PERIGUEUX, France, July 31 (UPI) -- The small East German town of Schwerin had never before entertained the bulk of the German government. Along with Chancellor Gerhard Schroeder came his Ministers of Defense, Finance, Foreign Affairs, Agriculture, Justice, Internal Affairs, Labor, European Affairs and even Culture.
And along with them to Schwerin Tuesday came all their equivalents in the French government, topped by President Jacques Chirac and Prime Minister Jean-Pierre Raffarin, for the 79th Franco-German summit. It was the first opportunity for France's new governing team to show their determination to get what has long been Europe's most important relationship back on track.
"In our view, the Franco-German couple makes up the driving force of Europe," said French Foreign Minister Dominique Villepin.
Ostensibly, the agenda was about cultural affairs and the media, and how to use them to relaunch the concept of 'Europe' to a public that seems bored and increasingly irritated by the whole idea of European Union and enlargement and ever more power seeping away from the national capitals to Brussels.
But Villepin made it clear Tuesday that for France the real issue was for Berlin and Paris to agree a compromise on the vexed issues of reforming both the EU institutions and its costly agricultural policy before the big EU summit in December that formalizes the entry of 10 new member states from Eastern Europe. For Paris, making it clear that France and Germany still make up the EU's directing duo, even after enlargement, is hugely important.
In six months time, it will be the 40th anniversary of the Franco-German Treaty of Friendship signed by President Charles De Gaulle and Chancellor Konrad Adenauer, and Paris wants to make it a big event. Chirac says he wants to mark the occasion by signing a new, improved treaty that will take what other Europeans call the Paris-Berlin 'axis' to a new level. Nor does the conservative Chirac try to conceal that he would prefer to sign it with a different German chancellor than the Social Democrat Schroeder. After a series of rows over EU affairs, with Chirac insisting that France have voting parity with Germany despite a much smaller population, the two men do not get on.
Schroeder's opponent in the German elections in September, Edmund Stoiber, is a conservative who is more to Chirac's liking. And when Stoiber called on Chirac earlier this summer in Paris, the Frenchman presented him with the order of the Legion d'Honneur, a subtle symbol of approval that irritated Schroeder -- as it was doubtless meant to do.
But the Schwerin summit was hailed as a success, because it had to be. Although it was not on the formal agenda, Paris and Berlin have a common interest in one crucial matter of European affairs that impinges directly on domestic policy for both countries. Having adopted the euro currency, the two countries are also locked into the EU's 'Stability Pact' that requires them to balance their budgets and in no circumstances allow deficits to exceed 3 percent of gross domestic product, and are finding the experience deeply uncomfortable.
The Stability Pact was the price the Germans demanded to join the euro, as a way of ensuring that more profligate governments like Italy would not force the new currency into runaway inflation. But the sluggish German economy means that Germany is now perilously close to breaching the 3 percent deficit barrier. And if that happens, it faces fines of 0.5 percent of GDP until the deficit is brought back under control. For Germany, that means an annual fine of $10 billion.
Germany is currently running a deficit of 2.8 percent, but the country is close to recession and the government's tax revenues are falling below expectations while high unemployment means spending is going up. The 3 percent barrier will almost certainly be broken. But France faces the same problem. The French deficit is currently 2.6 percent of GDP, but the new Chirac-Raffarin government is committed to cutting taxes by 5 percent -- so France looks set to break the barrier as well.
So far only one country has broken the barrier -- Portugal. And the unspoken main order of business at Schwerin was for Chirac and Schroeder to agree to go soft on Portugal this autumn to ensure there would be no embarrassing precedent that could lead to fines on Paris and Berlin next year. The Stability Pact has not been pronounced dead, but it might as well be.
What the world's financial markets will do to the euro, when they realize that the new currency's one control mechanism is being stealthily dismantled, has yet to be determined. But it is striking that a new currency that Germany insisted should be as strong as the old Deutschmark is now being managed as if it were the old and unlamented Italian lire.
