Brown and Mr. Sarkozy pointed to a massive public works plan by Barack Obama, U.S. president-elect, as further evidence that they are right to argue for a large stimulus package in Europe.  But their joint participation at a “Global Europe” summit in London was seen as a snub to Angela Merkel, German chancellor, who was not invited and who has been accused of failing to act decisively to inject demand into her own economy.  Ms. Merkel’s ministers have variously suggested that the Anglo-French enthusiasm for deficit spending was akin to lemmings jumping off a cliff, or that fiscal stimulus measures elsewhere might serve to bolster Germany’s export economy.

Mr. Brown and Mr. Sarkozy both revealed that they had spoken to Ms Merkel over the weekend to reassure her that they were not ganging up on Germany just days before a European Union summit discusses the economic crisis.  José Manuel Barroso, European Commission president, also attended the London event and revealed that he too had spoken to Ms. Merkel on Monday, explaining that any EU recovery package would be fatally flawed if Germany were not on board.

However, without Germany's help, the chances of an effective rescue package seem quite diminished.

Related Posts:

• Germany at Odds with UK, France Over EU Stimulus Plan
• EU Economy Update
• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe

Ahead of a two-day meeting of EU finance ministers in Brussels that starts Tuesday, Germany remains reluctant to cut taxes or significantly boost spending.  Merkel's hesitance to further contribute to EU rescue packages is increasingly putting her at odds with the UK, who recently reduced VAT, and France, who is expected to unveil new economic stimulus measures in the next few weeks.  The FT:

Differences were widening on Monday over a European Commission €200 ($252.7) billion economic recovery plan, with France and the UK eager to see a big, coordinated stimulus package but Germany more critical of such reflationary measures.  A paper by the French presidency of the European Union, to be discussed at Tuesday’s EU finance ministers’ meeting in Brussels, was similar in content and tone to the Commission’s plan, with some passages apparently lifted directly from the proposal published last week, EU officials said.

In contrast, Germany remained skeptical, with Chancellor Angela Merkel yesterday ruling out significant tax cuts and Peer Steinbrück, finance minister, at the weekend likening countries that are ready to adopt large-scale deficit spending programs to "lemmings" hurrying down the path to mass suicide.  The Brussels meeting will debate how EU countries haul their economies out of recession, ahead of a summit next week of EU heads of state and government that is set to approve the Commission proposals, if in modified form.

[...]

A more robust approach is backed by France, with President Nicolas Sarkozy remarking pointedly last week after talks with Ms. Merkel that France was "working" on a stimulus plan while Germany was still "thinking" about what to do.  France, the UK, and others contend that an extra German stimulus would help not merely the German economy but the EU as a whole.

The WSJ similarly reports:

While policy makers in the U.S. and elsewhere in Europe are drawing up ever-larger fiscal stimulus proposals, Ms. Merkel told her center-right Christian Democratic Union's annual conference that she would continue to strive for a balanced budget.

[...]

Germany's government has been vocally skeptical about whether debt-fueled spending plans will work. But many of Ms. Merkel's conservative colleagues, as well as German business groups, economists and international organizations, are complaining that Germany is doing too little to lift its economy, which is contracting fast amid a slump in global exports.

Neighboring European countries such as France also are disappointed that Germany isn't taking the lead to revive growth through tax-and-spending measures.  Instead, Ms. Merkel lectured her party on financial discipline on Monday, praising the famously thrifty inhabitants of Swabia, the region around Stuttgart where the Christian Democrats' conference is being held.

The root of the global financial and economic crisis is known to every Swabian housewife, Ms. Merkel said: "You can't keep on living beyond your means."  A lack of thrift in advanced economies caused the crisis and can't be its cure, she said.

Merkel said the country might enact further fiscal measures in early 2009 if the economy remains unstable.  However, many economists are already criticizing the government for not taking seriously enough the major downturn Germany faces.

Related Posts:

• EU Economy Update
• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe

The EU is standing in the way of France's efforts to save its banking system.  Reuters:

 The European Commission is blocking a French plan to shore up the capital positions of big retail banks, insisting they must reduce their lending in return for state support, the Financial Times reported on Saturday.

France announced last month that it would lend 10.5 billion euros ($13.6 billion) to the country's six top lenders before year-end to prop up their capital reserves. Paris has argued that without state support, lenders would have shored up their capital positions by reducing loans in the face of malfunctioning interbank lending markets, a move that would deal a fresh blow to an already troubled economy.

The Financial Times said French Economy Minister Christine Lagarde spoke with European Union Competition Commissioner Neelie Kroes on Friday to persuade her to lift her veto on France's bank support package.  But Kroes was sticking to her view that banks cannot use state aid to increase their lending books, the paper said. "We have to apply the same criteria to everyone...support should be sufficient to offset the negative impact of the current financial crisis and no more," the paper quoted one anonymous official as saying.

This will be a severe test of the viability of the EU in a crisis.  The pre-Euro Exchange Rate Mechanism ultimately collapsed when states refused to follow central dictats at the cost of domestic economic pain.

UK

In the UK, RBS became the latest bank to be taken over by the government as a result of the financial crisis, according to IHT:

The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector.  Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS.  The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about £20 ($30.8) billion.

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RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis.  Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown.  But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued.

The government will hold the RBS stocks until they are profitable again.

France

Ahead of expected benchmark rate cuts by the ECB, a proposed bailout of major French banks was blocked by the European Commission, who said France must reduce its lending rate before approval.  The FT reported:

The French government’s plan to shore up the capital position of France’s six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.  Christine Lagarde, French finance minister, on Friday spoke to Neelie Kroes, EU competition commissioner, to persuade her to lift her veto on France’s €10.5 ($13.3) billion support package but Ms. Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

[...]

The French government reacted furiously to the Commission’s argument.  One senior official described it as "ridiculous" and "stupid" because it would exacerbate the credit crunch – the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.

France – unlike the UK, Germany or Italy – intended to recapitalize all its lenders at the same time to ensure they did not tighten credit to business and households.  Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.

Eurozone

Eurozone inflation fell in November due largely to increases in unemployment.  With fourth quarter projections anticipating a third straight quarter of negative growth, the ECB is expected to cut rates by as much as 1 percent in December from its current key rate of 3.25 percent.  This should continue to help inflation drop in early 2009.  The IHT provided details:

Euro-zone inflation declined in November and unemployment jumped more than expected, reports showed Friday, lifting chances that the European Central Bank would increase the size of an expected interest rate cut next week to aid a shrinking economy.

With recession pressing on growth, the Italian government became the latest European country to offer an economic stimulus package, totaling €80 ($101.5) billion.  That came one day after Spain announced a €11 ($14) billion plan.  President Nicolas Sarkozy of France on Friday said he would present a €19 ($24.1) billion program next week that would help the struggling car industry and invest in infrastructure.

More evidence of the slowdown was reflected in data released by the Eurostat statistics office.  It said consumer price inflation in the 15-country euro area fell this month by 1.1 percentage points to 2.1 percent.  Forecasters had expected a decline to just 2.3 percent.

Related Posts:

• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe

At a Monday meeting, Sarkozy and Merkel both agreed not to adopt the valued-added tax cuts enacted in the UK to stimulate spending, an interesting reversal from the leading role Brown took in October after unveiling his financial rescue measures.  However, this seems to be about all France and Germany can agree on.  The FT wrote:

Mr. Sarkozy let slip his frustration with Berlin when talking about the need for fresh measures to support the economy.  "France is working on it, Germany is thinking about it," he said.

There is intense irritation in the French government at Ms. Merkel’s reluctance to do more to support Germany’s growth with a fiscal stimulus, especially given Berlin’s sound finances.

Merkel remains insistent that Germany will not contribute further funds to any proposed EU-wide rescue package.  Deutsche Welle reported that, "Merkel's government has already pledged 1.3 percent of GDP to energize the German economy, but Brussels is to request a further 1 percent of GDP to help pull the continent out of the financial doldrums."

Furthermore, tensions between other countries in the union also persist, according to the IHT:

Countries including Germany and France want all European countries, whatever their public finances, to spend 1 percent of their gross domestic product to stimulate growth, a figure that would work out roughly to a combined €130 ($167) billion.  This idea is opposed by countries like Latvia and Hungary, which argue that their financial situation gives them no room to cut taxes or increase spending.

Whether or not all nations are asked to meet the 1 percent target, the commission is expected to say that its budget deficit rules will be applied flexibly.  Member states will be given longer than usual to bring their budgets back into balance because of the exceptional circumstances.

The stimulus package is expected to be announced on Wednesday and submitted to EU leaders in December.

Related Post:

• More Fiscal Stimulus Planned for Europe – Peter Cassata

The French Socialist Party has a new leader.  If the press is right, she's got a big job ahead of her.

Martine Aubry has been elected the new leader of France's opposition Socialist Party in a ballot of party members that brought to an end an exceptionally bitter and divisive leadership contest. She defeated her rival, Segolene Royal, by only a handful votes, making many commentators in the French press doubtful that she can inculcate the discipline and direction needed for a win at national level.

"The Socialist Party cut in two," ran the headline in the centre-right Le Figaro  "Catastrophic scenario for the Socialist Party!" exclaimed the centre-left L'Express weekly.

Centre-right Le Point's Charlotte Chaffanjon described it as "a crazy night for the PS (Socialist Party)," that demonstrated "the profound malaise that reigns at the heart of a PS divided into factions fuelled by violent personal hatreds."  Dominique Pourquery, writing the editorial in the left-of-centre Liberation, said that the new leader, "elected after weeks of debates that have torn apart the PS, will have to restore unity to this shattered party".

It's not just a matter of personalities but of governing philosophy that's at stake.

An editorial in Le Monde described the battle between Ms Aubry and Ms Royal as a "confrontation of two conceptions of the role of the PS, its organisations and strategy on political alliances."  Ms Aubry wants a party that is "social democrat and firmly anchored on the left". Ms Royal - who has mooted forming an alliance with the centre-right MoDem party - "seeks out ideas as much on the right as on the extreme left, even if this sometimes strikes a populist note," Le Monde said.

The French president's penchant for summits is wearing on both European and U.S. officials, the IHT said Wednesday:

President Nicolas Sarkozy of France left the summit meeting on the financial crisis here last weekend in a triumphal mood, declaring that it had tamed the animal spirits of American capitalism. Then he went home and announced that he would hold his own summit meeting in a few weeks in Paris — on the same topic.

That has raised hackles in diplomatic circles, not just because the meeting appears to compete with a planned gathering of 20 world leaders next April.

[...]

Making matters worse, Sarkozy said nothing about his plans to convene a meeting to President George W. Bush or the 18 other leaders while he was here. A senior European diplomat said he found the French proposal "amazing," while an American official said that that would be a charitable description.

Sarkozy certainly cannot be accused of taking France's EU presidency lightly.  After calling various European summits in Paris to address the financial crisis, he was a vocal supporter of meetings for global finance ministers and central bankers, the G7, and the G20.  The IHT suggests Sarkozy is trying to top the U.S. in an area where France claims authority—market regulation:

Sarkozy's aggressive statements have put American officials on edge, with some saying that he seemed determined to turn the global crisis into a referendum on the ills of untrammeled capitalism.

[...]

The surfeit of summit meetings reflects what has become a tense trans-Atlantic contest over the global economy. Much of this is posturing by ambitious leaders, but it also reflects a genuine philosophical debate about how best to fix the fractured global markets.

On one side is Sarkozy, the supercharged French leader, determined to keep the initiative on what many in Europe regard as a long-overdue discussion of the excesses of American-style capitalism.

It will be interesting to see how the summit plays out.  Scheduled to take place less than two weeks before Obama's inauguration, from January 8-9, the meeting is being described by French officials as merely a conference to bring together world leaders and thinkers.

However, with the Economist already calling Sarkozy "the president who loved summits," one feels there may still be a few more meetings in store next year.