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HANDOUT (VIA REUTERS)

The 'New' Franco-German Alliance: A window to EU energy independence

Miguel Ángel Ortiz-Serrano

6 mins - 1 de Febrero de 2023, 07:05

On Sunday, 22 January 2023, we commemorated the 60th anniversary of the signing of the Elysée Treaty and the (not so) long-standing friendship between Germany and France. This historic milestone, which closed a period of diplomatic aggression and armed conflict that had been dragging on since 1870, has gone through periods of closeness and of cooling, as came to pass during the Merkel-Hollande pairing, whose - presumably - distant relationship limited the EU's room for manoeuvre in the toughest moments of the post-2008 crisis. In recent years, coordination and cooperation in economic, political and diplomatic matters have been growing progressively, especially since the outbreak of Covid-19 and its devastating effects on European industry. 

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Moreover, if there was one thing this marriage lacked, it was the realisation that they were in the same boat together, and there is nothing like a common enemy to strengthen ties, iron out differences and establish a framework for long-term action, leading to a joint communiqué that defines the main lines of the industrial and energy strategy of both countries - and therefore of the EU - for the coming years. Among other aspects, the German and French governments committed to working to achieve an EU energy policy that guarantees sovereignty and reduces dependence on third countries. The reindustrialisation of the old continent becomes crucial for both countries, in what is a collective effort to ensure the competitiveness of the Eurozone in a clearly globalised economy. Last but not least, the treaty envisages advances in cybersecurity and EU defence, to improve coordination between member states. If this does not remain mere symbolism, it would mean the definitive farewell to the EU's policy of antagonistic blocs, a closing of ranks that marks a before and after in terms of how the future of the EU is perceived from now onward. And everything indicates that they were serious, given the events in Barcelona that culminated in the signing of a treaty of friendship between the French and Spanish governments, reinforcing the commitments made and projecting an image of unity not seen for decades.



But why now? And, above all, what has led Germany and France to put aside their differences over the European project? The answer seems obvious, and is that, on one hand, the implosion of 2020 during the COVID-19 crisis showed how vulnerable EU economies were to supply shocks and the importance of a series of policies to ensure the EU's survival and recovery: bailout funds, programmes to ensure long-term growth, etc. On the other hand, the war in Ukraine has revealed how dependent some member states are on energy imports from third countries, which poses a supply problem if diplomatic relations deteriorate - as evidently has been the case.
 
Figure 1.- Percentage of GDP Spent on Energy Consumption
Source: OECD Economic Outlook, 2022. 

This affects Germany in particular, which has found itself with an unexpected problem and an urgent need to develop alternative forms of energy supply to replace Russian gas imports. On top of this, the creation of bottlenecks at ports of origin for exports of manufactured and intermediate goods has strained trade flows and created disruptions in the allocation of resources on a global scale. The story is familiar: Inflation, rising public debt, rising production costs and imports, slowing economic recovery, etc.
 
Figure 2.- Business and Consumer Sentiment Have Deteriorated
Source: OECD Economic Outlook, 2022. 
 
Expectations are therefore negative. Consumer and business confidence declined substantially compared to 2021 and is expected to remain at low levels for at least the first three parts of 2023. Inflation reached 10.9% in September last year and a 45.8% increase in production costs was recorded. True to their old Ordoliberal ideology, German leaders postponed taking action until the warning signs were evident and there was no other option. The data for France are not encouraging either: it has concerning levels of debt, a costly and inefficient nuclear energy network that does not guarantee long-term supply, and a rising inflation rate that erodes the purchasing power of households in a nation where the cost of living was already considerably high.
 
Figure 3.- Impact of Increased Tensions in Energy Markets in Terms of GDP Growth and Inflation
Source: OECD Economic Outlook, 2022
 
Reality is therefore stubborn and has pushed the actors involved to make a move. Faced with an expected recession in 2023 and a weak economic recovery in 2024, France and Germany have decided to tackle the disruptions caused by energy prices on the EU economy, which would result in more coordinated interventionism at supranational scale, as well as a deepening of the EU's industrial development strategy. The essence of the Franco-German pact is, consequently, the affirmation of the failure of those – by then already - rusty austerity policies that stifled households' purchasing power, delayed recovery, and missed an extremely valuable opportunity to shape a common project that would guarantee long-term growth (and incidentally, it should be concerned with a real reduction of economic inequality within the Union). 
 
 
In relation to this, Judith Arnal asks in an interesting article about the risks involved in this turnaround in EU industrial policy. China has become the main exporter of rare earths, magnesium and tungsten, among others. It is also the EU's largest investor in renewable energies (mainly solar panels and wind energy), and its companies are among the most competitive in the world. There is no doubt that China is a key nation for understanding the global geopolitical framework, and it is impossible to imagine an independent EU in energy matters without strengthening trade and political ties with this nation, although its interests do not always coincide with those of the EU, but this story should be written in a separate chapter.
 
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