1st on agenda for new French leader? Woo Germany

[May 15, 2012]  PARIS (AP) -- Just hours after Francois Hollande is sworn in Tuesday as France's next president, he will head to Germany, underscoring the importance of the German-French relationship at the core of finding a solution to Europe's debt crisis.

Hollande has demanded that the fiscal treaty that brought an uneasy calm to markets by cracking down on overspending be renegotiated to include growth measures. Germany is cool to the idea. The fate of the eurozone may rest on whether he and Chancellor Angela Merkel can find a compromise.

WHY GERMANY?

The German-French relationship has been at the core of negotiations on how to dig out of the crisis, touched off by ballooning debts that have made investors reluctant to lend to some countries. Because the rates to borrow money went so high for Greece, Ireland and Portugal, they were forced to ask for bailouts to pay their expenses. Some fear Italy and Spain -- with far larger economies -- could soon find themselves in the same position.

As the eurozone's two largest economies, and thus the primary contributors to those bailouts, France and Germany have mostly been allowed to set the new rules the bloc will abide by to ensure it never descends into a similar crisis again.

But, in reality, France and Germany often differed on the eurozone's course, with Germany the more steadfast proponent of budget discipline. France, after all, hasn't balanced its budget in more than three decades.

"We don't think the same thing on everything," Hollande said Monday on France-2 television. "We will acknowledge that, in order to find the right compromise."

WILL THERE BE A MERKOLLANDE?

Hollande's predecessor, Nicolas Sarkozy, and Merkel were said to be so tight they were referred to as one person, "Merkozy." Many now wonder what type of relationship Hollande and Merkel will have, especially since she backed Sarkozy over Hollande.

Hollande emphasized Monday on France-2 that he and Merkel would be speaking frankly about what each thinks "not of the other but -- of the future of Europe." That seemed to dismiss talk about whether they would get along swimmingly.

Many analysts say Hollande and Merkel will find a way to get along because they have to.

"Admittedly, Mr. Hollande has adopted a sharp tone ahead of his meeting with Mrs. Merkel later this week, but that is probably because, having presented himself as an emollient personality, he does not want to appear weak in international negotiations," said Stephen Lewis, an analyst with Monument Securities.

WHAT ABOUT HOLLANDE'S BAGGAGE?

Hollande campaigned like a traditional Socialist. He took aim at the banking system, promised a 75 percent tax on high earners and vowed to renegotiate a European treaty meant to limit overspending that had become synonymous with "austerity" -- measures taken to cut spending that have severely hurt social benefits.

But there's reason to believe that Hollande will govern more pragmatically. He has said he will order an audit of France's bank accounts before he embarks on any of his campaign promises, leaving himself an opening to scale them back. He has also promised to reduce France's considerable debts, committing to balancing the books just one year later than Sarkozy had aimed for.

Most importantly, while he says he will insist on a re-negotiation of the "fiscal compact" to add growth-promoting measures, his language leaves some room to maneuver. At one press conference, he indicated that the growth protocol could come in a separate treaty.

WILL GERMANY BEND?

Given the reality of a new French leader, Germany appears prepared to soften its position. Merkel and her government maintain that the fiscal treaty, which threatens sanctions for countries that spend beyond their means, is not up for negotiation and must be respected. But officials there have also begun to talk about the need to encourage growth.

Whereas just a few months ago, it seemed only economists were talking about the need to spur growth, Hollande has brought that issue to the center of Europe's conversation about its crisis. Politicians around the region are clamoring for more help from the EU, and European Central Bank President Mario Draghi has called for a "growth compact."

Just Monday, Germany's finance minister wrote in an essay in French newspaper Les Echos that "Germany says `yes' to growth."

"The idea for a growth initiative is not only legitimate, it is in line with Germany's wishes," wrote Wolfgang Schaeuble.

But he quickly moved to quash the idea that Germany was ready for increased spending. "By growth, I obviously don't mean the artificial stimulation of demand by budgetary spending," he wrote.

DOES GROWTH MEAN LABOR REFORMS?

Merkel's spokesman on Monday laid out exactly how Germany envisions stimulating growth.

"Growth is the result of smart reform policy, reducing bureaucracy, support for small and medium-sized companies, measures in the area of education and training, and above all labor market reforms," Steffen Seibert said in Berlin. "Growth can also be supported ... by the targeted and smart use of European funds that haven't yet been spent."

Many of those proposals are straight from Hollande's playbook. But others, like structural reforms, it's not yet clear how far Hollande will be willing to go. Economists say France desperately needs to make it easier for employers to hire and fire and reduce the amount they pay into the social benefit system. But those reforms will involve a major shake-up and will likely be fiercely resisted by labor unions.

"For the Germans, the return to economic dynamism has to pass through major structural reforms.... That's, after all, the strategy that was put in place across the Rhine 10 years ago," said Marc Touati, chief economist at the of investment company Assya. "Only, all Europeans are not Germans and are not necessarily ready to put up with the German cure."

[Associated Press; By SARAH DiLORENZO]

Associated Press writer Geir Moulson contributed to this report from Berlin.

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