Is France Europe’s Next Crisis?

France’s economic collapse has destroyed the Franco-German alliance. That means the end of the EU as we know it.

“The trouble with socialism,” said Margaret Thatcher, “is that eventually you run out of other people’s money.” Although a bit of an oversimplification—it ignores the major role of the euro—it sums up France’s economy.

France’s citizens face the highest tax burden in the eurozone. Public spending makes up 57 percent of the overall economy—also the highest in the eurozone—yet the country can’t get its debt under control, and its economy is shrinking.

No wonder the French are currently the world’s biggest pessimists. But the consequences reach far beyond France. This is about a fundamental change in the most important relationship in Europe—the Franco-German axis.

The collapse of the French economy is part of a trend catapulting Germany to the forefront of Europe.

The bad news seems to come out of France on a daily basis. The latest was on May 15, when France’s statistics office revealed that the economy had shrunk 0.2 percent over the first three months of 2013, putting France in a “triple dip”recession. The International Monetary Fund said earlier this year it expected France’s economy to shrink over the course of 2013, putting it on a list of countries that includes Portugal, Italy, Greece and Spain.

After publishing a poll of European nations on May 14, Pew Research concluded that “No European country is becoming more dispirited and disillusioned faster than France.” On the same day, the Financial Times wrote, “Whereas Spain and Italy are suffering from a severe credit crunch and drastic austerity, France’s biggest problem appears to be the generalized gloom infecting businesses and households.”

Unemployment is at 11 percent—double Germany’s. For youth, it’s 26.5 percent, compared to Germany’s 7.6 percent. At 3.2 million, the number of unemployed is setting new records. And it’s been rising every month for nearly two years. Many in France are cutting their spending, as they fear they could soon add to those statistics. “Scarcely a week goes by without another factory closure or a redundancy plan,” wrote the Economist last month.

Under eurozone rules, the French government cannot borrow more than 3 percent of gross domestic product each year. With borrowing at 4.8 percent, it was forced to ask permission from the European Commission to miss its target for the next two years.

French President François Hollande has painted himself into a corner. As a result, he is the most unpopular president in France’s history. He is a socialist, and was elected based on promises to reverse the austerity of the previous government. But now that he’s in office, he can’t get around the fact that the government has run out of other people’s money. With the tax burden already so high, he can’t raise taxes to increase revenue. Since he came to power opposing spending cuts, he’s stuck.

All of this could push France onto the list of problem countries. “France could get into a situation that is not too dissimilar to Spain if you see the economy contract a couple of percent from where we are now,” said the cio of Armstrong Investment Managers, Patrick Armstrong.

But the French aren’t just worried about the short-term economy. Only 9 percent think their children will be better off than they are, according to the Pew survey.

The unhappiness is so bad that Le Point magazine recently published an article titled, “How revolutions are born: Are we in 1789?”—referring to the year the French Revolution began.

Some argue that it’s not that bad. The French government can still borrow money cheaply. With Japan printing money, investors are desperate to put their cash anywhere they can avoid losing money. They assume France is “too big to fail,” and that Germany will always back it up.

They could be right. France may not ever request a bailout. But that doesn’t matter. Spain and Italy on their own could force a revolution in the eurozone.

The fact is, France is now a problem for Europe. Economists debate how big a problem it is, but almost no one disputes that it is a problem. It’s not one of the strong economies that will pull Europe out of this mess. It’s actually dragging the euro down.

In the long term, this gives more power to Germany. In the short term, it’s having the opposite effect as France sides with southern Europe against Germany. This shift in the balance of power makes it harder for Germany to gets its way.

However, in the long term, the golden rule applies: He who has the gold rules. France has run out. The borrower is servant to the lender. And France is a borrower.

The director of global economic attitudes at Pew Research Center, Bruce Stokes, says that its survey on economic attitudes in Europe suggests that France and Germany, “which have for decades been the driving force behind European integration, increasingly see the world through different lenses.”

“The Franco-German alliance was based on rough equality between these two continental powers,” he continues. “In the 1980s, West Germany’s economy and population were slightly larger than France’s, but not overwhelmingly so, and French economic growth actually exceeded its neighbor’s.”

Three decades later, this rough balance between Germany and France no longer exists,” he writes. “Germany’s population is now a quarter larger than that of France, the German economy is 38 percent bigger” (emphasis added).

“Today the French and the Germans differ so greatly over the challenges facing their economies that they look as if they live on different continents, not within a single European market,” he writes.

“This new evidence of a dramatic divergence of public opinion across the Rhine on the problems now facing Europe and the merit of the European Union itself raises new questions about prospects for the European project,” Stokes concludes.

He’s right. Pew’s study shows that before the euro crisis, France and Germany were in broad agreement about the advantages of the EU and its future. Now there’s a huge difference. The French are now more Euroskeptic than the British—only 22 percent believe they’ve benefited from European integration.

This news comes just weeks after a public spat between the two countries. Last month a French government paper on European policy was leaked. It scolded Germany for “the selfish intransigence of Chancellor Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future.” Merkel’s coalition partners, the Free Democratic Party, hit back, publishing an internal report titled “France—Europe’s biggest problem child”—which somehow made its way to the German press.

There is no more Franco-German axis. This means the end of an era and the end of the EU as we know it.

As both the Telegraph’s Ambrose Evans-Pritchard and think tank Open Europe’s director, Mats Persson, point out, this isn’t a temporary falling-out that will go away if a left-wing party wins the German elections. There’s a broad agreement between all of Germany’s major parties when it comes to Europe and the euro. Germany won’t become more like France after the election.

The direction of Europe will no longer be decided by meetings of French and German leaders, who used to get together ahead of EU summits. Instead it will be a clash of wills—the future of Europe will be dictated by whoever can get their own way.

Germany, with its healthy economy, holds most of the cards. It doesn’t hold all of the cards, so it will have to make some compromises. But with the French economy weakened, France can no longer compete with Germany for leadership of Europe.

“Germany has more economic weight and political will to determine Europe’s future than it has had since World War ii,” wrote Reuters’s Fred Kempe. “Now, though, it lacks a partner that can replace France’s pivotal importance.”

France and Germany used to share the driving seat, listening to the demands of the other EU passengers and choosing the overall direction. France is out of the driving seat—it is now occupied by Germany alone.

However, there’s still a limit on what Germany can do alone—the passengers can still get out of the bus. The Trumpet has pointed before to the growing role of the Catholic Church in speaking up for southern Europe’s unemployed masses. The Vatican will supply the glue Germany needs to keep the EU together. The Catholic Church will soon take France’s place as Europe’s second driver.

The decline of France is a major milestone on the road to a new Europe. The next one will be the rise of the Catholic Church.

For an overview of what to expect from this crisis, see our 2008 article “Did the Holy Roman Empire Plan the Greek Crisis?