Hollande won't let Berlin deter his growth drive

PARIS Thu May 10, 2012 2:26pm EDT

Newly-elected French President Francois Hollande attends a ceremony at the Luxembourg Gardens to mark the abolition of slavery and to pay tribute to the victims of the slave trade in Paris May 10, 2012. REUTERS/Charles Platiau

Newly-elected French President Francois Hollande attends a ceremony at the Luxembourg Gardens to mark the abolition of slavery and to pay tribute to the victims of the slave trade in Paris May 10, 2012.

Credit: Reuters/Charles Platiau

PARIS (Reuters) - French president-elect Francois Hollande signaled to Germany on Thursday that he will not be deflected from his drive to change Europe's focus from austerity to growth after Chancellor Angela Merkel rejected any economic stimulus on credit.

Hollande met Eurogroup President Jean-Claude Juncker in Paris as he tries to rally European partners to support his push to change the focus of euro zone policy.

The Socialist will travel to Germany on Tuesday hours after his inauguration as president to press his demand to add growth measures to Europe's budget discipline treaty with Merkel.

Germany's conservative chancellor told parliament in Berlin that "growth on credit" would just tip Europe deeper into crisis, rejecting stimulus policies that would require new debt.

French Socialist Party spokesman Benoit Hamon retorted: "Angela Merkel is sticking to her position but she cannot override the will of the French people."

Juncker, head of the Eurogroup of euro zone finance ministers and prime minister of Luxembourg, declined comment on the substance of his hour-long meeting with Hollande. He said on Monday he had told the president-elect by telephone that growth elements could be tacked on as long as the fiscal pact was not altered.

Merkel has also insisted that the essence of the treaty could not be unpicked but Socialist party heavyweights have insisted that Hollande would not submit the pact for ratification unless he can get pro-growth elements added to it.

BALANCED PACT

Michel Sapin, a long-time friend of Hollande who is tipped as a possible finance minister, said that Germany was not a European super-power and warned that Europe progressed when Berlin and Paris worked as equals.

"If we think that we can get out of the crisis with more debt we'll hit a wall. If we think we can get out with more austerity then we'll hit a wall," Sapin said on BFM TV.

"So we have to find the right path, the balanced path that Hollande has called for of serious budget management and boosting growth," he added.

When they meet, Hollande may have to promise Merkel to pass a "super-law" committing France to sticking to deficit-cutting targets in return for German acceptance of some of his proposals for growth-stimulating instruments.

Hollande has already vowed to pass legislation that would force the government to meet targets, a move that should satisfy the fiscal pact signed by 25 European Union leaders in March.

Yet it could be tricky for him politically to give Berlin a firm promise a month from a parliamentary election in which he is anxious to win a clear left-wing majority.

Hollande, who defeated conservative President Nicolas Sarkozy last Sunday, has had to walk a tight path between reassuring financial markets that he will adhere to deficit goals and promising voters that he will put their wellbeing ahead of the pressure for more austerity.

Merkel, talking tough ahead of a major regional election on Sunday which her Christian Democratic party seems likely to lose, insisted there is no alternative to the debt- and deficit-reduction programs being demanded of countries like Greece. But she is broadly open to Hollande's ideas now that he has stopped publicly demanding the creation of common euro zone bonds.

NEW FRANCO-GERMAN BALANCE

The Socialist is proposing four ideas: more financing for the European Investment Bank, European "project bonds" to fund infrastructure programs, the creation of a financial transactions tax and better use of EU structural funds.

Hollande's aides say he will seek a compromise with Merkel and his aim is to get their relationship off on a good footing, but they also say he will stand firm on his basic principles.

Analysts see it unlikely Hollande would risk any conflict that would alarm markets over his commitment to deficit goals.

"Merkel will probably be pragmatic. Hollande should get project bonds, but he will need to deliver a bankable guarantee that he can get a balanced budget law through parliament," said Nomura chief political analyst Alastair Newton.

"It's not Francois Hollande's style to seek conflict. He is a man who has built his career on consensus and conciliation and he will want to form a bond with Merkel," he added.

Hollande also backs allowing the European Central Bank to directly lend to troubled states via the euro zone's bailout fund. He told online magazine Slate.fr last week that having opposed euro bonds, Berlin could not now veto that idea too.

Germany's centre-left opposition, emboldened by Hollande's election, has begun calling for a "growth pact" to be added to the EU fiscal pact, which still requires ratification by several national parliaments.

Hollande's decision to meet Juncker before Merkel, as well as European Council President Herman Van Rompuy who he saw on Wednesday, is a sign he wants to broaden out euro zone decision-making from the "Merkozy" duo formed by Merkel and outgoing President Nicolas Sarkozy, a senior Socialist said.

"We are no longer in the era of the Franco-German couple, though there is no substitute for Franco-German harmony," Hubert Vedrine, a former foreign minister, told the daily Liberation.

He said Hollande wanted to rebalance the relationship with Germany politically and economically - and psychologically.

"For that, he needs to bring other partners back into the game. And not be afraid of making things clear with Berlin, because on a lot of issues we have different approaches."

(Editing by Daniel Flynn and Paul Taylor/Jeremy Gaunt)