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Philip Stephens has a good piece in the FT today on "the Franco-German question".

Now the Franco-German question - FT.com

The new German question asks whether Europe - whether it is the European Union or a more closely integrated eurozone - can find a new equilibrium now that Germany is so visibly the preponderant power. This in turn marks the return of the Franco-German question. Berlin is assuming the role of leader with a mixture of hesitancy and tetchiness. Paris will struggle mightily to accept the place of follower.

The choreography is calculated to conceal this redistribution of power. The euro crisis has been cast as the Angela and Nicolas show - the German and French leaders smiling for the cameras at the Élysée; a jointly signed missive spelling out a euro rescue plan.

This is called keeping up appearances.

Stephens goes on to talk about Bretton Woods and Keynes:

Now the Franco-German question - FT.com

In 1944 John Maynard Keynes argued forcefully that the planned new exchange rate regime required symmetrical obligations on creditor and debtor countries to deal with any imbalances. If the system was to endure, austerity on one side had to be balanced by growth on the other.

Keynes lost the argument then, but governments have been returning to it ever since. During the 1980s it was at the heart of economic discord between the US on one side and Germany and Japan on the other. It runs through today's trade tensions between Washington and Beijing.

The big irony, though, is that this very same debate was present at the creation of the single currency. François Mitterrand's effort at the start of the 1980s to pursue an expansionary economic policy ended in humiliation when Helmut Kohl made fiscal rigour the price of the franc's continued place in the European exchange rate system. France resolved never again.

The outcome was the "franc fort" policy and a push to share economic decision-making between Germany and France. Once the D-Mark had been subsumed in a single currency, the austerity versus growth argument would finally be settled. That was the theory.

Germany is now within reach of the political integration it sought as a counterpart to monetary union when the euro was established. The danger is an assumption in Berlin that the new structure can be built to an entirely German design.

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by afew (afew(a in a circle)eurotrib_dot_com) on Fri Dec 9th, 2011 at 05:12:03 AM EST

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