EU's real brake isn't Britain but Franco-German impasse

BRUSSELS Forget Brexit. The real obstacle to deeper European integration is not the awkward British, whether they choose to stay in the European Union with a "special status" or leave.


It is a long-running Franco-German impasse on how to make the euro zone stronger and more sustainable, reconciling two radically different economic and political cultures.


Now that David Cameron has won a deal to enshrine formally Britain's semi-detached status in the 28-nation bloc - if his skeptical voters don't detach it completely - the onus will return to Europe's founding nations to work out a way forward.


European federalists such as Belgian Prime Minister Charles Michel are fretting that the terms granted to Britain's embattled leader may whet others' appetite for opting out of EU policies and ultimately lead to a disintegration of the union.


"We must not give the impression that Europe is a self-service," French President Francois Hollande said. "There can be differences but there cannot be a Europe where each country picks out what it wants."


The risk of a wider unraveling was highlighted by Austria's unilateral decision last week to impose migrant quotas at its borders, and the refusal of four central European states to take any share of the million migrants who entered the EU last year.


But it is the breakdown of Franco-German leadership in the euro zone - the economic core of the 60-year-old European project - that worries the architects of European integration.


Paris and Berlin have long slept in the same bed with very different dreams.


In the heat of the euro zone debt crisis in 2010-12, they found just enough common ground: The euro zone tightened fiscal rules and created its own rescue fund, a partial banking union with a common supervisor and a mechanism for winding up failed banks with an embryonic common resolution fund.


But since the European Central Bank averted a meltdown of the 19-nation currency zone by pledging in 2012 to do "whatever it takes" to preserve the euro, reforms to reinforce economic governance and mutualism risk have stalled.


FRUSTRATED AND CHEATED


A 2012 blueprint entitled "Towards a Genuine Economic and Monetary Union" signed by the four presidents of the European Commission, the European Council, the ECB and euro zone finance ministers, led to the first steps in banking union but got stuck after that.


The French refused to contemplate the principle of making binding contracts with Brussels to reform their rigid labor market or generous welfare system - issues that could trigger strikes and topple governments.


The Germans and their allies balked at providing financial incentives for countries to sign up to such reforms. Berlin brushed aside ideas for a central euro zone budget, common bank deposit insurance or any joint debt issuance.


A second report last year outlining a more modest three-stage plan for euro zone reform, adding the signature of the president of the European Parliament, got no more traction.


Both main European powers are frustrated and feel cheated. The Germans think fiscal discipline is still not being properly enforced, notably on the French, while the French feel Berlin is still failing to show solidarity with weaker southern economies.


And both have other pressing domestic concerns - a massive influx of refugees to Germany, in which Berlin feels abandoned by most EU partners, and a deadly security challenge from Islamist militants in France.


The moment of truth has been postponed, at least until after national elections in France and Germany in 2017.


Fear of splitting the left and losing another referendum on Europe after the 2005 defeat of the EU constitutional treaty has driven Hollande's timid European policy, insiders say.


Whether a center-right successor - or a second-term Hollande if the Socialist were re-elected against the odds - would be open to sharing more sovereignty remains to be seen.


Meanwhile, the challenge of integrating a million refugees - a project on the scale of reunification with ex-Communist eastern Germany in the 1990s - is likely to cramp the political attention span of Chancellor Angela Merkel or her successor.


IMBALANCE


A growing power imbalance between an economically successful Germany and a stagnant, reform-shy France has compounded underlying differences of national tradition.


Germans dream of a rules-based Europe in which governments transfer sovereignty over national budget balances to a central authority with the power to fine or expel them, and economic reform commitments are made enforceable by EU courts.


In such a union, Berlin might be willing to accept a limited common euro zone budget and common bank deposit insurance but probably never common debt issuance.


A "transfer union" - redistributing wealth from industrious northerners to easy-going southerners - remains many Germans' nightmare. They see it as an open door to "moral hazard", a permanent reward for bad behavior.


Many in France still dream of a smaller core euro zone with harmonized taxes at or close to their own high levels, a common minimum wage and unemployment insurance, and a sizeable common budget backed by joint public borrowing.


But with rare exceptions, the French remain allergic to outside control or supervision of their public finances or economic policies.


These divisions will not be dissolved magically whether Britain stays in or leaves the EU, although the shock of a British vote to depart would create political pressure for a bold euro zone initiative.


To be sure, Britain has now given a formal commitment not to obstruct further euro zone integration in return for concessions on migrant workers, exemption from EU political integration and safeguards for the City of London financial sector.


But euro zone countries would first have to agree on how to deepen their monetary union.


The efforts of a pioneer group of 11 euro zone states without Britain to introduce a financial transaction tax, the subject of inconclusive wrangling among finance ministers since 2012, shows just how hard that is likely to prove.


(Writing by Paul Taylor; editing by Philippa Fletcher)