What are the causal factors underlying the formation of French preferences during the Eurozone crisis solving process (2008-2017)? Going beyond the clear distinction between national preference formation and interstate bargaining of liberal intergovernmentalism, Clement Fontan and Sabine Saurugger show that in France confidential and restricted administrative networks played a central role in reducing the uncertainty stemming from the fragile financial positions of the hypertrophied domestic banking system. At the same time, French negotiators found themselves between a rock and a hard place during negotiations at the EU level, not crossing the red line fixed by Germany, on the one hand, and ensuring that policy solutions were compatible with governmental political stance and domestic economic interests.

The newly elected French President Emmanuel Macron made it very clear in 2017 that France is forcefully returning to the European Union negotiation table. In his speech at the Sorbonne on September 26, 2017, he advanced his proposals for a reinforced Economic and Monetary Union (EMU): “What we need is a long-term economic and political strategy, and our challenge within the eurozone is to work out how to make it an economic power which can compete with China and the United States […]We need convergence and stability through national reforms, but also by coordinating our economic policies and a common budget[1].”

This statement is in line with French preferences on the Eurozone institutional architecture. Since the end of the 1980s, French governments have been seeking to complement rules-based EMU with a “gouvernement économique”, a fuzzy concept aiming at increasing economic policy coordination and fostering EU-level interventionism in order to promote growth and create jobs without losing sovereignty. At the same time, French politicians have been using EMU rules as a “useful external constraint” to reform their economies in the face of domestic resistance Emmanuel Macron relies on the EMU imperative to legitimise domestic reforms, but he also hints at a new external constraint. Indeed, the new French government is trying to overcome previous policy deadlocks between Paris and Berlin by restoring French credibility with the implementation of structural reform in order to push forward new Eurozone arrangements[2].

These elements, while crucial to understand France’s position in the EU, however, are focusing on the president’s office only. Our research opened up this institutional black box and to understand how and through which mechanisms France’s national preferences with regard to the EU are established. More precisely, we analysed the causal factors underlying the formation of French preferences on the reforms of Eurozone governance during the crisis (2010-2017).

We argued that in order to understand the process of preference formation, even in an extremely centralised country such as France, it is crucial to take into account the political economy of the state-finance nexus as well as the horizontal influence stemming from other EU countries (in particular Germany).

Elite networks and Greek debt

Our research shows that small French policy networks have been crucial in reducing the high level of financial uncertainty caused by the crisis. Two players were central in the formation of French preferences during the negotiations on the first Greek bail-out (February-June 2010): the top civil servants at the Treasury and the cabinet of the French presidency. More precisely, these players were at the heart of policy networks at both national and supranational levels. At the administrative level, the policy positions of Treasury and the Presidency are homogenous because of the strong personal links between their members, which are fostered by similar education and career paths. In the case of the first Greek rescue, the positions of these small policy circles were unambiguously influenced by a strong degree of economic patriotism: the priority of the French government was to protect its banking system and avoid a second recapitalisation. In other words, the exposure of French banks to peripheral sovereign debt heavily influenced national preferences.

More generally, they are supporting further integration of the Eurozone, which follows a historical French stance on EU economic integration. The homogeneity of positions within the French administration stands in strong contrast with Germany, which was riven by administrative division between the minister of Finance and the minister of Economy, which mirrors the political struggles between the members of the governmental coalition

Information sharing within French policy networks helped civil servants to determine precisely the extent of banks’ exposure to Greek sovereign debt (and later on, on the sovereign debt of other peripheral countries) and, hence, to design policy solutions accordingly. More precisely, French civil servants made a deal with French banks – based on the Vienna initiative template[3] – as early as in February 2010: banks committed to keep Greek debt on their balance-sheets in order to stabilise its value while the French government ensured that Greek debt would not be restructured and that it would provide liquidity to the Greek government in order to ensure the payment of coupons to its creditors. Indeed, in late 2009, French banks and insurance groups held 26% of the Greek severing debt purchased by foreign investors, well above German financial institutions (15%)[4]. If the Greek debt would have been restructured, BNP Paribas, the largest French bank whose assets are worth 120% of the French GDP, should have been recapitalised. As Figure 1 shows below, the evolution of French banks’ exposure to the Greek sovereign debt is in line with this bargaining: French banks held their level of exposure to the Greek debt from the first half of 2010 until they started to fire-sale Greek bonds just before their restructuring in mid-2012.

Mutually assured red lines

But French preferences are also influenced by the Eurozone institutional structure and power games even before member states start the intergovernmental bargaining process. On the one hand, Germany’s economic power and legal organisation nudge French negotiators to internalise German red lines when building-up their own policy preferences. On the other hand, the iterative nested games that characterise Eurozone macroeconomic policies are a window of opportunity for French negotiators to further their interests and protect their own red lines.

When Eurozone countries set up the European Stability Mechanism, French negotiators recognised that they would have preferred a higher capitalisation (which was set at €500bn) but they did not ask for it since German negotiators would not agree with it. In the words of a Treasury agent: “French negotiators internalise German preferences when building their policy positions. We would not propose a policy blueprint that would go against German red lines” (Interview 3). French negotiators are updated about the evolution of German red lines because they are in constant contact through direct phone lines with their German counterparts sitting at the Eurogroup preparatory committees (interviews 1, 2, 4). These open lines of communication between EFC members occur because they meet each other on a very regular basis and they are sharing the willingness to strike policy compromises, which are constrained by the red lines set up in Berlin and Paris. In the words of one member of the French permanent representation “these channels of communication are open in order to find a proper balance between the logic of conditionality and debt mutualisation “(interview 4).

Even though Germany constrains its policy space, France is still one nodal point of Eurozone negotiations. Indeed, Luxembourgish, Dutch and Belgian EFC members underline that the Eurozone policy space is shaped by three groups of players: Germany and other ordo-liberal countries (Finland, Netherlands), France and Southern Europe countries (Spain, Italy) and supranational institutions (European Commission, European Central Bank). Other countries usually follow the positions defined within one of the nodal points or try to build bridges between them (interviews 5, 6, 7). This is because smaller Eurozone countries do not have the necessary expertise or the structural power to define their policy positions autonomously for each EMU negotiation. France, like Germany or the European Commission, does.

What have we learned?  

First, our research results show that French economic governance is dominated by a small number of civil servants and banks’ representatives who form homogenous policy networks. The temporal and financial pressures stemming from the financial crisis exacerbate these dynamics of entanglement and reinforce the “state-finance nexus” It is also important to note that economic patriotism does not mean a shift of preferences towards intergovernmental governance. Rather, the policy networks defining French economic patriotism advocate for further EU integration and would actively support a new EU treaty if it would be politically feasible.

Second, France’s preference formation is taking place in a distinctly transnational context. Instead of being solely influenced by societal pressures at the domestic level, preference formation becomes an inherently transnational process that involves governmental elites. We have seen that the exchanges between French and German high level civil servants were systematic, as they were with regard to their Benelux counterparts. Contrary to the German and Dutch cases, however, domestic politics and electoral outcomes did not affect the formation of French preferences during the negotiation of the four policy items we focused on.

This teaches us that in order to understand member state’s preferences in the EU, in particular in times of crises, we need to take into account the structuring elements of preference formation. The degree of formal or informal institutionalization of relations between transnational elites can be a key indicator for interlinked processes of preference formation. This is particularly the case in the shorted timeframe of a crisis where a small group of elites must deal with major, system-threatening situations.

Blog post is based on Fontan, C. & Saurugger, S. (forthcoming), ‘Between a Rock and a hard Place. Preference formation in France during the Eurozone crisis’, Political Studies Review

[1] http://www.elysee.fr/declarations/article/initiative-pour-l-europe-discours-d-emmanuel-macron-pour-une-europe-souveraine-unie-democratique/ accessed July, 24, 2018. Emphases are ours.

[2] Brunsden Jim, « EU certifies Emmanuel Macron has delivered on deficit promise », Financial Times, May

23, 2018

[3] The Vienna initiative is a private-public framework where large banks and supranational institutions coordinate to maintain bank exposure in East, Central and South East Europe.

[4] Jack Ewing “Germany Already Carrying a Pile of Greek Debt”. The New York Times, April 28th, 2010. https://www.nytimes.com/2010/04/29/business/global/29banks.html.