The Culture War Over Europe's Money

The Germans are richer and more stubborn.The French are flashier and faster on their feet.

By WALTER RUSSELL MEAD, WSJ

The European crisis repeats the same pattern endlessly. Bad news sinks markets, ultimately accelerating into a panicky wave of liquidation. European leaders convene, deliberate and emerge with what they say is a "fix." Markets leap in joy, until investors gradually read the small print and discover that the fix is a fudge and the core problems remain. Then the bad news starts up again and the markets sink. Repeat. Endlessly.

That seems to be Europe's core strategy for coping with the greatest challenge since World War II. This week we see the cycle at work again. The latest miracle fix—a handover to technocratic governments in Italy and Greece—is looking shopworn and shoddy already. Meanwhile, there's bad news from Spain and Portugal, where despite the most-solemn promises to undertake the most-sweeping reforms, and the blessings of Brussels, the economies are somehow failing to grow. Add disappointing news on Italian bond yields, and Europe has resumed its grim slide.

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.The underlying problem remains: Germany and France are locked into their most bitter struggle since the panzers exploded out of the Ardennes Forest in 1940. Money is one big component of the fight. The French bottom line is that Germany must help raise the carcass of the French banking system from the dead. Clueless European regulators (who accomplished the not insignificant feat of making America's dysfunctional regulatory system look Solomonic) pushed many banks to invest in soon-to-be-worthless sovereign debt from soft euro countries like Spain, Italy and Greece. So French banks in particular are loaded to the gunwales with bonds that won't float.

Worse, the French corporate elite decided in its sleek official way that this was the right time to go long on Italy, buying banks, companies, stocks and bonds in the most disastrous French intervention on the peninsula since King Francis I lost the battle of Pavia in 1545.

Obviously, argue the French, Germany must pay for this. With immaculate Gallic logic they can demonstrate that if France is stuck with the costs of its folly, it will lose its AAA credit rating. That in turn will make the European Financial Stability Fund (EFSF) a dead instrument, exposing Europe and Germany to the full unmitigated force of the financial storm.

The French position seems to be to wait patiently for their slow-witted Teutonic neighbors to puzzle their way to an understanding of the clarity of French reason. At that point, the Germans are supposed to capitulate, authorize the European Central Bank (ECB) either directly or indirectly to print masses of money, and the proceeds will go to save the French banking system and national elite—without anything so humiliating as a bailout ever being mentioned.

If that were all, perhaps the matter could be adjusted. But this is about power: It is about who rules Europe, or rather whose rules will rule Europe in the decades ahead.

France is basically a Club Med country with some northern features (historically often found among the Huguenots and Jews, out of which communities many of its most successful business leaders have come). It wants a "political" economic system for Europe, one in which political pressures can ensure the kind of steady devaluation of the euro that Italy, Spain, France, Greece and Portugal used to enjoy with their national currencies in the good old pre-euro days. The only problem with this old system was that it gave too many advantages to the Germans, Dutch and others (in the form of lower interest rates). France wants to stick the Germans with a Latin currency and Latin rules for running it.

Germany, on the other hand, wants the Latin countries to live by northern rules: Keep the currency sound, the budgets balanced and let the chips fall where they may. There is zero, repeat, zero consensus in Germany to go Latin and give the euro into the hands of slick French and Italian politicians. Technocrats bound by rules, the Germans can accept: That is why an Italian technocrat is following a Frenchman at the head of the ECB. But that is also why the Germans are being such sticklers about ECB rules against bailouts and unlimited ECB purchases of sovereign bonds.

If there is a way to bridge the gulf between these two positions, nobody so far has found it. Neither side is willing to surrender, and no compromise can be found. This is why European summits end in one disappointing fudge after another. Neither side wants a meltdown, so both work together to produce some facsimile of an agreement that looks plausible but only papers over the irreconcilable differences between them.

Whose Europe will it be? In the past, nations have gone to war over exactly this kind of balance-of-power dispute. This time the issue happens to be currency. The EU is an attempt to develop a post-historical structure that can accommodate these controversies without bloodshed, but the hidden assumption has always been that there are no truly irreconcilable gaps between the interests of France and Germany.

There weren't, until the euro included both countries in a single currency zone that ultimately would have to be run by one set of rules. The question now is whether France will give the laws to Germany, as it did in the Napoleonic period and 1918, or whether Germany will dictate to France as it did in 1870 and 1940. The Germans are richer and more stubborn; the French are flashier and faster on their feet.

We shall see.

Mr. Mead is a professor of foreign affairs and humanities at Bard College and editor-at-large of the American Interest.