That letter from President Sarkozy and Chancellor Merkel to Herman van Rompuy (President of the European Council) has shaken rather than stirred the word’s financial markets.

I thought it worth a detailed look. But Protesilaos Stavrou has done it for me. Here is his thorough and interesting fisking by someone close to the Greece end of the issues:

So this is my analysis of the joint letter of French President Sarkozy and German Chancellor Merkel. The two leaders are stuck in the same policies that have allowed the crisis to spiral, that have failed to contain contagion and that have created a euro of two speeds. Moreover they focused more on the future upon a false ceteris paribus assumption.

Economic governance needs to be enhanced and further integration needs to be achieved, but these will be done in a very different manner than what the Franco-German axis wants. Most of the rhetoric of the two leaders will be fundamentally revised by market pressures and events in the real world that are far detached from the world Mr.Sarkozy and Ms.Merkel currently visualise.

Grahnlaw too has a go:

All in all, the Franco-German proposals would enhance the influence of the heads of state or government (of the biggest eurozone states) at the expense of the other EU institutions, without solving the fundamental problems of the euro area: lack of robust institutions and democratic legitimacy at European level.

Let’s instead look at the style and methodology of the letter and some of the things lurking below the surface.

First and foremost, it’s a letter to Mr van Rompuy (President van Rompuy as they put it). He was chosen to be the president of the European Council only because he was not a threat to any national leaders’ press conference. This is why they offer him a key new job:

Regular meetings of the euro area Heads of State and Government: these meetings will be convened twice a year and when necessary in extraordinary session to act as the cornerstone of the enhanced economic governance of the euro area. They would in particular check the proper implementation of the Stability and Growth Pact by euro Member States, discuss the problems facing individual Member States of the euro area and take the requisite fundamental decisions on averting crisis…

The Heads of State and Government of the euro area should elect a chairman as a rule for a 2 year and half term. We expressed our wish that you could take on this job.

Can you imagine President Sarkozy writing to President Blair in such dainty terms? No you can’t.

Because the two leaders are wanting the Euro-world to transform itself on their terms when they have no real capacity to make that happen on their own, they resort to grand but hollow exhortatory language. The English text has no fewer than 22 uses of the word ‘should’:

  • cooperation should
  • member states should
  • aforementioned proposals should
  • cohesion funds should (be suspended)
  • progress should
  • (my favourite) parliaments should (Note: and if they won’t/don’t?)

I have written before about how such musty, needy rhetoric sounds eerily reminiscent of another grim European tradition:

This strange repetitive exhortatory language detached from any real analysis of the problems is reminiscent of the communist apparatchik from Party HQ standing on a barren collective farm field and addressing the workers. He hectors them to even greater efforts to bring about the triumph of socialist productivity. They stare blankly at him, lost in their own thoughts and the disappointed emptiness of their blighted lives.

Plus there are the usual crop of redundant Euro-tautologies, especially the word ‘further’, included to give a sense of inexorable dynamism:

  • to strengthen further
  • be further enhanced
  • further progress

Here’s a core policy passage –  see the shoulds and furthers (original emphasis):

… euro area Member’s States should take all the necessary measures to improve competitiveness, foster employment, ensure stability of the euro area as a whole and deepen economic integration. In particular, further progress should be made on tax policy coordination to support fiscal consolidation and economic growth. Member states should commit to finalize the negotiation on the Commission’s proposal on “a common consolidated corporate tax base” before end 2012. Euro area member states should be ready to consider enhanced cooperation for further progress on tax coordination. 

Again, a creepily empty communistic exhortation. Improve competitiveness! Foster (sic) employment! Ensure stability! If any of this were possible it would have happened already after hundreds of similar high-level Euro-exhortations and declarations, and we would not be in this mess.

Then there’s some new work for the Franco-German motor. Joint proposals on a Financial Transactions Tax, work on a common corporation tax – and, best of all, more meetings!

We have decided to convene a meeting at the beginning of each European semester in order to exchange on our economic and fiscal policy and to define together the macroeconomic assumptions underpinning our budgets. The first meeting will be held in January 2012

And on and on.

There are huge issues at stake here. One is Democracy: how to make any of this work in a way which maintains minimal legitimacy.

This is linked closely to the second issue, Legality: how to achieve the changes needed without triggering core Treaty changes and possible referenda and horrendous delays. The answer to both is simple: proclaim that they are strengthening the Eurozone governance within the existing treaties – and hope for the best:

France and Germany propose to strenghten (sic) further the governance of the euro area, in line with existing treaties.

Below the surface of all this vainglorious and probably doomed letter-writing is a momentous question: how far can France and Germany continue to pull together politically in this way when the evidence suggests their objective interests may be diverging?

France has striven for decades to maintain a formal equality with Germany within Europe. This is an existential issue for French policy, no doubt with memories of C20 wars still very much alive. Yet the logic of the situation aims at something different: a rebooting of the Euro currency project within which Germany must shoulder huge new financial responsibilities and therefore surely should have more power.

Mrs Merkel is torn between feeling obliged to go along with German/French diplomatic Euro-flim-flam (that’s what Germans simply must do to show their loyalty to the EU cause) and the fact that her voters and MPs are unimpressed with the way things are developing, apparently at Germany’s expense.

France in turn is anguishing. If the Eurozone fails, the whole EU project so beloved and championed by France and Frenchmen for decades will look ridiculous. But how to stop it failing without creating new top-level EU institutions within which Germany must have extra weight and which in any case surely need new treaties?

Hence this latest top-level diplomatic fudge. An attempt to sound as if the two leaders are doing something new and radical, in the hope that the markets will be so awed by this new show of Franco-German unity and determination that they back off.

There is one good reason why this won’t happen, oddly enough trailed in the letter itself (my emphasis)

… by end-2011, all Member States of the euro area whose debt level exceeds the reference value must present an adjustment path for reducing their debt below the reference value and expose how to address the impact of ageing population on the long term debt sustainability

Should markets have much confidence in Europe’s long-term ability to pay back its debts if there won’t be enough Europeans around to earn the money to make the payments?

QTWTAIN

That should do it.