In the wake of the first round of the French presidential election, a leaked document from Berlin, conveniently and somewhat revealingly translated into English, has found its way into MarketWatch’s hands.
Memo to Chancellor
Bundeskanzleramt, Berlin, 23 April 2012
From [ ] NAME BLACKED OUT
Esteemed Bundeskanzlerin, I am sorry. The results of the first round do not look good. I have to tell you that French elections traditionally propel change in the Franco-German monetary alignment. One of the reasons for monetary union in Europe was, as you may recall, to free us from the old style of doing things. But France is an old nation, and old patterns die hard. The French seem to be becoming more French, just as we are growing more German. So I would get ready, distinguished lady, for another change now.
Read our full coverage of the French election.
1. Let history be your guide. Two months after the French presidential elections in June 1969 that brought Georges Pompidou to power, France devalued the franc. In March 1976 a regional election reverse for President Giscard d’Estaing’s party prompted the franc’s departure from the Snake (the forerunner of the European Monetary System, EMS). In March 1978 an unexpected victory for Raymond Barre in the parliamentary elections catalyzed Chancellor Schmidt and Giscard to press ahead with the EMS. François Mitterrand’s May 1981 victory ushered in turbulence and three franc devaluations in the next 22 months. Victory for the right in the March 1986 parliamentary elections brought a franc devaluation one month afterwards.
2. In September 1992 the narrow referendum majority for the Maastricht treaty forced heavy franc selling, where the French only narrowly avoided devaluation after some furious encounters with the Bundesbank. In 1997 President Jacques Chirac rashly dissolved the National Assembly, allowing in a Socialist government under Lionel Jospin in June, undermining France’s commitment to the single currency. Need I go on? I believe you get the message.
3. Spreads between French and German bonds will likely rise this week. In any public statements, avoid saying that a rise in French interest rates is a good thing that will force the French to be more disciplined. Leave that kind of thing to Weidmann at the Bundesbank. Anyway, he’s more convincing that you are.
4. Consider appointing Hermann Gröhe ambassador to Mongolia! When you made him the general secretary of the Christian Democrat Party, surely part of his brief was not to travel to Paris in January and say you were going to campaign for Sarkozy. Gröhe’s attacks on Hollande three months ago for proposing “outdated concepts and left-wing dreams from the ragbag of politics” may have appeared clever at the time. I recall witness you chortling over the choice of words. However you will probably be seeing Hollande as president-elect in just over two weeks. So you will have some explaining to do.
5. Gröhe said Germany needs “a strong France with a strong president at the helm.” Tell Hollande we had him in mind all along. Also mention that the reason why you decided you didn’t want to campaign for Sarkozy after all was because you wanted to even up the contest and give Hollande a sporting chance. Hollande’s a decent man, and he’ll have other things on his mind. He may act as though he believes you.
6. Hollande says he will renegotiate your favorite fiscal pact to produce more growth. Tell him that you, too, are in favor of that. The Germans are not masochists! We have added the word “growth” to various European texts (please see various enclosures). Believe me, it works wonders! A lot of people in Germany favor higher wages. And they all have votes! Your big problem will be to get the Bundesbank to pay for it. Ring Weidmann this afternoon and tell him … I mean, ask him, what he thinks of the idea. (But don’t tell anyone you’re doing it. It’s strictly speaking illegal to give the Bundesbank instructions. Come to think of it, it may be time to set aside that bit of legislation. Leave it to me, I’ll fix that.)
7. Commentators will emphasize that Sarkozy is the latest European leader to fall foul of the “EMU syndrome.” They will say he’s a loser. They are right. That’s what makes him different from you. Don’t forget this. In the German elections next year, you can buck the trend. You may have to call on the support of the Social Democratic Party. My advice is to telephone Peer Steinbrück. After all, as your finance minister in the Grand Coalition a few years ago, he had several furious rows with the French. A good man! Ask whether such a coalition could be put together again. Just in case.
8. If you can get on to the front foot with Hollande, and blame the previous gaffes on someone else, you will have a good chance of building an excellent relationship. Don’t forget: All the leading Franco-German alliances since the Second World War have been between men (yes, all men) of differing political persuasions. You can do at least as well as they did.
9. Hollande will have lots of allies in Europe and so you had better get used to speaking to Social Democrats again.
10. Many people will point to Hollande’s statement last week: “Germany cannot remain an island of prosperity in the middle of an ocean of recession.” Building growth rather than pressing austerity could be an election winner. For you, I mean, not just for him! There’s a downside: the Bundesbank will have to tolerate an inflation rate of 3% to 4% for the next few years as well as Germany moving to a current account deficit. You know this. Weidmann knows this. And you know Weidmann. He will have to see eye to eye with you on this. Weidmann can’t have changed that much, surely, since he went off to Frankfurt a year ago? For a start, can you ask him to stop talking so much about Target-2? It’s getting on everyone’s nerves. Shall we speed up that telephone call to Weidmann? Shall I get him on the phone for you, immediately?
END OF MEMO
Source: Market Watch