Certainly the tight-money Duisenberg years were not kinds to either France or Germany, though this is arguably because of Duisenberg's historical deference to the Buba and their tight money, strong currency bias (irrespective of whether this is good for Germany or not) which is probably why he was Germany's first choice for the post. Trichet has been better for France, but again, imho, this is relative, and certainly the strong Euro is not good for France like it is for Germany.

The Hun is always either at your throat or at your feet. Winston Churchill

A uniform non-arbitrage taxation on capital flows between regions and business sectors (similar in implementation to the Tobin tax: add an extra spread by means of tax, to loan payments by one sector/region to a party in a more favored sector), agreed at EC level could enable preferential rates to underdeveloped areas, or eco/ethical businesses while controlling bubbles elsewhere, as was suggested in a previous diary by techno. It would eliminate the potential for "asymmetric shock" that was studied and dismissed before the EMU.

Pierre

Lest anyone gather from this that I'd advocate going back to the days when Italy's finance ministry printed money to pay for government program and that France run a 6% of GDP deficit,  this is not at all the case. In fact, the GSP doesn't go far enough - why can't member states run balanced budgets? But we cannot expect this to be economically effective if no EU-wide institutions assume the role of economic growth and development oversight and promotion that sovereign member-state governments once assumed.

To give an idea, I was trying to get at this in the first diary I ever posted here, essentially the same inter-regional economic levers employed by FDR back when government actually worked in the United States (citing Galbraith et al):

The relevant rigidities are to be found in the thinking of Europe's central authorities on two  levels. First, these authorities are unable, or unwilling, to foster the development of macro-economic policies that  can effectively build Europe's peripheral economies through national programmes of full employment--and that, indeed, once did so in the heyday of national Keynesianism from 1945 to 1970. Second, they have been unwilling to make the vast income transfers, across national lines, that would be required to make rural or service sector or even civil-service life in Spain as attractive as it is in Sweden.

In fact, present European policy is designed to work in just the opposite direction. Through monetary union and the Maastricht treaty, Europe has moved to restrict the autonomy of both monetary and fiscal policies and to impede the achievement of full employment on the national scale. Meanwhile, barriers to migration and resettlement obstruct the citizens of the European periphery from taking full advantage of the more generous social welfare systems to their north.

Anyhow, I understand that enlargement has made this even more politically tricky, as predictably certain elements throughout Europe are even more averse to income transfers to poor Romania and Bulgaria than they were to income transfers to Ireland and Spain in previous decades. And in fact, I believe this is precisely why the English and the Americans, push so hard for enlargement - they baldly want the project of an effective and proserous federal Europe, one of shared sovereignty, to fail.

And, as an aside, the fact that the most effective proponents of the Europe I think we can and should be have been (to my mind overly, but no matter) conservative social democrats like Delors or Prodi tempers my naturally more leftish tendancies, if for no other reason than pragmatism.

This being said, EU-wide institutions do not grow to take the place of the fundamental role that member-state finance ministries played in guiding and spurring economic growth and development, something will have to give.

The Hun is always either at your throat or at your feet. Winston Churchill

You know what we say around here of "externalities": polluter pays.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd

A fair, and very, very good, deal.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

And of course you are also correct on Total viz the former DDR, though it seems to me there was a quid pro quo there. Total paid for this, directly to the Christian Democratic party...

The Hun is always either at your throat or at your feet. Winston Churchill

I remember going to school and we only had water to drink for lunch, they didn't reinstate milk until somewhere round 1996. Felt like a huge luxury when we got it.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

For one thing, France saw interest rates rise, relative to USD, by something like 250 bp, with double digit yields on government debt. That's a huge price to pay.

Further, most all the economic activity financed by the debt which France helped pay for via that interest rate premium, happened in Germany. German jobs, German firms, German shareholders, East German beneficiaries of 1:1 conversion.

I think the word "greatly" is not out of line in this context. And for that matter, I am not alone, here's Paul Krugman, early into the Buba's tight money policy:

While a system based on German leadership did well in the 1980s, it was bound to run into trouble. Under the EMS, the Bundesbank in effect sets monetary policy for Europe; yet only Germany has a direct say in these policies. It is as if the Federal Reserve Bank of San Francisco controlled the U.S. money supply but was answerable only to California. That's fine as long as what is good for California is good for America and vice versa, but what if there's a conflict of interest?

The conflict of interest is now upon us. Reunification creates huge needs for new spending within the enlarged Germany. The International Monetary Fund forecasts that West Germany will go from a small budget surplus in 1989 to a deficit of 3.5 percent of GNP in 1991. True to form, the Bundesbank is restricting credit to offset any inflationary effects of this fiscal expansion. German interest rates have surged since the fall of the Berlin Wall last year, rising above U.S. rates for the first time in memory and driving the mark to record highs against the dollar.

This may be acceptable from Germany's point of view. But other European countries do not share in the fiscal expansion from reunification; if they go along with Germany's monetary contraction, as they must to sustain the EMS, they are threatened with recession. France's interest rates have risen as much as Germany's, and the franc has risen as much against the dollar as the mark has. It is as if, faced with a boom in California, Alan Greenspan were to focus on preventing any rise in the West Coast cost of living. By raising interest rates enough to stabilize California prices, he would plunge the rest of the U.S. into a recession. Greenspan, who answers to a national constituency, would not do this, but the Bundesbank's Karl-Otto Pohl, who runs Europe's money but answers only to Germany, would and will.

Another analogy: What would have happened if the Ronald Reagan-Paul Volcker policy cocktail of the early 1980s -- fiscal deficits coupled with tight money -- had been served up under the pre-1973 dollar standard, in which other countries pegged their currencies to ours? Everyone else would have been obliged to match our high interest rates, without the stimulus from our deficits. The result would have been a global recession -- everywhere except in the U.S.

So the question is whether the macroeconomics of German reunification -- a mix of budget deficits and high interest rates that is oddly reminiscent of early Reaganomics -- will destroy the EMS. A breakup of the EMS would hurt European unity, undoing much of the momentum from the agreement to unify markets in 1992. Yet the choices seem stark. Either Germany must concede that the Bundesbank answers to Europe, not merely to Germany, or the rest of Europe must endure a recession imposed by the tight monetary policy of a booming Germany.

And we know with hindsight, unlike Paul Krugman above, what happened. Pohl did in fact ignore the interests of the rest of Europe, and we all endured the most painful recession since World War two. And, importantly, we had no real say in the matter, if we wanted to maintain the EMS and with it, the European project.

The Hun is always either at your throat or at your feet. Winston Churchill