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War to Save the Euro: Merkel Rising, Hollande Falling

The further the Eurozone sinks, the bigger the abyss between Germany and France. Relations between the continent’s two biggest economies won’t get any better today, as the Eurozone is expected to contract for the second straight year. The WSJ:

The European Commission, the EU’s executive arm, forecasts a 0.3% contraction for 2013 and sees falling spending by businesses, consumers and national governments pushing euro-zone unemployment to a new high. Mass joblessness is expected to increase in the countries hardest hit by the crisis, with the average unemployment rate expected to reach 27% in Greece, 26.9% in Spain and 17.3% in Portugal.

“This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward,” said Marco Buti, the commission’s top civil servant, in a statement.

The Battle of France is going to be the first big test. President Hollande is expected to preside over a broken pledge to bring France’s deficit below three percent of GDP. The European Commission, which oversees this deficit requirement, can either fine France or grant it the same leeway given to Portugal, Spain, and Greece, in which case Hollande would be forgiven for poor growth rather than blamed for a lack of effort.

Either way, the schism between France and Germany is growing. Political relations between them have been at the heart of the EU, but the two countries are now on very different paths: Reuters reports that while businesses in Germany are maintaining a healthy rate of growth, “French services companies fell into their worst slump since the nadir of the Great Recession in early 2009.”

It looks as if a rivalry between a “Northern Alliance” and “Club Med” is dividing the EU, with Germany and France as the leaders of two opposed teams. When the two agree, Europe’s path is clear. But these days it’s far from clear that they will be able to agree in the future.

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