It's France, not Greece

By MARTIN WALKER, UPI Editor Emeritus   |   June 18, 2012 at 6:40 AM   |   0 comments

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PARIS, June 18 (UPI) -- The messy and confused result of Sunday's election in Greece is probably not going to change anything soon for the fate of the euro but France's less closely watched parliamentary election just might do so.

In Greece, almost all the main parties went into the election with the same policy: to stay in the euro but to renegotiate the terms of Europe's support. The Greeks want more time to pay and more and better-targeted aid from Europe to restore at least some prospect of growth while they try to soften the savage spending cuts and austerity regime Europe demands.

The conservative New Democrat party won the most votes, with 30 percent, and should be able to form a stable coalition majority with the PASOK socialists. But their mandate will be weak. The upstart leftist Sipras party won 27 percent, which means that the new government will face a powerful opposition outside Parliament, with more than half of young Greeks out of work.

The real question is going to be Europe's readiness to loosen the screws on Greece, at a time when Greece shows only limited evidence of helping itself. The Greek government promised to raise $38 billion through privatizing state holdings. So far not a cent has been raised and there has been little improvement in Greece's notoriously leaky system of tax collection.

Moreover, Greece represents just a tiny fraction of Europe's economy, less than 3 percent.

France, however, is the second economy in Europe after Germany and the fifth-largest in the world. France's economy is pivotal, far more important than those of Spain or Italy.

Last month France threw out the center-right President Nicolas Sarkozy and elected the center-left Socialist Francois Hollande. Sunday France went to voting stations again in the second round of its parliamentary elections to decide whether Hollande's party would be able to govern with a parliamentary majority drawn solely from its own ranks or whether it would have to depend on Communist and other far-left votes.

This matters because a government dependent on far-left and Green support would be fighting the recession with one hand tied behind its back. It would make it tougher to cut back on public spending or to rein in pensions and healthcare costs or to restructure the overmanned French public sector.

The French state accounts for more than 55 percent of gross domestic product and just short of 25 percent of the workforce. The British state, by contrast spends 44 percent of GDP and provides 18 percent of employment. Government in the United States spends 37 percent of GDP and employs 15 percent of the workforce.

The Socialists won a clear victory and can now govern without the left. But one of Hollande's key campaign promises was to undo the retirement reforms of his predecessor and reduce the retirement age to 60 for people who had worked since the age of 18. He also promised massive new job creation programs, including 60,000 new school teachers, without saying how this would be funded.

As a result, Germany is worried. German Chancellor Angela Merkel made an unusual and waspish public critique of France in a speech Friday in which she stressed that her country was "the pole of stability and the engine of growth in Europe." Her meaning was clear; France plays in the second division.

"Europe should discuss the different growth levels between France and Germany," she said.

She then compared unit labor costs in the two countries, noting that "in the year 2000, Germany was doing worse or roughly the same as France on several levels but the differences have grown very sharply, something else that we should discuss in Europe."

Merkel is right. Since the year 2000, German unit labor costs have been held steady and even in some years decreased, thanks to the labor market and welfare and retirement reforms passed by her predecessor, Gerhard Schroeder. By contrast, France's unit labor costs have risen 23 percent.

Her Finance minister, Wolfgang Schauble, made a separate attack on the French decision to cut the retirement age and aides pointed out that it wouldn't be easy to persuade German voters, who retire at 67, to show much solidarity for French ones who retire at 60.

And now Hollande has sent to his colleagues in the European Union an 11-page paper calling for $150 billion in immediate stimulus spending, half from the European Investment Bank and almost all the rest from the European Union's structural funds. But he also wants jointly financed eurobonds to finance at least $7 billion, to establish a precedent that would undercut Germany's stout resistance to any eurobond system.

A crisis seems to be coming in Franco-German relations at a difficult time for Europe.

As it became clear Sunday evening that Hollande's Socialists had won a clear victory, the real focus of French politics shifted from Paris to Brussels and Berlin. Hollande has won a battle in France; now he faces in Europe a far more difficult political campaign against Germany's insistence on economic orthodoxy.

And the more that France and Germany dispute economic strategy, the weaker this divided Europe will be and the more difficult to save the euro.

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