Today’s big setpiece is a meeting of German Chancellor Angela Merkel and French President Francois Hollande ahead of a June EU summit which is supposed to lay the path for a banking union. The traditional twin motor of Europe has sputtered – not least because the French economy is so much more sickly than Germany’s – but also because of real differences of opinion.
When the Franco-German relationship was running smoothly, the two countries’ leaders routinely met before EU summits to prepare a joint position which more often than not prevailed (much to the annoyance of some of their partners). But Merkel and Hollande have conspicuously not done so on a number of occasions since the latter took power a year ago.
Hollande wanted a banking union including a structure to wind up failing banks and common deposit guarantee. The latter is already dead in the water and Germany is wary of the liabilities the former might impose upon it. The European Central Bank may have taken euro break-up risk off the table – though its pledge to save the euro is still to be tested – but banking union is still a huge issue. Without it the seeds of a future crisis, or even a revival of this one, will have been sown.
The smart money is that the June summit is long on bank regulation, short on bloc-wide measures to deal with stricken lenders. The big question is whether progress will be easier after Germany’s September elections.
There appears to be a recognition in Germany that antipathy towards its insistence on budgetary rigour (cuts and pain) is reaching uncomfortable levels. It has approached Spain and Portugal with a plan to help get money flowing to their credit-starved companies in the hope that it will bring down sky-high unemployment and German Finance Minister Wolfgang Schaeuble warned on Tuesday that failure to win the battle against youth unemployment could tear Europe apart. He also ruled out ripping up Europe’s welfare model.