Confusion Surrounds French-German Economic Ties With New Elect

Simply put, France will not cooperate.  Hollande will not cooperate.  Where does this leave the Euro?

A litany of chatter has surrounded the ousting of French president Nicholas Sarkozy in last Sunday’s elections, replacing him with Francois Hollande.  The biggest question surrounding the change is whether France (NYSEARCA:EWQ) will continue to cooperate with Germany (NYSEARCA:EWG) under Hollande as it did under Sarkozy.

Simply put, France will not cooperate.  Hollande will not cooperate.  Germany’s austere approach to solve the European (NYSEARCA:FXE) debt crisis runs against the leading political ideologies in France, and among other European (NYSEARDA:VGK) nations.  Austerity, while effective at reducing government cost, is widely seen as an impedance to prosperity.  What’s more, the plan comes from Germany (and that matters too).

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In the U.S., Germany is seen as a strong country.  This is due in part to the large German heritage, along with a few bruises from the last great war.  In Europe (NYSEARCA:VGK), however, the Germans are still perceived as the down-trodden losers of the last century; the power hunger wolves who at each advance failed to consume the rest of Europe.  Strengthening this notion is the presence of foreign militaries in West Germany which have endured long after reunification.  Among these is the French military base in the southern Rhine River Valley.  To the French, Germany is an occupied country.  Therefore, in French thought, why should a political powerhouse such as France take orders from a defeated people?

Where news-savvy pundits have failed to place emphasis or attention is on a recent series of events which have passed more or less unnoticed, but which will affect Europe’s future and are indicative of the Franco-German relationship.  The first quiet event occurred less than 18 months ago, when France and Great Britain (NYSEARCA:EWU) signed a military compact effectively merging their two military forces together as one.  On the surface, it appeared to be a move by the French to strengthen British (NYSEARCA:EWU) ties to the continent.  And on the surface, it appeared to be a money-making deal where French arms manufacturers could now access British-controlled markets (example: France sold fighter jets to India, once a British-exclusive market).  But the deeper significance of the merger has to do with a cultural closeness the English and the French share over the Germans.  Neither France or Great Britain (NYSEARCA:EWU) have any desire to see Germany rise as the economic and military leader of Europe.  Thus, the move was more anti-Germany rather than pro-Europe.

Under Nicholas Sarkozy, the French military suffered budget reductions as part of an effort for austerity.  These cuts, which mainly occurred in the summer of 2008, came amid calls by the German Chancellor to begin looking at government spending and debt (yes, they saw the current crisis coming).  Additionally, in the same summer Russia (NYSEARCA:RSX) invaded Georgia setting off a global diplomatic boxing match.  In the throws of the fight, France, Britain, and the U.S. agreed to lift some provisions on the Germany military which had stayed since World War II.  In the French public mind, this was a step in an exceedingly dangerous direction.  Ever since, Sarkozy has collaborated with German Chancellor Merkel, abiding by her wishes and typically following her lead.

Francois Hollande will not collaborate as clandestinely as his predecessor.  Sarkozy was the first French president to work constructively with Germany; Jacques Chirac was firm, Francois Mitterrand was complacent.  Hollande will no doubt reverse a good deal of Sarkozy’s work with Germany.  Budgets will increase according to his campaign promises.  Education will see more teachers, public works will have better training, and the military will see fuller coffers.  Merkel will not be able to Lasso the new French president because he holds true an older ideology, one which is arguably out of date with the modern world.  Nonetheless, Hollande will not stand idly by as Germany (NYSEARCA:EWG) takes the lead in solving the Euro dollar (NYSEARCA:FXE) debt crisis.  Other European countries are also beginning to show resistance to Germany’s austerity plans.  As more nations align themselves against the German austerity machine, France will take center stage as the leader of the plan to solve the debt crisis the French way.  And that is exactly what Hollande wants.

Bottom Line:  Look for political tensions between Germany and France.  Europe is also beginning to shy away from austerity, which means the debt crisis is still in mid-crisis and the fate of the Euro dollar (NYSEARCA:FXE) still in question.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

This is a guest post by Christophe Adrien.