German Chancellor Angela Merkel and French President Nicolas Sarkozy attend a meeting in Paris. Photo by Philippe Wojazer/AFP/Getty Images.
German Chancellor Angela Merkel and French President Nicolas Sarkozy met Tuesday in Paris to come up with a joint strategy on addressing fears about the euro currency. Their meeting was notable for what didn’t come out of it for as much as what did, according to one veteran analyst.
We asked Bruce Stokes, senior transatlantic fellow for economics at the German Marshall Fund of the United States, for explanation. Answers have been edited for length.
What’s your takeaway from the Merkel-Sarkozy meeting?
BRUCE STOKES: I think that it both raised some issues that were surprising and more forward-leaning than we anticipated and dodged some issues. They have proposed a financial transaction tax, which has been kicking around some time in Europe and the French had been pushing. The significance of this is indicated by the fact that the stock market in the U.S. dropped after this was suggested.
But the reality is — just as Willie Sutton said, “I rob banks because that’s where the money is” — you tax financial transactions because that’s where the money is. The Europeans need money, and there’s an argument to be made that the financial sector had caused some of the problems we’re in. So there’s a practical and a moral reason to tax them, but this is highly controversial. And the fact that the French and the Germans now agreed to go forward with this idea when the Germans were very reluctant to be involved in this suggests that the meeting was of some import.
Fifty-seven percent of the revenue of the overseas affiliates of American companies comes from Europe. If the European economy were to go back into recession, that would take a huge hit.
Second, they have talked about a common corporate tax between Germany and France. Corporate taxation in the European Union has always been an issue because there are wide variances in the level of taxation — hugely controversial. The fact that the two largest economies in Europe said they’re going to come up with a common corporate tax is not only important to Europe but it’s a signal to the U.S. that as we consider reducing our corporate taxation and trying to make it more competitive, we’re going to have to watch what the Germans and the French do because that’s a market now of over 100 million people who have a similar corporate tax rate, a similar base for the taxation, and we’ll want to stay in line with that.
The Europeans also talked about some process issues. They talked about a eurozone president — a single person to call, in theory, if the other eurozone members go along with that. It would help with the coordination of policy both inside Europe, and between Europe and the United States.
What they didn’t talk about is equally important. They did not talk about creating a euro bond, which is highly controversial. The French are pushing it, the Germans were very reluctant — although they seem to be behind the scenes moving in that direction. And this would be a common way for all the countries of Europe to raise money. It would lower the cost of borrowing from places like Portugal and Greece. It would raise the cost of borrowing from people like Germans, that’s why they’re against it. But there are leaks coming out of Germany that the government is beginning to move in that direction, but clearly they’re not ready to go there yet.
Who’s in the power position?
BRUCE STOKES: I think without a doubt Germany is the first among equals, and the French for years have seen it as in their self-interest to try to stay as close to the Germans as possible, and to ride the German coattails in terms of being the two most powerful countries in Europe.
Clearly the French have won some fights in this most recent tussle with the Germans in terms of what to do going forward in Europe. In other words, this financial transaction tax is a French idea. The idea of stronger euro-governance — having more decision-making being done in a centralized way in Europe — is a French idea. One of the other things they came up with in this meeting was they pushed even harder to have a centralized authority in Brussels looking over the shoulder of national budget-makers. In other words, when the Italians or the Spanish or Portuguese are drawing up their budget, it would have to be submitted to somebody in Brussels, and Brussels could say this isn’t going to balance, this isn’t going to work. So the meeting today called more strongly for that oversight to happen. This is important, because the European Parliament is taking up this idea in the fall, and it wasn’t at all clear whether it was going to pass.
But the Germans also won in this meeting, because the Germans have put in their constitution a balanced budget amendment. It’s unlike our balanced budget amendment [proposal] in the sense that you have to balance the budget in Germany over the business cycle — so it’s not every year but over a business cycle that it has to be balanced, which gives you a little more flexibility. The French had been on board for that idea, but they hadn’t done anything about it. Sarkozy now has agreed not only to have that in France but they have now jointly called for all the countries in the eurozone to have a balanced budget amendment to their constitutions.
What would have to happen for countries to start leaving the eurozone?
BRUCE STOKES: The idea that the eurozone is going to break up is something that skeptics of the eurozone have been saying since before it was created. So when we hear skeptics say, “This can’t last,” we have to bear in mind this was the same people who said it was never going to work to begin with. So part of this is “I told you so.”
That said, it does seem to me that a default by Greece would probably force them to leave the eurozone with tremendous costs. This is not a costless measure. All of their debts are denominated in euros. The new currency they would have would fall in value, and the cost of their debts would rise dramatically. So it would be a huge cost to them.
But if they went into default, they might be forced out of the euro. The fact that that hasn’t happened yet, the fact that Europe keeps going to great lengths to keep the euro from falling apart, is a reminder to us as outsiders that Europeans don’t see this as an economics test but a political test of Europe. And they are willing to pay a very high economic price to sustain the political unity of Europe. I think only Europeans can fully appreciate what this means to them, because to outsiders and especially skeptics of the euro, this seems irrational.
What might the effect of a weakening Germany and France have on the U.S. economy?
BRUCE STOKES: We are much more integrated into the European economy than we fully appreciate. Fifty-seven percent of the revenue of the overseas affiliates of American companies comes from Europe. If the European economy were to go back into recession, that would take a huge hit. Europe is our largest trading partner, by far the largest of our direct investment is in Europe. So we are intimately tied to Europe’s future. As today showed, the suggestion of the financial transaction tax caused the Dow Jones to go down. Whether or not that’s a logical response, that’s how markets do respond. We can’t assume decisions made 3,000 miles away don’t have some kind of impact on us and our 401ks.