By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When EADS and BAE went to the French government with their merger project back in July, they were greeted “as if by a Parisian waiter smoking on the pavement, who makes sure patrons understand they’re not welcomed”, says one investment banker involved in the talks. Not that Paris was opposed to the deal. But it made for an unexpectedly important decision to take at a time when the new socialist government’s energy was focused elsewhere.

So the first reaction in Paris – and to be fair, in other capitals – was to raise objections to the deal and set out a series of “conditions” to be met. The merger’s initiators – the chief executives of the Franco-German Airbus maker and the British defence group – wanted to do away with the complex Franco-German shareholding and governance at EADS. But Paris’ insistence on keeping a significant stake in the future company has triggered a chain of counter-objections that could end up killing the project.

The French state currently owns 15 percent of EADS, which would be diluted to 9 percent once the merger is completed. Ideally the stake would be sold down the road, to soothe political concerns in London and in the United States – which will also have to approve the deal. But France doesn’t want to be seen as being forced to sell the shares or be involved in a “privatisation” – still a dirty word in some circles of the French left.

That appeared to be accepted by the UK, and the two merging companies’ CEOs seemed resigned to it – as long as Paris indicated it wouldn’t seek to increase its stake further. But that in turn raised concerns in Germany, which wants to remain on par with the French, and presented demands of its own.

In the runup to an important Oct. 10 deadline, there is still ample room for the ultimate compromise – since no one will want to be held responsible for the deal’s failure. But the difficulties started with French demands. No one seems to have explained to President François Hollande that France would remain influential enough in the new company with a golden share and dispositions to protect strategic secrets. It may be time for a crash course in business basics.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

François Hollande’s campaign pledge to slap a marginal 75 percent tax on incomes above 1 million euros a year was so outrageous that it took his advisers by surprise. “Cuba without the sun”, one of them reportedly quipped. The same adviser is now the French president’s deputy chief of staff, in charge of ensuring that politics prevail over economic rationality.

Some of the 3,000-odd French taxpayers who will be hit by the new tax may have hoped that President Hollande would bury candidate Hollande’s surprising proposal. No such luck. So Bernard Arnault, head of luxury empire LVMH and France’s richest resident, is asking for a Belgian passport. Talk abounds of a rush of French tax exiles to friendlier havens. Companies warn that top managers will have to move abroad, or of their future inability to “attract top talent”. The clumsy protests against the tax are often even more ridiculous than Hollande’s arguments in favour of it.

The protesters tend to forget that the new tax isn’t as bad as it looks. The surcharge is temporary – two years only. It will be watered down by the French tax system, which provides ample deductions for families. And it will only hit wages, not income derived from capital. Moreover, the idea that it will deter talent is silly. In the age of high-speed trains and Internet, the CFO of a French-based company can easily work from Brussels or London.

In the current French context, it would be best for the refuseniks to get over it and move on. France is bracing for severe fiscal discipline next year. Two-thirds of the effort will come from tax hikes, and a third from spending cuts. Neither will be popular, but change is necessary. The mix may not be quite right, but the government needs to muster as much support as it can.

As in other Western countries, the rich have had a nice ride in France over the last decade. They may feel that Hollande’s tax punishment is unfair. But in the age of austerity, the privileged should think twice before stoking the flames of social resentment.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

France and Germany must clear the air before the merger between BAE and EADS can proceed. Their uneasy alliance over the Airbus maker’s shareholding and governance cannot continue as is – its end is even a prerequisite for the merger. But Paris and Berlin remain obsessed by “parity”, the sacrosanct notion that their position in the company should be identical. Franco-German parity could be preserved in a larger group, as long as political passions are kept under control.

The two nation’s shareholdings in EADS have always been kept rigorously equal – currently at 22.5 percent for each side. The only asymmetry was that the French state has a 15 percent direct stake in the company, with media group Lagardère, formerly a defence contractor itself, owning 7.5 percent. On the German side, Daimler long represented the country’s interests. The auto group has been reducing its stake – 7.5 percent has gone to a consortium of government controlled regional banks and KfW, the state-owned lender was set to buy another 7.5 percent.

Ideally, the merger would serve as a golden opportunity to clear the air. Each of the three governments involved – the UK, France and Germany – would own a golden share with significant blocking powers. Furthermore, as important customers of the enlarged group, they would have considerable influence over its decisions.

The problem is that the French government seems to want to keep its stake in the group – which would be reduced to around 9 percent in the combined entity. It’s unclear whether this is a deal-breaker for Paris. The government’s preference may simply be motivated by the need to avoid a domestic backlash over “privatisation” – still a dirty word in some circles of the ruling left.

But if the French persist, the German government might be tempted to go ahead with the sale of the Daimler stake to KfW. Such a move back into the state’s orbit would reinforce UK worries about excessive politicisation, perhaps leading to a British nixing of the project.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Regulators chase financial fraud like anti-doping inspectors pursue Tour de France riders: they play catch-up. Innovation – in the form of new products or new drugs – is always a few steps ahead. So the police only come in after the fact – and often before the fact has even been defined as a crime.

In the wake of the scandal over the rigging of the London Interbank Offered Rate (Libor), European Commissioner Michel Barnier and the British government are looking at regulating the benchmark interest rate, as well as other rates. These attempts may get bogged down, and could backfire or miss their targets. They also risk missing new fraud or misbehaviour. But with the financial crisis entering its sixth year, the era of self-regulation for widely-used market barometers must become a thing of the past.

A case can – and undoubtedly will – be made that regulating private benchmarks raises questions of regulatory overreach. Finance is awash with private indicators and those set up by market participants.

The question of when exactly they become so important that public regulation is legitimate isn’t an easy one. But in the case of Libor, which over the years has become the reference for contracts worth trillions of dollars, that threshold has long been passed. Its daily calculation on the basis of hypothetical submissions by a handful of bankers clearly does not stand up to scrutiny.

Credit ratings agencies have tried to resist regulation by arguing that doing so would encroach on their ability to utter opinions. Similarly, free-market fundamentalists argue that mere numbers should remain beyond the regulators’ reach.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

François Hollande has chosen the early strike option. His government will not wait to embark on the austerity programme needed to take the budget deficit back to three percent of gross domestic product next year. French Prime Minister Jean-Marc Ayrault was expected to detail the pain in his address to parliament on July 3. Public-sectors unions will protest and threaten. But in spite of the likely uproar, fiscal discipline is the easy part. Making the economy competitive again will be much harder.

In his electoral campaign, and in his first two months of office, Hollande gave the impression that his commitment to fiscal discipline didn’t go much beyond lip service. The painful reality check was not expected before the autumn. But after a few meetings with Angela Merkel, and a couple of euro summits, it looks like wisdom has struck. Furthermore, a scathing review of France’s public finances by the country’s top audit court, earlier this week, didn’t leave any room for doubt. Due to slowing growth, France needs to find up to 10 billion euros in extra savings or tax hikes this year, and 33 billion in 2013.

Adding austerity to austerity may not look like a bright idea in France anymore than elsewhere, given the stagnant economy. But the country is a special case because public spending is the highest in the euro zone, at 56 percent of GDP. And as the audit court reports showed, it is also one the most inefficient in major areas like education. Cutting spending is in France a structural reform by itself, not just a fiscal obligation.

Tax hikes are also on the horizon for France to meet its target and reassure markets that it is not the next euro basket case. But beyond that, the country needs competitiveness and growth. Its current account deficit is as preoccupying as its fiscal one, if not more so. To address this, Hollande will need to liberalise services, lower labour costs and reform a growth-hostile tax system. He will find that more difficult than simply plugging holes in the budget, as gaping as they may be.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Mario Draghi is the unheralded yet undeniable “winner” of last week’s euro summit. The European Central Bank he presides over could end up with enlarged powers as supervisor of the euro zone’s banking system. It has successfully fought off attempts by most governments to force it into action – whether outright bond-buying or indirect sovereign financing through a banking licence given to the euro bailout fund, the European Stability Mechanism. Finally the ECB did get something it had advocated: that the ESM be allowed to recapitalise the area’s troubled banks directly. Meanwhile, euro members have reaffirmed their commitments to stick with fiscal discipline. From Draghi’s viewpoint, what’s not to love?

For the moment, the ECB’s determined power grab to take over as bank supervisor, then possibly outright regulator, hasn’t formally succeeded. Many difficulties need to be overcome, and the euro leaders’ statement only indicates that the future banking supervisor will involve the ECB. The nature of the supervising body and the scope of its powers are yet to be sorted out. Once the European Commission has come up with a proposal, expect governments to fight tooth and nail over the details.

That’s when the ECB will realise that with greater powers comes greater scrutiny. The central bank been deft at maintaining its independence from national governments in the euro’s first decade – helped not least by the fact that there are so many of them. Should it become the bank supervisor, it will have to accept a close monitoring of the obvious conflict of interest resulting from its position as main creditor of the banking system.

The more the euro zone wants to move towards tighter fiscal union, the more acute will become the question of the democratic legitimacy of its main common institutions: the European Commission and the ECB. Up to now the central bank has had a constituency of 17 governments. It is moving into a space where it needs to find a broader democratic support. There may come a point when Draghi finds this a mixed blessing.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Avoiding the great Greek scare hasn’t allowed the euro zone to breathe a sigh of relief on Spain. Yields on the country’s 10-year bonds are now reaching 7.2 percent. The Spanish government has already done a lot. The extra steps it could take are of marginal importance in the current context.

Markets aren’t listening to Madrid. What matters is that the euro leaders come up with a credible road map to overhaul monetary union at their end-of-month summit.

It’s time to end the alphabet soup – plan A, plan B etc – and come up with a grand plan. The euro leaders’ collective fault is to have let markets even imagine that Spain could be bailed out – or even that it could possibly leave the euro. If they don’t want either to happen, they must act fast.

What is needed is a powerful message that the euro zone is integrating, not disintegrating. It may start with the launch of a fully-fledged banking union, as Mario Draghi and French President François Hollande advocate. It will not happen overnight. Angela Merkel doesn’t think it is possible without a fiscal and even a political union: this should be a good incentive for the French president to accept the type of sovereignty transfers that France has historically refused – even if the price is that some structural reforms might be forced on his government.

The second challenge euro zone leaders must tackle is the consequence of austerity on the region’s economy. Greece, Ireland, Portugal and Spain are bleeding. No one advocates that their governments should stop cleaning up their budgets. But indiscriminate spending cuts hurt demand, and income tax hikes hurt competitiveness. More time will be needed to reach the fiscal targets agreed. There is no avoiding that basic fact. And the ECB may want to confirm its hints that it is ready to lower its key interest rates next month.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Financial desperation combined with diplomatic inexperience could end up costing the euro zone dearly. France, Italy and Spain seem to think that presenting Germany with the same demands, over and over again, will soften Angela Merkel to the point that she will accept reforms like euro bonds, a banking union or a direct recapitalisation of the region’s banks by the European Stability Mechanism, the euro zone’s bailout fund. But the more the gang of three insists, the more Germany is digging in its heels. On some of the issues it can even rely on the support of the European Central Bank. Ganging up on Germany is not only inefficient: it could backfire if it makes it impossible for euro leaders to come up with some common vision at their summit at the end of the month.

The euro zone used to be simple. It only took Germany and France to agree on the main issues. Then the two of them went to work on the others to clinch the ultimate deals and compromises. The situation has changed. Since the bailouts began, the split between the north and the south has widened. France has a foot in both camps. It is the second-largest contributor to the bailouts, but also has a fragile economy which might have to rely on German benevolence at some point in time.

François Hollande started his presidency in a conciliatory mode with Merkel, after having campaigned against German-style austerity. Now he seems to want to lead the clan asking for serious German concessions. He invited Merkel’s opposition, the Social Democrats (SPD), for talks at the Elysée. He is clearly aiming at some kind of alliance with Italy’s Mario Monti, whom he is visiting on Thursday in Rome, and is on the same page as Spain’s Mariano Rajoy.

The aim is to get Germany to agree to what it has always refused: immediately launch reforms that would imply financial backing from Berlin. Merkel understandably wants to make sure that some European fiscal authority keeps national governments in check. Her partners’ insistent drumming will only reinforce her in the conviction that she alone stands in the way of irresponsibility.

By Pierre Briancon and Fiona Maharg-Bravo

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

To be successful, Spain’s bank bailout should be a takeover. Euro zone governments have so far been vague about the exact “conditionality” they will attach to recapitalising the country’s lenders. Nonetheless, that vagueness is indicative of the direction they’re heading. There’s the classic restructuring of the banking sector, which will be supervised by the European Commission’s competition authorities. Then there is what the euro zone governments called “horizontal structural reforms” which could signal the end of Spain’s politicised banking system. Madrid may resist on sovereignty grounds. But there’s little it can do.

EU authorities have no template for taking over a country’s banking sector. But the International Monetary Fund’s report on Spanish banks, released on the eve of the bailout, offered some suggestions that cut to the heart of the current system. In particular, the IMF recommends more direct regulatory powers for the Bank of Spain, which currently relies on the government for its authority. The IMF also called for the introduction of a bank resolution scheme that would impose losses on both shareholders and bondholders, which have largely escaped any pain so far. However, any new rules are unlikely to be in place in time to reduce the current bailout bill.

The most difficult reform will be to end the decades-long tradition of cronyism at the former savings banks, whose overhaul is still a work in progress. That will mean Spain’s bailout fund, the FROB, replacing existing management teams, and possibly taking controlling equity stakes. Arguably it will be easier for the European Commission, the European Central Bank and the IMF to push for such reforms, allowing the Spanish government to employ the “euro zone made me do it” excuse.

Ideally, the troika should keep the leverage of disbursing its funds in tranches, instead of paying out the whole amount in one go. There may be some tough conversations ahead with the Spanish government, when it becomes clear that some sovereignty has to be surrendered. But Madrid’s partners should make it clear that they aren’t prepared to spend up to 100 billion euros in order for Spain’s banks to continue with the same men and practices.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The case for the euro zone to step in and help recapitalise Spanish banks should have been a no-brainer. Spain is in a bind of its own making, but the challenge of turning its economy around has been magnified by the crisis. As for the euro zone, it has the instruments and the money to help Madrid recapitalise the country’s banks, leaving the government to tend to its own business.

This weekend’s possible mini-bailout could and should have been a simple, straightforward, shock-and-awe intervention weeks ago. Instead, time was wasted because of Spanish Prime Minister Mariano Rajoy’s misplaced pride, and because the dysfunctional euro family has been unable to put its own bailout fund to use.

Rajoy says he doesn’t know how much money the banks need, so there’s no point in tapping the bailout fund. But the specific number isn’t the central issue for now. Spanish banks may need anything between 40 billion and 100 billion euros. What matters is that the European Financial Stability Facility steps in, in principle. And if the first round isn’t enough, there will always be time to add more later.

The sticking point has been for too long whether the EFSF or its successor, the European Stability Mechanism, should be allowed to rescue banks directly, or indirectly through governments. Rajoy has been adamant that Spain doesn’t need a full bailout a-la-Greece, and he may be right. But obsessing about the stigma of aid has done nothing to calm markets.

Germany’s symmetric obsession – conditionality – has also been a major impediment to a deal. Rajoy wasn’t ready to accept humiliating conditions forced upon his government, which is already doing a lot to get out of the morass.