Tuning out of the Merkozy show

Germany will have to learn leadership, and France followship. Both will find it a wrenching experience. The rules of the European game changed forever with the reunification of Germany. It has taken the euro crisis to spell out the brutal implications.

One has to feel some sympathy for Angela Merkel. Germany's chancellor has been excoriated in turn for absent and for oppressive leadership. At one moment she is said to be standing idly by while the euro burns, and at the next of issuing teutonic diktats about the terms of its survival. Germany, the rest of us have been reminded, has always been too big for Europe.

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 lyse; a jointly signed missive spelling out a euro rescue plan.

This is called keeping up appearances. For France, the survival of the euro is existential. Never mind the initial, enormous economic shock that would follow its failure. The break-up of monetary union would most likely see France slide into the continent's second division. Europe is the engine room of French power. Without it there would be nothing left of its global pretensions.

Sarkozy, of course, has been fighting his corner – pressing for a Gaullist, intergovernmental arrangement rather than a leap to fiscal federalism. France has been attuned to the danger of Berlin's habit of elevating the avoidance of moral hazard above restoring confidence in financial markets.

In the end, however, Berlin has prevailed. As Charles Grant of the Centre for European Reform has observed, the proposals for a stability union presented to the Brussels summit were essentially written in Germany, even if the odd page was edited in Paris.

Assuming (perhaps foolishly) agreement at the summit, the present approach should secure a second chance for the euro: the more so if it provides cover for decisive intervention in the markets by the European Central Bank. But for the very reason it has been written in Germany, the strategy fails to offer a sustainable long-term answer.

The economic argument at the heart of all this never really changes. Instead it returns again and again to the disagreement that surfaced nearly 70 years ago among policymakers at Bretton Woods.

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. Franois 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.

Merkel's stability union will endure only if it acknowledges that Keynes was more than half-right. Any supranational scheme, whether enshrined in treaty or otherwise, that condemns much of Europe to indefinite austerity will not survive the realities of national politics.

If German leadership is to avoid being oppressive, it must recognise that fiscal union cannot be a one-sided affair. It was encouraging this week to hear Merkel talk about the competitiveness problems in the weaker eurozone economies. It would be more so were she to talk about formulating a strategy for growth.

For its part, France must begin to reimagine the political geography of Europe. The Franco-German relationship will always be a pivotal one, but it is now unequivocally unequal. Paris needs friends beyond Berlin – in Warsaw, Rome and Madrid. If Britain's Tory party were ever to leave behind its European nightmare, there would also be a case to revive the old entente.

Radoslaw Sikorski, Poland's foreign minister, recently told an audience in Berlin that the big threat to Europe came not from German power but from German inactivity. Given the two countries' history, that was a pretty brave thing to say. Few would dispute that the survival of the euro now rests with German leadership. There must be more to that leadership, though, than the promise of austerity.

Copyright The Financial Times Limited 2011.