Angela Merkel is hosting Francois Hollande and the two leaders are set to discuss business ties, the EU vote and the conflict in Ukraine. DW takes a look at the economic relationship between the two countries.
The hosting of French President Francois Hollande by German Chancellor Angela Merkel in her own electoral heartland of Stralsund, located in what was formerly communist East Germany, on official Europe Day is all about symbolism.
The two leaders want to send a signal that they are "friends and understand each other well," says Claire Demesmay, an expert on Franco-German relations at the Berlin-based German Council on Foreign Relations. "Both leaders must show that they can cooperate and work together like their predecessors," Demesmay added.
The relationship between Merkel and Hollande did not begin on a good note. Two years ago, the German Chancellor had refused to receive Hollande, as she did not want to support the Socialist's bid for the French presidency. It was widely believed that the French leader resented Merkel's decision. Since then, there have also been divisions on a spate of economic and political issues.
While conservative Merkel has championed austerity throughout the eurozone crisis, Hollande has advocated stimulus through more government spending during his two years in power. Both countries still do not act as a harmonious couple, when dealing with economic and European policy issues.
Furthermore, the divergence in the economic performance of both countries also puts an additional strain on their relationship. In Germany, Merkel claims a robust economy and won a comfortable re-election in 2013, although she had to settle for a coalition government with the rival Social Democrats.
But for Hollande, things look quite gloomy with France facing economic and budget woes. Furthermore, unemployment in France is twice as high as in Germany and the country's bilateral trade deficit with Europe's largest economy amounts to nearly 40 billion euros ($54.9 billion). The problems have dented Hollande's popularity and led to his Socialist party losing a record number of seats in the recent local elections.
Both countries also have different industrial policies. While French governments actively intervene in the nation's economy, German policies are more cautious. For instance, in the discussions related to the possible takeover of the technology group Alstom by either Siemens or General Electric, the French administration has taken an active role.
The differences in their economies' trajectories also explains their policies towards the euro zone's common currency, the Euro. While Paris wants to see the value of Euro depreciate – potentially giving a boost to exports – Berlin is comfortable with a stronger Euro and is totally against interference in the affairs of the European Central Bank (ECB), which sets the monetary policy for the common currency area.
Mario Draghi, ECB President, also made it clear that he does not accept French plans. A day before the meeting between Merkel and Hollande, Draghi declared that it wasn't good policy to undermine the credibility of the existing rules and there was no justification to push structural reforms on the back burner. But the French do not like to hear such words, particularly as they view the ECB as too powerful
In a newspaper interview, economist Hans-Werner Sinn from the Germany-based Ifo Institute, says huge sums are required to influence the exchange rate of the euro and such an act would invite countermeasures from other countries.
"The euro's appreciation is a problem for France," says Jürgen Pfister, a former chief economist at German bank BayernLB. France is more vulnerable to a stronger Euro than Germany as the French economy "is less competitive," Pfister told DW, adding that the reasons for this include excessive wage growth in the past decade and the neglect of non-European growth markets, among others.
The disagreements also extend to other areas such as debt and deficit reduction. While undertaking economic reforms, Hollande wants to avoid imposing additional burden on French companies and a backlash from the trade unions. In any case, the French leader does not intend to overhaul France's highly rigid labor market.
But he wants to protect the country's welfare state. "The French social system is exemplary for Hollande, even if he knows that it needs to be reformed," said Demesmay. French efforts to win more time to cut their deficits and bring their debt down to acceptable levels, however, have met with resistance from the German side.
Marcel Fratzscher, President of the German Institute for Economic Research, says the French Government cannot cut taxes and simultaneously claim that they have no money to reach the deficit target of three percent of economic output.
Franco-German expert Demesmay, however, explains that these conflicts in the bilateral relationship are not new. These issues have existed for decades and they will continue to prevail, she told DW.
However, there are also areas where the French want to emulate the Germans, Demesmay added.
"Germany is a role model for Hollande in many ways, particularly the German education system and the involvement of social partners in decision-making processes, which he has said more than once."
Despite the differences, both countries also work together and demonstrate unity at times. This tendency can be seen in the compromise they reached to set up a European banking union, as well as in their stance towards Russia in the ongoing conflict in Ukraine, Demesmay told DW.