Financial Gap Between Germany and France Widens

Germany and France are the twin towers built to support Europe’s dwindling financial strength. That has changed rapidly, and Germany is left to stand alone. That will alter the balance of power in the eurozone. It also will put one more nation in the region — France — on the list of countries with troubled financial situations.

French Prime Minister Francois Fillon will release a plan to increase austerity measures in his country. He said the measures are meant to lower France’s budget deficit by 20%, Reuters reports. The news service also reports that these cuts will be the most “rigorous” since World War II.

Economists and capital markets investors will have to decide whether austerity will cripple the French economy. Theses groups have already had to wrestle with the question as they look at expenditure cuts in Greece, Italy and Portugal. These countries do not just have to lower national government spending sharply. Each has raised taxes. Those taxes may well be regressive.

Germany’s ruling coalition announced a number of tax cuts on November 7 that will help lower- and middle-class taxpayers in particular. Plans to build new roads and other infrastructure will accompany these new programs. This will help job creation in an economy where unemployment is already low by the standards of the eurozone. The economic slowdown in the eurozone has affected even Germany. Its PMI was weak last month. Its trade with neighbors has slowed. But its national balance sheet is strong. Industry in the country still benefits from overseas demand in the U.S. and emerging countries like China. Consumer spending within Germany has not been crippled by a recession.

There have been fears that Germany will determine the financial fate of Europe. Weaker countries will have to turn to it for loans. France had provided a balance to Germany’s power within the region. France’s President Nicolas Sarkozy was willing and able to question and often block Angela Merkel’s programs to restructure the finances of the eurozone. But now France has admitted its economy has weakened enough that it has suddenly turned to extreme austerity.

Sarkozy’s leverage will disappear as his fight to bolster France’s balance sheet makes it more difficult for him to put money into the pools meant to shore up the region’s finances.

Douglas A. McIntyre