France and Frankfurt

PRINCETON – Over the past two years, financial markets have turned the spotlight on a succession of countries – Greece, Ireland, Portugal, Spain, and Italy – turning each into the epicenter of a seemingly perpetual European financial earthquake. But politicians always recognized that the heart of the European project was the relationship between France and Germany. Is that relationship now in jeopardy?

There is a falling-domino argument that suggests that the crises on Europe’s periphery will have a knock-on effect on the Franco-German core. France, in the aftermath of a property and asset-price bubble, is vulnerable to some of the same combination of banking and public-finance problems. Indeed, now France’s presidential election has politicized the link between peripheral dominos and Europe’s French heart.

In his final campaign rally before the first round of the presidential election, Nicolas Sarkozy stood in front of a banner proclaiming “la France forte,” or strong France. For much of his audience, Sarkozy’s head obscured the “e” in France, so that the slogan looked more like “franc fort,” or strong French franc – which sounds like nothing if not “Frankfurt,” the German financial center that is the seat of the European Central Bank.

Sarkozy’s speech reinforced that message. Only reelecting the president could save a strong currency that guaranteed French wealth and incomes. The left would trigger a currency collapse and a run on French securities that would bring the euro crisis from Greece, Spain, or Italy to the heart of the European process, France’s relationship with Germany.