 Good. So welcome, everyone, and welcome to Emily. Emily Mansfield is from the Economist Intelligence Unit and is going to talk about Franco-German relations, an issue that is always of interest to anyone interested in European affairs. Historically, of course, Franco-German relationship has been central to the European integration project, maybe a little less so as the EU moved from six to 28 members, probably become a little more so as it shrinks to 27. Many issues to discuss. Emily's going to cover a lot of issues. She's the lead analyst at the EIU for France and Germany. So I will hand straight over to you, Emily. Thank you. Excellent. Thank you very much. Well, it's a pleasure to be here today to talk about France and Germany. Let's see if this works. Yes. A few years ago, when Angela Merkel was only in her third term as German Chancellor, and in France, François Hollande was struggling with the label of most unpopular president in history, the Franco-German relationship could best be described as lopsided. The engine of growth in the eurozone was quite definitely being driven at this point by Germany. Then came 2017, and, of course, Emmanuel Macron. Macron placed EU flags next to French flags at his campaign rallies. At his victory celebration, he played the EU anthem, Ode to Joy, as he walked around the pyramid of the Louvre. He went to Berlin to visit Merkel on his very first day in office. Fast forward four months, from May to September, and with Emmanuel Macron standing in the vaulted halls of the Sorbonne, giving a soaring, ambitious speech about his vision for the future of the EU. A very unmerical thing to do. Merkel herself, of course, at this point was distracted with the German federal election, the need to build a coalition. It took nine months for her to respond, and when she did, she erred on the side of pragmatism and caution. Very Merkel thing to do. But that's not to say that nothing came out of this. One of Macron's proposals in his Sorbonne speech was to renew the landmark cooperation accord, the EU, the Elysée Treaty. This had been signed by Conrad Adnar and Charles de Gaulle in 1963, and in January of this year, on the 56th anniversary, Merkel and Macron symbolically renewed their country's vows of friendship. So, differences of style, differences on substance, but a common understanding that they are at the heart of the European project, and they have to work together in order to shape and guide this. I'd like to start today by looking at the problems that France and Germany want to solve on the European stage, the issues that have been making headlines over the past few years, and the issues that are making headlines today. I'll look at where the two countries agree and where they don't, and I'll also look at how what's happening domestically in both countries affects what they want to do and also what they can do on the international stage. So, let's start with the economy. I'm an economist by background, as are most of my colleagues, and we were amused to find as growth in the eurozone started to pick up in 2015, 16, 17, that the hashtag euro boom was trending on Twitter. Obviously, this was slightly tongue-in-cheek. It's not many regions of the world where 2.5% annual growth counts as a boom, but nonetheless, this eurozone sovereign debt crisis had had a very big effect, and this recovery was welcome news. From Macron's perspective, though, this improvement perhaps presented a little bit of a problem. Why? Well, there are a number of factors behind the economic recovery. One was a pickup in global growth, which drove demand for European goods and services. Another was an improvement in labour markets across Europe, which saw unemployment rates trend down. Perhaps the most important factor was the stance of the European Central Bank. Mario Draghi's promised to do whatever it takes to save the eurozone was the single most important factor restoring financial market confidence in the eurozone. But efforts to move on from the crisis went far beyond just the ECB's loose monetary policy stance. The Blocked Crisis Management Toolbox was vastly expanded with an explosion of new acronyms. The European Stability Mechanism, or ESM, permanent lending fund with a capacity of €500 billion was set up in case a member state needs to be bailed out in future. The EU Banking Union improved the oversight of systemically important financial institutions. And structural reforms were undertaken too at the domestic level, for instance, in Spain. All of this meant that when Macron turned out with a shiny new plan to reform the eurozone, proposing a really big eurozone budget with the aim of playing a fiscal stabilisation role for countries going through downturns, a eurozone finance minister to manage this, more risk pooling for the eurozone, that immediate sense of urgency had faded. With economic growth at its strongest in a decade, and Germany and other European states still very reluctant to accept more risk-sharing, his ideas proved a tough sell. That's not to say that he failed. France and Germany did reach a compromise in the end, agreeing not to the big eurozone budget that Macron had proposed, but a smaller one, aimed not at fiscal stabilisation, but at improving competitiveness and convergence. They also agreed to widen the remit of the ESM turning this into something akin to an IMF for the eurozone. So eurozone reform will not end up as the sort of full fiscal integration that Macron was perhaps hoping for, but nonetheless it will be driven forward, and it will be driven forward by France and Germany together. At the same time the economic picture was improving, say from 2015 onwards, the geopolitical context was becoming more difficult. The migration crisis showed how woefully unprepared the EU was for a genuine challenge to its external borders and asylum policies. The signing of the Paris Climate Agreement brought home just how important it was going to be to come up with an effective EU climate policy. And the vote for Brexit in the UK brought new fears of Euroscepticism and the rise of populist parties, just as the governments in Poland and Hungary were pushing for a new sort of illiberal democracy that threatened the bloc's core values. And then of course we had the election of Donald Trump. This perhaps did more than anything else to bring the EU and in particular France and Germany closer together. Trump flouts the normal rules of engagement for a US president in so many ways, of course, from his diplomatic spats on Twitter to criticism of close, long-standing allies. But the most disquieting thing for France and Germany is Trump's disdain for traditional alliances. His desire to weaken security ties with Europe and his wavering support for NATO. The times when we could fully depend on others are, to a certain extent, over, was Merkel's carefully calibrated comment. Ideas about how the EU should future-proof its policies on migration, climate change and security loomed large in Macron's presidential campaign and also at his speech at the Sorbonne. Unlike his plans to reform the eurozone, which gradually took more of a backseat, these big pan-EU issues were still very much at the forefront of what he was proposing in his latest manifesto for EU reform published earlier this month as the opening shot in his campaign for the European Parliament elections. So what are his latest ideas? Well, on migration, he's proposing a revision to the Schengen area, making membership conditional on strict broader protection and sharing the burden of asylum seekers. On climate change, he's proposed new EU emissions targets and the European Climate Bank to help with the shift to renewables. And on security, he's called for a new treaty linked to NATO and a European Security Council with the UK after Brexit. The response to Macron's latest manifesto came not from Merkel, but from Anna-Griek Frumpk-Kaunbar, or AKK, as she's typically referred to, who took over as the leader of Merkel's party, the Christian Democrats, in December. What did we learn from this? Well, firstly, just how close AKK's style is to that of Merkel, measured, pragmatic, feet on the ground. Secondly, that power is clearly already starting to shift in a very gradual orderly way from Merkel to her chosen successor. And thirdly, that on most of these big political topics, migration, climate change, security policy, France and Germany are broadly in agreement. I'm certainly expecting cooperation on these issues, regardless of whose in charge of Germany, to continue in a very close way in the coming years. Of course, on some political issues the two countries really do disagree. In her op-ed, AKK made various jabs at her French partners calling for the European Parliament seat in Strasbourg to be closed and for France to hand its UN Security Council seat to the EU. She also poured some cold water on Macron's rather enthusiastic institution building ideas, warning against European centralism, stressing the importance of subsidiarity. Parly, I think this was about making her position clear in the run-up to the European Parliament elections, appealing to her domestic support base and clarifying her profile and her positions. But there are some perhaps more serious ongoing differences of opinion between France and Germany. And one of the most important of these concerns defence. France sees itself as a global power and its armed forces as a tool of foreign policy. It spends 1.8% of GDP on defence and is working to meet the 2% NATO target by 2025. Meanwhile, Germany, weighed down by history, considers military intervention only as a very last resort. This week we found out that Olaf Scholz, the German finance minister who belongs to the Social Democrats, has rejected the government's plans to raise defence spending from 1.2% of GDP last year to 1.5% by 2024, still well below the 2% NATO target that Trump holds so dear. With the coalition partners now at odds and Trump's hectoring on the subject unlikely to let up, it seems like this will remain a very much alive issue. And one that makes Germany also very uncomfortable. If it really did raise its defence spending to 2% of GDP, it would have a bigger military budget than France. And quite frankly, without the same kind of military tradition, I think the government would struggle to know what to spend this on. There are also differences of opinion over issues like arms sales. Germany announced a suspension of arms sales to Saudi Arabia after the journalist Jean-Marc Khashoggi was killed in the Saudi consulate in Istanbul. France did not, partly because it has a strong military partnership with the Saudi Kingdom, and partly because doing so would mean putting thousands of French jobs in the defence sector at risk. Something the pragmatic Macron is very much not wanting to do, particularly at the moment given the domestic context. One of the reasons this German suspension of arms sales to Saudi Arabia caused such consternation in France was that under the current Franco-German defence agreement, it means that no weapons that have produced joint visa with both French and German components can be sold to the Saudis either. I suppose realistically the two countries will probably be able to find a way around this, but I don't expect their different perspectives on this subject more broadly to be cleared up anytime soon. If we were in Brussels right now at the EU summit, recovering from the Brexit discussion yesterday, one of the big topics we'd be talking about would be China. The European Commission has for the first time labelled China a systemic rival, and I think the rise of China is one of the things bringing France and Germany closer together right now. In particular, it's bringing them closer together on one age-old area of disagreement. This is the preference for state intervention in France and for free markets in Germany. Last year of the top 10 biggest global firms by value, eight of the 10 were American, two were Chinese, and none were European. Seven of those 10 were also tech firms. I think it's safe to say there's been a slightly belated recognition in Europe that we risk getting left behind in terms of developing new technologies and building big firms, especially in the tech sphere, that can compete on the global playing field today. At the same time, there's been a pretty relaxed attitude to Chinese investment into Europe, at least until the pace of Chinese acquisitions started to ring alarm bells. Europe has been a bit slow to realise that China is not just a market, it's a competitor. So the alarm bells, I think, started to really ring in 2016, you can see on the chart. This was when Chinese investment flows into Europe reached almost 40 billion euros, four times the size of European investments to China. This was also the year when the big German robotics firm, KUKA, was sold to a Chinese competitor. KUKA robots are the fastest in the world. They're recognisable, they're high profile. You can watch one playing table tennis for the world champion on YouTube. This was the sale that made Germany realise it had gone one step too far. So a new strategy emerged. 2017, a merger was proposed between French and German industrial manufacturing firms, Alstom and Siemens, with the argument being that this could create a European champion in the railway industry that would be able to fend off competition from other, quote, large international firms. Although they didn't name it explicitly the large international firm they had in mind, was the China Railway Rolling Stock Corporation, a state owned Chinese giant that has plans to go global. It didn't work out. Migrato Vestiga, the competition commissioner, rejected the merger last month on the grounds that it breached EU competition law and could lead to higher prices. Her decision wasn't really a surprise. But the reaction to it was, I think, interesting. Both the French and German authorities said they would work to reform EU competition law so that mega mergers like this could go ahead in future, allowing the EU to build European champions that could compete with their biggest rivals from the US and China. French governments, of course, have long promoted national champions, especially in what the French state considers to be strategic sectors like defence or infrastructure. But for Germany, with its reverence free markets for order liberalism, this is a policy shift. By the time Vestiga decided to strike down the Alstom Siemens merger, the external environment for Europe had got trickier. The big headlines were no longer about the rise of China, but instead about the US-China trade war, and Trump's threat to impose tariffs on European car exports to the US on security grounds. In this context, the French and German economy ministers Bruno Le Maire and Peter Altmaier announced that not only would they be pushing to reform EU competition law, but that they were launching a whole new joint industrial strategy. Their proposals span state intervention in industry, funding for innovation, and foreign direct investment into the EU. Let's take these one by one. So firstly, state intervention. In his proposals for Germany, Altmaier announced increased support, and in some cases joint Franco-German support, for new technologies like 3D printing, chemicals and electric car batteries. This looks like a step towards the traditional French approach to the manufacturing sector with support for strategic sectors. Electric car batteries are a key example. China currently produces about half of the world's lithium-ion batteries, which are the sort used in electric vehicles. Germany, with its massive car industry and heavy dependence on vehicle exports, is long focused on diesel technology. It risks getting left behind as the automotive industry shifts towards electric vehicles if it can't become more competitive in this area soon. So government support for electric car batteries is perhaps one way to mitigate this risk. Secondly, funding for innovation. Of course, Macron has been working to do this in France ever since his election, announcing tax credits for startups, funding research into AI, and giving coding and data science more importance in the education system. You might have heard of the startup incubator called Station F in Paris, which has a partnership with the state investment bank, BPI France. This is now the biggest startup incubator in the world. Now, of course, Altmaier and Le Maire are starting to talk more about EU-level funding and strategy for innovation as well. Thirdly, tightening the rules around foreign direct investment. Of course, to some degree, this has already happened. The European Commission adopted a proposal to establish a framework for screening investment into the EU in 2017. This is going to be coming into force as a recommendation in April. Macron has been talking about building a stronger France in Europe and a stronger Europe in the world since before he was elected. But it's still a controversial topic. Macron's suggestion of European preference in public procurement, which, as he says, is in line with US and Chinese policy, did not meet with entire approval from AKK in her response to his manifesto. Realistically, this is a non-starter in Brussels anyway. What might be more realistic is to focus on pursuing the idea of reciprocity in public procurement. This means EU governments could disadvantage bids for public tenders from companies based in countries that are not open to EU investment in Britain, such, of course, as China. This stands a better chance of getting off the ground than a wholesale shift towards protectionism on the part of the EU. And I think it's something France and Germany should be able to get behind together. So to sum up where we've got to you so far, France and Germany are working together to push through some eurozone reforms, even if this means some compromise on both parts. They're broadly aligned on the big questions of how to address migration and climate change at the EU level and also on the need to become less dependent on the US for security, albeit with some differences of opinion on defence matters. They also agree on the need to fund innovation and new technologies in order to remain competitive with China. And their positions seem to be moving closer on the need to build and support European champions. The one big area I haven't touched upon so far is how what's happening domestically right now in France and Germany will feed into these issues. In France, the big story, of course, over the past four or five months has been the gilet jaune protests. These were triggered initially by an attempt to raise fuel tax as part of the government's green agenda, which would have disproportionately hit people living in the more rural parts of the country who commute by car. But the protest quickly became something much broader, a revolt against Macron's presidency and in particular his sweeping form agenda, which has been being implemented at quite some speed, particularly by French standards, and has widely been seen as leaving the lower middle classes worse off. In response to the protests, Macron announced two things. Firstly, a 10 billion euro package of concessions last December, and secondly, a national debate, public consultation on a scale that's never been seen before. Over the past two months, more than a million people have taken part in debates, answered questions online, and written in complaint books in town halls across the country. Macron has been in his element off the regal pedestal that was doing his approval ratings no favours, and back debating with citizens in his shirt sleeves for hours on end. The aim of the debate was to give citizens a legitimate platform to express their grievances and to dissuade them from taking to the streets. And to be honest, it seems to have worked. Macron's popularity is up and support for the protesters is on a declining trend. That said, turning the results of this debate into a coherent policy response is going to be a gargantuan task. The government has commissioned the National Library of France to digitise the responses and then will use a combination of AI, natural language processing, and human efforts to pass them. Macron will have to find a way to turn the key demands into a sensible addition to his policy agenda that both meets with the public's approval and also doesn't destroy what he's done so far in terms of a pro-business reform agenda. He's already jeopardised his fiscal plans for this year. He won't want to do any further damage to investor perceptions of France. I think that assuming he achieves even a modest degree of success in turning these ideas from the grand national debate into a sensible new set of policies, this will re-energise his cause for initiatives on the EU level to discuss the future of Europe with citizens across the region. Macron, of course, has been a bit distracted from the international stage in recent months, but I think we can expect a return to the energetic promotion of new ideas that we've seen from him previously as the European Parliament elections approach. In Germany, the biggest issue would seem, at least on the surface, to be Merkel's impending departure from the Chancellor'ship after 14 years. I actually don't think that Merkel's departure, the end of this unusually long period of political stability in Germany, is the most significant shift that's coming up in the country right now. AKK, Merkel's preferred successor, is well placed to become the next Chancellor, and broadly speaking, she represents continuity. Of course, at the moment she is doing her best to distinguish herself from Merkel, staking out a more conservative position on social issues, emphasising her differences with the social Democrats, and pushing for a tougher stance on migration. But realistically, I think placing some clear water between the policy stances of the two big mainstream parties in Germany will lead to a healthier level of public debate in the mainstream in Germany. And judging by how she's governed the state of Saanen for seven years, at heart she's moderate and pragmatic with a consensus building approach. Merkel has said that she won't step down before the end of her term. I'm afraid our forecast is that she will. But this is because she wants to give AKK the best possible chance of winning the Chancellor's ship for the Christian Democrats in 2021, and not expecting Merkel's exit to be a destabilising event, not expecting the government to fall or anything like that. Yes, there'll be some more jockeying for position in the aftermath, but this is a transition that will take place on Merkel's terms and at a time of her choosing, with the aim of stability and continuity. I would argue instead that the really big kind of tectonic shifts that we're seeing in German politics are already happening. And the most significant of these is the decline of the two-party system. We've seen support for the two big mainstream, big-tent parties falling, and support for the AFD on the far right and the liberal Greens rising. This political fragmentation is in line with the pattern that we've been seeing in many other countries across Europe, reflecting a more divided, more atomised society. And it makes coalition building rather more difficult and parliamentary debate more fractious. In this context, given this big shift in Germany, I think the need to maintain control will see AKK measuring her responses to big issues on the EU level against the landscape of her support in Germany. She needs to speak to her voter base and not just to supporters of the Christian Democrats, but those supporters who've drifted to the AFD as well. In this sense, at least I think cooperation between France and Germany will become much easier once the European Parliament elections have passed. She can start focusing again on common goals with Macron rather than on proving a point back home. So my conclusion is really quite a hopeful one. France and Germany agree on the challenges that Europe faces and are working together to build policies that they can both support and that other countries can get on board with too in order to meet goals that they both share. There are some areas in which they will be more successful than others, and some in which they will have to compromise more than others. I think we can probably expect to see some progress on migration. The reformed the Schengen area seems to be supported by both parties. I think the differences that they have on defence will be much more enduring. They're very structural and deep-rooted. They'll be difficult to change, and I think there'll be ongoing efforts to balance between France's desire for state intervention on the one hand and Germany's preference for free markets on the other. Perhaps the biggest difference is really just on style. Macron, visionary and enthusiastic and AKK keeping her feet on the ground in a similar manner to Merkel. But between them I think they stand a chance to build a future for the Franco-German partnership and for the EU that will be both ambitious enough to meet the challenges the bloc faces in future and also realistic enough to be achievable right now.