Francois Hollande comes to power at an interesting conjuncture, with Europe in crisis and the political mood on the move. It is a shift of mood not just amongst the electorate - most of whom have long been opposed to austerity (all we saw last Sunday was their chance to express their views in elections) - but amongst the political class and the technocratic elites. Voices arguing that Europe needs a growth strategy as well as a fiscal consolidation strategy are finally emerging from the IMF, from the Presidents of the European Council and the European Commission, as well as from a growing number of European leaders.  Angela Merkel swept everyone before her when she demanded a new European Fiscal Compact only months ago, but today is beginning to look surprisingly isolated with calls for a re-think coming not just from Greece and France, but also from Belgium, Spain and Italy.

Politically, Hollande therefore has more potential clout than might initially appear. Despite this the reality remains that, financially, virtually all the economic power in Europe lies in German hands and, hardly surprisingly, the German Chancellor has rapidly stated that as far as she is concerned, austerity rules. At the same time Hollande can hardly go off on a spending spree of his own. The markets would pulverise him. 

What then can Hollande do?  Pre-election, he was hardly a radical on curbing the calls for deficit reduction, merely saying that France should go slower and have a further year to consolidate. But there is one significant other possibility. In consultation with like-minded colleagues, he should turn the discussion on its head and say to Germany: we fully support the need for fiscal consolidation, but, as good Europeans, we all expect equality of treatment. In particular, you will understand that 2+2 must equal 4 and so if there are to be no deficits there must be no surpluses either.

More precisely, he should direct attention to the current text of the Fiscal Pact. Title III, Article 3, sub-clause 1 (a) reads as follows:

the budgetary position of the general government of the Contracting Parties shall be balanced or in surplus*

*[emphasis added]

The removal of these last three words would make a fundamental difference. Not only is it the case that, economically, the removal of deficits will in any case require the removal of surpluses - but more importantly, it would place on Germany the obligation to play its part in financing the growth strategy without which such fiscal consolidation is impossible.

To underline his point, Hollande might add some history. The error in the current European Fiscal compact is identical to that made at Bretton Woods in 1944. That discussion was about balance of payments surpluses and deficits, but apart from this shift of focus, the problem is identical. Those at Bretton Woods insisted on countries acting to correct deficits but without placing a reciprocal obligation on surplus countries. There is still the widespread view that Bretton Woods worked smoothly from the start. It did not. It was massively breached by the UK in 1947, when as the Bretton Woods arrangements required, we liberalised capital flows - but then, against the rules, had to re-impose them virtually straight away to prevent a forced devaluation. The system was only saved when in 1948 the US launched Marshall Aid, a stimulus of a kind not even contemplated by the Bretton Woods agreement.

Reminding Germany of this history would be salutary; at least some of their current prosperity stems from how their post-war recovery was financed. And Hollande’s pressure in this direction can hardly be too uncomfortable for the German Chancellor. Asking for less taxation and more spending is not the most difficult of messages to deliver to a politician – even in Germany.