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Analysis: France runs into German wall on EU growth drive

By Mark John

PARIS (Reuters) - French efforts to divert Europe from economic austerity have foundered twice in a week due to German resistance, underlining a growing policy divide that is hobbling the core partnership.

Berlin rejected President Francois Hollande's call on Tuesday to set a mid-term target for the euro, a move he hoped would bring the single currency down to a level that would make it easier for French industry to sell its goods abroad.

Three days later, German Chancellor Angela Merkel joined forces with Britain's David Cameron at a Brussels summit to push through the first ever cut in the 27-nation's budget, taking an axe to spending on infrastructure projects backed by Paris.

"Is it the budget I would have liked if it was just up to me? No. But the problem with Europe is that there are others involved," a resigned Hollande told reporters after all-night talks secured a deal on EU funding from 2014-2020.

Both Hollande and Merkel have insisted that the Franco-German motor is still driving EU integration 50 years after the friendship pact between the former World War Two foes.

But while they say achievements such as last year's deal on EU banking supervision show that Paris and Berlin can still overcome their differences to forge compromises, the French voice is increasingly struggling to make itself heard.

"EU budget: Hollande left out of pocket", ran the headline of the left-leaning Liberation newspaper on the roughly three-percent cut in EU spending, mainly at the expense of transport, energy and telecoms projects which Paris has argued would foster growth and make Europe's economy more competitive.

"Cameron and Merkel impose austerity on Hollande" was how the conservative Le Figaro summed up the meeting.

PRE-SUMMIT HUDDLE

Hollande could have expected a hero's welcome in Brussels for his handling of his first war in the African state of Mali, where French forces have driven al Qaeda-linked rebels out of its main northern towns and into the hills.

Moreover, with Cameron having put Britain's EU membership on the line by promising a referendum on it if re-elected, last week's summit could have offered France and Germany the stage to rally together in a demonstration of European solidarity.

But in the budget wrangling that ensued, it was Hollande who looked isolated as his efforts to forge a coalition of southern and eastern European states demanding more generous spending were quashed by Germany, Britain and other northern countries.

EU officials were mystified when Hollande, citing other engagements, chose not to attend a pre-summit huddle with Cameron, Merkel and EU President Herman Van Rompuy on Thursday afternoon where key details of the deal were hammered out.

From then on, what Cameron called the band of "like-minded budget disciplinarians" including Germany, the Netherlands, Sweden and Finland had the upper hand and for France, it was a matter of salvaging what it could from the summit.

While the overall EU farm spending of which France is the main beneficiary will fall sharply from its 2007-2013 level, Hollande managed to limit the damage to French farmers with a small rise in related funds for rural development.

But he had to concede that Britain's cherished 29-year-old rebate from EU spending, about which he had noisily complained in the run-up to the summit, would have to remain untouched.

"We are seeing the Germans extending a hand more and more often to the British than to us," French political analyst Eric Zemmour said, suggesting Merkel's priority was to give Cameron ammunition at home to defend Britain's membership in the EU.

WIDENING GULF

Ultimately, cuts to an EU budget which in total represents barely one percent of the region's economic output are unlikely to influence how quickly it comes out of the current downturn.

However the clash between Paris and Berlin on the level of the euro currency points at deep-rooted differences in the national interests of the two countries that may prove more telling in the long run.

A study by Deutsche Bank last month calculated that France's exporters start being priced out of world markets when the euro rises above 1.22-1.24 dollars - a level it has already long left behind to trade at $1.33 now.

Germany's higher value-added export products, however, only start to be disadvantaged when the exchange rate is above $1.54. Until that point, there is little damage to the German economy and indeed some benefit in a strong euro because it keeps the prices of imported goods and hence inflation in check.

"We do not agree on economic policy and a number of other areas," Jean-Dominique Giuliani, head of the Robert Schuman Foundation, a French think tank on Europe, told Europe 1 radio.

"The gulf between France and Germany is widening somewhat and that worries me."

(Additional reporting by Luke Baker in Brussels, Andreas Rinke in Berlin, Peter Griffiths in London and Leigh Thomas in Paris; editing by Anna Willard)

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