Christine Lagarde, the French head of the IMF, has joined Italian Prime Minister Mario Monti and most of the rest of the world in piling the pressure on Germany. Her message is simple: give more money to Europe, and stop this austerity talk before you wreck the global economy.Of course she puts it more politely than that. As the Washington Post reports on her remarks to the German Council of Foreign Relations (no relationship to the American CFR):
“There are three imperatives — one is stronger growth, two is larger firewalls; three, deeper integration. Resorting to across-the-board, across-the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”
For good measure, Lagarde added that what Europe really needs is a bigger bailout fund (the Germans are on record as opposing this) and more support by the European Central Bank for the continent’s troubled governments and banks (something Germany also doesn’t want). In particular, she thinks Eurobonds (anathema in Germany) would be a great idea, so that German credit would stand behind Greek, Spanish and Italian debt.The Germans are in a tight spot. French President Sarkozy and Italian Prime Minister Monti are both easier for the Germans to deal with than their political opponents back home. That reality forces Germany to be polite when Sarkozy comes up with what, to Teutonic eyes, look like hare-brained schemes; they also know they can’t push either Sarkozy or Monti too hard, or things will get worse.The fiscal austerity pact the Germans want to push through the European treaty process is turning to mush as negotiators tweak at it clause by clause; the urgent need for more liquidity to prevent a European financial meltdown led Germany to acquiesce in a massive easing of ECB policy — and it seems clear that any future emergencies will lead to more support.So far, the French-led Operation Gulliver is having a lot of success. (The tiny Lilliputions tied Gulliver down with a thousand threads while he slept; when he woke up he couldn’t break free. That is more or less what the Latin countries hope to do to the German giant in their midst.) Germany can’t let the European financial system collapse, it can’t let Italy go the way of Greece and it can’t fight every amendment to its proposed fiscal pact. As a result, it keeps making lots of little concessions that, bit by bit, are shaping a new European order that is not at all like the one the Germans say they want.Presumably some of the German establishment understands this, and is going along with the process for the sake of European unity. These folks think that Germany’s destiny lies in a united Europe and they fear that German populist and nationalist resentment would wreck the union rather than see their money turned into a softer, more Latin instrument. From their point of view Operation Gulliver is a kind of necessary deceit for the sake of Europe, and they aren’t about to wake the sleeping giant of German public opinion until they are sure the ropes are in place. Others may underestimate the importance of the small concessions being extracted one by one by one, and may not realize just how slippery the slope on which they stand has become.Be all that as it may, world financial markets seem to be thinking that Germany is slowly giving up the fight and that its threats and demands are a bluff. The ECB will print as much as it must to keep the financial system afloat, and at the end of the day, Germany will not push Italy and Spain over the cliff for the sake of austerity.At the moment then, France seems to be winning the latest round in the Franco-German rivalry. Madame Lagarde’s message to the GCFR, that Germany’s role is to pay and to pray for the new Europe, is a blast of the trumpet from a victorious France. If Gulliver sleeps through it — and it looks as if he will — then the tying and restraining process will continue.