Sarkozy’s Budgetary Battle is Europe’s Too

French President Nicolas Sarkozy continues to shatter the European status-quo. Some of his endeavors have earned him many admirers, others not so much. His first EU summit was largely perceived as a triumph. Gallantly campaigning for a slimmed down version of the EU constitutional treaty, whose outline was agreed upon a few weeks ago in Brussels, the new French president was instrumental in leading Europe out of its constitutional malaise.

At that same EU summit, he also ruffled some feathers, especially those of economic liberals. Indeed, the Frenchman showed his Gaullist streak—obtaining the deletion of the words “undistorted competition” from the new treaty, which he defended by skeptically asking: “What has competition done for Europe?”

France has long been known for its protectionism, or “economic patriotism” as former Prime Minister Dominique de Villepin put it. While Sarkozy promised a “rupture” from these dismal economic policies of the past, regarding industrial policy and trade, it has largely been business as usual.

This has understandably disappointed many European free marketeers who firmly believed that the election of the neoliberal Sarkozy would veer France and Europe toward less protectionism and more economic growth. Unsurprisingly, Sarkozy’s economic patriotism has put him at odds with more economically liberal states such as Britain, whose new Chancellor of the Exchequer Alistair Darling characterized recent French actions as protectionist, declaring: “There is no other name for it.”

Britain is not the main antagonist in the most recent foray, as this time the showdown is over monetary policy. Sarkozy is taking on many members of the Eurozone, the group of thirteen European states who wield the euro as their currency, specifically directing much of his ire at the group’s Stability and Growth Pact.

The pact seeks to enforce fiscal discipline by dictating that each Eurozone member-state must keep its respective annual budget deficit under 3% of GDP. It has not fared so well. France and Germany, among others, have breached the pact in the past. This lack of compliance led Eurozone ministers this April to attempt to salvage the fiscal spirit of the pact, boldly agreeing to balance their budgets by 2010.

Mr. Sarkozy has taken issue with the timing of the commitment, arguing that his economic strategy, which he touted during the recent electoral campaign, takes precedence. Although Sarkozy was the candidate of the incumbent party of Chirac, he represented that change by outlining a daring economic scheme hinging on tax cuts and greater worker productivity. Yet these economic policies do not coincide with the eurozone's dictate of balancing the budget by 2010.

Granting big tax-cuts means an increase in the budget deficit in the short-term. In the long-term, according to Sarkozy, the deficit will give way to greater revenues for the state, resulting from higher levels of economic growth. Budgetary inflation in the short-term, full state coffers in the long-term. This is risky strategy, which does not adhere to eurozone standards. Hence the reason for the French president’s appearance in this week’s meeting of Eurozone finance ministers.

In an unprecedented move for a European leader, Sarkozy showed up in Brussels on Monday to explain his economic tactics to a largely skeptical group of European finance ministers. The French president expressed his desire to infringe upon April’s promise, asking for, or perhaps demanding, more time to balance the budget. And as expected, Sarkozy was not given a warm reception. An unnamed diplomat noted that the meeting was “pretty heated.” Why were many of the participants apparently so unwilling to grant Paris a little flexibility?

Well, other than the blatant violation of a pledge, it is the fear that Sarkozy’s move will set a dangerous precedent. If France gets more time to tinker with its budget, then why not Portugal or Italy? More specifically, the Germans are also against Sarkozy’s calls for more political guidance of the European Central Bank and demands for the bank to expand its focus from curbing inflation to fostering jobs and growth. Berlin is adamant about low inflation and ECB independence, putting France and Germany at loggerheads.

While breaking April’s promise undoubtedly puts forth a negative image of France and could lead to more calls for flexibility from other member-states, the precedent has already been set. The Stability and Growth Pact has been constantly disobeyed since its inception in 1997: what is left to salvage? The fiscal straight-jacket of the eurozone takes away economic sovereignty from European governments. Public spending cannot be utilized by the state to help speed economic recovery in the midst of hard times. The pact is not realistic, which is why it is frequently abused.

To be sure, a degree of economic and fiscal collaboration is necessary for monetary union. But just as important, if not more so, for the future of the eurozone is economic growth and productivity for one of its biggest economies. Granting a little flexibility would not be the end of the world. It could produce positive economic gains for the rest of the continent. Sarkozy can technically pursue any fiscal strategy he desires this year, as the French budget is within eurozone bounds. However, Sarkozy is right to warn his colleagues of his plans, which run the risk of reneging on the budget declaration.

Europe has recently experienced indications of an economic recovery. Growth has increased on average, and Germany continues to be the world’s biggest exporter. Yet the EU needs an economically vibrant France to further raise levels of prosperity. If Sarkozy’s tax stimulus package and subsequent breach of eurozone rules can turn France into a leading engine of economic growth, then he should be given the opportunity to do so.

Often what is good for France is good for Europe, as former French President Charles De Gaulle frequently stated. Despite Sarkozy's protectionist grandstanding, which is partially employed to keep the majority of the French onboard for his painful economic reforms, his struggle for economic growth is also Europe’s. He needs to be free to wage that struggle.