ERLANGER: "TWO COMPETING VISIONS OF A EUROPEAN ECONOMY"

Two Competing Visions of a European Economy

By STEVEN ERLANGER

BRUSSELS — The market storm over the fate of the euro has calmed to prevailing winds, but there is considerable nervousness here over the economic health of Spain, the impact of austerity on long-term growth and continuing differences between France and Germany over the economic direction of the European Union.

Similar divisions were evident in the recent Group of 20 meeting, between a Europe bent on deficit reduction and a United States still promoting stimulus spending, a friction that analysts say contributed to a shaky week in world financial markets.

Both President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany are weakened by the financial crisis and public unhappiness, and both are maneuvering for their economic conceptions of Europe. Mrs. Merkel is demanding stability, fiscal rigor and a European Central Bank that focuses on keeping inflation low, while Mr. Sarkozy favors looser discipline, with room for stimulus spending and more concentration on promoting economic growth.

To complicate matters further, they are trying to thrash this out within a new European Union structure that is still confused and inchoate.

Market and diplomatic concerns are compounded by the uneven pace at which the European Union moves, lurching from summit meeting to summit meeting to find one ad hoc patch after another, and the slowness of European officials to work out their new institutional arrangements after ratification of the Lisbon Treaty last December.

Under that treaty, the new European president of the council of national leaders, Herman Van Rompuy, an economist and former Belgian prime minister, has moved more quickly than others to establish a powerful staff. Given the urgency of the economic crisis and the need for decisions by national leaders, he has managed to “presidentialize” decision-making, undercutting the influence of the European Commission, national finance ministers and the Eurogroupled by Jean-Claude Juncker, which sets economic policy for countries using the euro currency.

While not able to impose his will on Mr. Sarkozy or Mrs. Merkel, who dislike each other, Mr. Van Rompuy has worked hard to be a discreet and calming intermediary, senior European officials say. Europe’s institutional confusions have made the French-German relationship even more important, rather than less, these officials say.

Mr. Van Rompuy’s negotiating skill has also overshadowed José Manuel Barroso, the president of the European Commission, the permanent bureaucracy, which has had little to offer in a crisis founded in the debts and budget deficits of governments in the 16-nation euro zone. Even worse, France and Germany have sent relatively weak commissioners to serve in Brussels, and Germany in particular has been adamant in refusing to cede any new economic powers to the commission. Mrs. Merkel also insisted that Mr. Van Rompuy, not Mr. Barroso, be put in charge of a task force to recommend euro-zone reforms.

At the same time, the new high representative for foreign and security policy, Catherine Ashton, has made barely a ripple. She has concentrated on replacing her staff and negotiating with the European Parliament and nations over the shape and personnel of the new External Action Service, a European Union diplomatic corps intended to supplement and coordinate, but not replace, national diplomats. The service, which could end up with about 5,000 diplomats, will incorporate current overseas representatives of the commission, who are maneuvering to keep their posts.

Mr. Barroso, however, has already created waves by appointing his former chief of staff, a fellow Portuguese, João Vale de Almeida, to the new European Embassy in Washington, one of the most prominent posts to be filled in addition to those in Moscow and Beijing, without consulting member states.

Ms. Ashton, too, is trying to manage the French-German gap, looking to the current French ambassador in Washington, Pierre Vimont, as the most likely executive director of the new service, with a German deputy, perhaps Helga-Maria Schmid, who runs the policy unit of the council’s secretariat.

But while the Europeans are slowly constructing these new institutions and bureaucrats are struggling for dominance within them, the French-German divide remains deep, European and national diplomats say.

Mr. Sarkozy and Ms. Merkel know they must cooperate if Europe is to function, and their staffs and ministries work hard to coordinate. Franco-German agreement is “necessary but not sufficient,” as Mr. Barroso said in an interviewhere.

At each crisis, usually after German hesitation, the two have found a compromise, as they did at the last summit meeting in mid-June. But both leaders are increasingly unpopular, with Mr. Sarkozy battling ministerial scandals and Mrs. Merkel just managing to force through her choice for the ceremonial German presidency.

The two leaders are pulled in different directions by their electorates. The Germans do not want to finance others in Europe and demand austerity, while the French are unhappy about pension reform and coming, if still vague, budget cuts.

“They are patching things over,” a senior European official said. “They are coordinating, but out of necessity, so halfheartedly, not out of choice or conviction.”

In addition to their differences over growth policies, Mr. Sarkozy wants an “economic government” of the European Union to coordinate fiscal policies at the level of the 16 nations of the euro zone, the better to put pressure the European Central Bank to be more flexible on interest rates. Mrs. Merkel has accepted the French terminology of economic government but insists that it include all 27 members of the European Union, to water down French influence.

Mr. Sarkozy wants the economic government to have its own secretariat, which Mrs. Merkel has so far managed to reject, while the Germans want harsh sanctions, including the possibility of expulsion from the euro zone, against nations that flagrantly break the rules.

At base, Germany wants the rest of Europe to behave as it does — pursuing policies of low inflation, nearly balanced budgets and export-led growth — and sees no reason to change. But France says that without more German consumption to accompany greater austerity and competitiveness from others, trade imbalances within the euro zone will sink it.

In an article published this week in Le Monde, Hubert Védrine, the former French foreign minister, wrote that the French-German relationship urgently needed a fresh, public debate to find a synthesis. “France and Germany rarely have the same initial positions on issues,” he wrote. “Now the disagreements are somehow many. But there is, yet, no alternative in Europe to the French-German entente.”